Reg. Nos. 33-30394/ 811-5857
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. 14 [ X ]
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. 13
(Check appropriate box or boxes.)
CMC Fund Trust
(Exact Name of Registrant as Specified in Charter)
1300 SW Sixth Avenue, PO Box 1350, Portland, Oregon 97207
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: (503) 222-3600
J. Jerry Inskeep, Jr.
1300 SW Sixth Avenue, PO Box 1350, Portland, Oregon 97207
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b)
-----
on _______________ pursuant to paragraph (b)
-----
X 60 days after filing pursuant to paragraph (a)(1)
-----
on _______________ pursuant to paragraph (a)(1)
-----
75 days after filing pursuant to paragraph (a)(2)
-----
on _________________ pursuant to paragraph (a)(2) of Rule 485
If appropriate:
this post-effective amendment designates a new effective date for a
----- previously filed post-effective amendment.
Please forward copies of communications to:
Robert J. Moorman
Stoel Rives, LLP
900 SW Fifth Avenue
Portland, Oregon 97204
<PAGE>
Part A-I
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
[Logo]
Columbia
CMC SMALL CAP FUND
CMC INTERNATIONAL STOCK FUND
CMC Small Cap Fund and CMC international Stock Fund (each a "Fund" and
together the "Funds") are portfolios of CMC Fund Trust both seeking to provide
investors capital appreciation.
As with all mutual funds, the Securities and Exchange Commission does not
guarantee that the information in this Prospectus is accurate or complete, nor
has it judged the Funds for investment merit. It is a criminal offense to state
otherwise.
______________, 1998
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Introduction................................................................. 3
Risk/Return Summary...................................................... 3
A Team Approach to Investing............................................. 3
Risk of Investing in Common Stock........................................ 3
Information About the Funds.................................................. 4
CMC Small Cap Fund....................................................... 4
Goal................................................................. 4
Strategy............................................................. 4
Risk Factors......................................................... 4
CMC International Stock Fund............................................. 5
Goal................................................................. 5
Strategy............................................................. 5
Risk Factors......................................................... 5
Historical Performance................................................... 6
Expenses ................................................................ 8
Financial Highlights..................................................... 9
Management...................................................................11
Information About Your Investment............................................12
Your Account.............................................................12
Buying Shares........................................................12
Selling Shares.......................................................13
Distribution and Taxes...................................................13
Income and Capital Gains Distributions...............................13
Tax Effect of Distributions and Transactions.........................14
More About the Funds.........................................................15
Portfolio Securities.....................................................15
Small Cap Fund.......................................................15
International Stock Fund.............................................15
Changes to Investment Objective and Temporary Investments............16
Investment Strategy......................................................17
Small Cap ...........................................................17
International Stock Fund ............................................17
Other Risks..............................................................17
Foreign Securities...................................................18
Year 2000............................................................18
Conversion to Euro...................................................18
For More Information.........................................................19
2
<PAGE>
- --------------------------------------------------------------------------------
INTRODUCTION
- --------------------------------------------------------------------------------
Risk/Return Summary
This Prospectus provides important information about the Funds offered
by this Prospectus. For your convenience, concise descriptions of each Fund
begin on the next page. The descriptions provide the following information
about each Fund:
o GOAL
o STRATEGY
o RISK FACTORS
o HISTORICAL PERFORMANCE
o EXPENSES
o FINANCIAL HIGHLIGHTS
A Team Approach to Investing
In developing and managing the funds' portfolios, Columbia Management
Co., the investment adviser for the Funds ("CMC" or "Adviser"), uses a team
approach to investing, where individual team members are responsible for
researching and monitoring specific sectors of the market. This team
approach also helps facilitate an important investment process, whereby top
down analysis is used to evaluate the macro economic and investment
environment, and bottom up analysis is used to conduct intensive
fundamental research of individual companies.
When a Fund is focused on investment in specialized securities or
small capitalization stocks, a greater emphasis is placed on bottom up
research, such as for the Small Cap Fund. When a Fund is focused on a
broader segment of the market, such as the International Stock Fund, the
top down approach is emphasized. Both types of analysis, however, play an
integral role in the investment process, and are explained in greater
detail under "MORE ABOUT THE FUNDS, INVESTMENT STRATEGY" in this
Prospectus.
Risk of Investing in Common Stock
Because the Funds invest primarily in common stocks, they are subject
to the risks associated with stock investing. Although common stocks have
historically provided long-term returns that are greater than other types
of investments, stock returns have also been volatile over shorter periods
of time. Consequently, the Funds' portfolios - and likewise your investment
in the Funds - will fluctuate in value in response to changes in the
economy and the activities,
3
<PAGE>
financial prospects and results of the individual companies whose stock is
held by the Funds.
- --------------------------------------------------------------------------------
INFORMATION ABOUT THE FUNDS
- --------------------------------------------------------------------------------
CMC SMALL CAP FUND
GOAL
What is the Fund's Investment Goal?
The Fund seeks to provide investors capital appreciation.
STRATEGY
What investment strategies does the Fund use to pursue this goal?
Under normal market conditions, the Fund invests at least 65 percent
of its total asset value in common stocks of companies that each have a
market valuation, at the time of investment, of less than $1 billion. See
"MORE ABOUT THE FUNDS" for additional information about the strategy of the
Fund.
RISK FACTORS
What are the principal risks of investing in the Fund?
In addition to the risks of investing in common stocks described in
the "INTRODUCTION" to this Prospectus, investment in small cap stocks
present unique investment risks. This is because small cap companies:
o May have a limited operating history
o May be dependent on a small number of products or services
o May lack substantial capital reserves
o Have low trading volumes, which may make it difficult for the
Fund to sell the security and result in erratic or abrupt price
movements
You could lose money as a result of your investment in the Fund. You
should invest in this Fund only if you are willing to assume substantial
risks of
4
<PAGE>
significant fluctuations in the value of your investment to achieve a
potentially greater return. An investment in this Fund should be part of a
balanced investment program.
A description of other investment restrictions and certain investment
practices of the Fund are included in the Statement of Additional
Information.
CMC INTERNATIONAL STOCK FUND
GOAL
What is the Fund's Investment Goal?
The Fund seeks to provide investors long-term capital appreciation.
STRATEGY
What investment strategies does the Fund use to pursue its goal?
Under normal market conditions, the Fund will invest in equity
securities of companies based outside the United States. Generally, at
least 75 percent of the value of the Fund's total assets will be invested
in equity securities of well capitalized, seasoned foreign companies. The
Fund considers a company to be well capitalized if it has an aggregate
market valuation of at least $500 million at the time of investment. The
Fund will invest in at least three different foreign countries and may
invest in companies located anywhere in the world. See "MORE ABOUT THE
FUNDS" for additional information about the strategy of the Fund.
RISK FACTORS
In addition to the risks of investing in common stocks described in
the "INTRODUCTION" to this Prospectus, investment in foreign securities
present unique investment risks. This is because foreign securities:
o May be subject to greater fluctuations in price than domestic
securities
o Are affected by changes in currency exchange rates
o May be subject to foreign taxes that could reduce their effective
yield
5
<PAGE>
o Are subject to potential political or economic instability of the
country of issuer, especially in emerging or developing countries
o Are generally not subject to uniform accounting, auditing, and
financial reporting standards comparable to those of domestic
companies
o Generally have less public information available about them than
do domestic securities
o Are generally subject to less governmental regulation and
oversight
o Are generally more illiquid than domestic exchange traded
securities
You could lose money as a result of your investment in the Fund. You
should invest in this Fund only if you are willing to assume substantial
risks of significant fluctuations in your investment. An investment in this
Fund should be part of a balanced investment program.
A description of other investment restrictions and certain investment
practices of the Fund is included in the Statement of Additional
information.
HISTORICAL PERFORMANCE
How have the Funds historically performed?
The bar charts and tables below illustrate the Funds' annual returns
as well as their long term performance. Each bar chart shows how the Funds'
performance has varied from year to year. The first table compares the
Small Cap Fund's performance over time to that of the Russell 2000 Index, a
widely recognized unmanaged index used as a benchmark for small cap stock
performance. The second table compares the International Stock Fund's
performance to that of the Morgan Stanley Capital Index (MSCI) EAFE, an
unmanaged index which reflects the movement of stock markets in Europe,
Australia, and the Far East by representing a broad selection of
domestically listed companies within each market. The bar charts and tables
assume the reinvestment of dividends and distributions. The Funds'
historical performance does not indicate how the Funds will perform in the
future.
6
<PAGE>
Year by Year Total Return as of 12/31 each year
Small Cap Fund
Year Total Return Percentage
---- -----------------------
1989* 5.43
1990 -11.56
1991 45.44
1992 12.31
1993 16.33
1994 1.70
1995 36.39
1996 21.82
1997 21.93
*Fund began operations August 30, 1989
Best Quarter: Q1 91 25.69%
Worst Quarter: Q3 90 -28.29%
International Stock Fund
Year Total Return Percentage
---- -----------------------
1994* -7.58
1995 5.52
1996 16.77
1997 10.18
*Fund began operations February 1, 1994
Best Quarter: Q2 97 13.18%
Worst Quarter: Q4 97 -7.60%
7
<PAGE>
Average Annual Total Return as of 12/31/97
Small Cap Fund
Since Fund's
Inception on
1 Year 5 Year August 30, 1989
------ ------ ---------------
Fund 21.93% 19.10% 16.88%
Russell 2000 Index 22.36% 16.40% 13.40%
The Fund's total return for the nine month period ended September 30,
1998 was -16.83%.
International Stock Fund
Since Fund's
Inception on
1 Year February 1, 1994
------ ----------------
Fund 10.18% 5.99%
Morgan Stanley Capital 2.06% 5.27%
Index (MSCI) EAFE
The Fund's total return for the nine month period ended September 30,
1998 was -6.65%.
EXPENSES
What expenses do I pay as an investor in the Funds?
The table below describes the fees and expenses that you may pay if
you buy and hold shares of a Fund. As a shareholder, you pay no transaction
fees in connection with your investment in a Fund. Annual fund operating
expenses described in the table are paid out of a Fund's assets and are
therefore reflected in the share price.
----------------------------------------------------------------
The Funds do not charge a sales load or 12b-1 distribution fees.
----------------------------------------------------------------
8
<PAGE>
- --------------------------------------------------------------------------------
Fee Table
Small International
Cap Fund Stock Fund
Shareholder transaction fees None None
Annual Fund Operating Expenses
(expenses that are paid out of Fund assets)
Management Fees 0.75% 0.75%
Distribution and/or Service (12b-1) Fees None None
Other Expenses ____% ____%
Total Fund Operating Expenses ____% ____%
- --------------------------------------------------------------------------------
Expense Examples
This example is intended to help you compare the cost of investing in
the Funds with the cost of investing in other mutual funds. The
examples assumes that you invest $10,000 in a Fund for the time
periods indicated and then sell all of your shares at the end of those
periods. The examples also assumes that your investment has a 5%
return each year and that the Fund's operating expenses remain
constant as a percentage of net assets. Your actual costs may be
higher or lower, but based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
Small Cap Fund $_______ $_______ $_______ $_______
International Stock Fund $_______ $_______ $_______ $_______
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand each
Fund's financial performance since inception. Certain information reflects
financial results for a single fund share. The total returns in each table
represent the rate of return an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with each Fund's financial statements, are included in the
Statement of Additional Information under "Financial Statements."
9
<PAGE>
<TABLE>
<CAPTION>
Small Cap Fund
Fiscal Year Ended October 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............. $52.04 $56.00 $49.35 $56.44
------ ------ ------ ------
Income from Investment Operations:
Net Investment Income (Loss)..................... (0.04) (0.08) 0.22 0.18
------ ------ ------ ------
Net Realized and Unrealized Gains
(Losses) on Investments........................ 14.08 16.79 10.88 1.99
------ ------ ------ ------
Total from Investment Operations............. 14.04 16.71 11.10 2.17
------ ------ ------ ------
Less Distributions:
Dividends (from net investment
income)........................................ (0.16) (0.17)
Dividends (in excess of net investment
income)........................................ (0.01)
Distributions (from capital gains)............... (11.68) (20.67) (4.25) (8.99)
Distributions (in excess of capital
gains)......................................... (0.04) (0.09)
------ ------ ------ ------ ------
Total Distributions.......................... (11.68) (20.67) (4.45) (9.26)
------ ------ ------ ------
Net Asset Value, End of Period................... $54.40 $52.04 $56.00 $49.35
====== ====== ====== ======
Total Return..................................... 26.98% 30.30% 22.55% 3.87%
Ratios/Supplemental Data
Net Assets, End of Period (in
millions) ..................................... $ 522 $ 522 $ 537 $ 468
Ratio of Expenses to Average Net
Assets......................................... 0.76% 0.78% 0.77% 0.78%
Ratio of Net Investment Income (Loss)
to Average Net Assets.......................... (0.08)% (0.14)% 0.43% 0.29%
Portfolio Turnover Rate.......................... 168.72% 147.77% 125.8% 97.24%
(1) From inception of operations on August 30, 1989. Ratios and portfolio
turnover rates are annualized.
(2) Based on average number of shares outstanding during the period.
(3) Not annualized.
</TABLE>
<TABLE>
<CAPTION>
International Stock Fund
Fiscal Year Ended October 31,
--------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period............. $42.46 $37.06 $39.51 $40.00
------ ------ ------ ------
Income from Investment Operations:
Net Investment 0.41 0.32 0.39 0.10
Income............................
Net Realized and Unrealized Gains (Losses)
on Investments and Foreign Currency
Transactions................................... 6.16 5.86 (2.64) (0.59)
------ ------ ------ ------
Total from Investment Operations............ 6.57 6.18 (2.25) (0.49)
------ ------ ------ ------
10
<PAGE>
Less Distributions:
Dividends (from net investment income)........... (0.46) (0.78) (0.19)
Dividends (in excess of net investment
Income)........................................ (0.01)
Distributions (from capital gains) (5.86)
------ ------ ------ ------
Total Distributions......................... (6.32) (0.78) (0.20) --
------ ------ ------ ------
Net Asset Value, End of Period................... $42.71 $42.46 $37.06 $39.51
====== ====== ====== ======
Total Return..................................... 15.47% 16.67% -5.69% -1.23% (2)
Ratios/Supplemental Data
Net Assets, End of Period (in millions).......... $ 81 $ 74 $ 69 $ 84
Ratio of Expenses to Average Net Assets.......... 1.05% 1.00% 0.98% 1.16%
Ratio of Net Investment Income to Average
Net Assets.................................. 0.88% 0.78% 0.99% 0.53%
Portfolio Turnover Rate.......................... 126.56% 119.98% 158.32% 123.80%
(1) From inception of operations on February 1, 1994. Ratios and portfolio
turnover rates are annualized.
(2) Not annualized.
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Funds' investment adviser is Columbia Management Co., 1300 S.W. Sixth
avenue, P.O. Box 1350, Portland, Oregon 97207-1350 ("CMC" or "Adviser"). CMC has
acted as an investment adviser since 1969.
The Fund's have contracted with CMC to provide research, advice, execution
and supervision with respect to investment matters and to determine what
securities to purchase or sell and what portion of the Fund's assets to invest.
For the fiscal year ended October 31, 1998, each Fund paid CMC a management fee,
expressed as a percentage of average net assets, of 0.75%.
CMC uses an investment team approach to analyze investment themes and
strategies for the Fund. Members of the investment team are responsible for the
analysis of particular industries and market sectors within those industries,
and for recommendations on individual securities within those industries or
market sectors.
Richard J. Johnson, a Vice President of CMC and a Chartered Financial
Analyst, joined the Adviser in 1994, and assumed principal responsibility for
implementing, on a daily basis, the investment strategies developed for the
Small Cap Fund in April 1995. Before joining the Adviser, Mr. Johnson was a
portfolio manager and analyst for Provident Investment Counsel (1990-1994).
11
<PAGE>
James M. McAlear, a Vice President of CMC, has had principal responsibility
for investment decisions of the International Stock Fund since its inception in
1994. He joined the Adviser in 1992. Previously, Mr. McAlear was Senior Vice
President for American Express Financial Advisers in London (1985-1992) and
Executive Director for Merrill Lynch Europe (1972-1985).
- --------------------------------------------------------------------------------
INFORMATION ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
YOUR ACCOUNT
Buying Shares
Investment in a Fund enables clients of CMC to invest in diversified
portfolios of either small cap securities or foreign securities in a pooled
environment, rather than purchasing securities on an individual basis.
If you want to invest in a Fund, contact your CMC representative at
1-800-547-1037. In addition, an independent fiduciary of a CMC client
account, after careful review of this Prospectus, including the Fund's
expenses and consistency with the client's written investment guidelines,
may approve the investment in a Fund. Upon approving the investment, the
independent fiduciary will authorize CMC to invest a portion of the
client's portfolio in the Fund, at CMC's discretion, and subject to
limitations imposed by the independent fiduciary.
-----------------------------------------------------------
If CMC is considered to be a fiduciary of your assets,
including the account with the Fund, under the Employee
Retirement Income Security Act of 1974, certain conditions
must be satisfied before assets may be invested in the Fund
by CMC on your behalf. See the Statement of Additional
Information for more detail.
-----------------------------------------------------------
The price for a Fund's shares is the Fund's net asset value per share
("NAV"), which is generally calculated as of the close of trading on the
New York Stock Exchange (usually 4:00 p.m., Eastern time) every day the
exchange is open. Your order will be priced at the next NAV calculated
after your order is accepted by the Fund.
Each Fund's investments are valued based on their market value using
the last sales price reported on the principal securities exchange on which
the investment is traded, or, in the absence of recorded sales, at the
closing bid prices on such exchanges or over the counter markets. Trading
in securities on many foreign securities is completed at various times
before the close of the New York
12
<PAGE>
Stock Exchange or on days the New York Stock Exchange is not open for
business. Currently, the calculation of a Fund's NAV may take place at a
time different than that at which the prices of a Fund's portfolio
securities are determined. As a result, events affecting the values of
foreign portfolio securities that occur between the time the prices are
determined and the close of the New York Stock Exchange will not be
reflected in a Fund's calculation of NAV unless the Board of Trustees or
CMC, if so delegated by the Board, determines that the event would
materially affect the NAV.
Although neither Fund has a policy with respect to initial or
subsequent minimum investments, purchase orders may be refused at the
discretion of the Fund.
Selling Shares
You may sell shares at any time. Upon redemption you will receive the
Fund's next NAV calculated after your order is accepted by the Fund's
transfer agent. Any certificates representing fund shares being sold must
be returned with your redemption request. You can request a redemption by
calling your CMC Representative at 1-800-547-1037. Redemption proceeds are
normally transmitted in the manner specified in the redemption request on
the business day following the effective date of the redemption. Except as
provided by rules of the Securities and Exchange Commission, redemption
proceeds must be transmitted to you within seven days of the redemption
date.
Each Fund also reserves the right to make a "redemption in kind" - pay
you in portfolio securities rather than cash - if the amount you are
redeeming is large enough to affect the Fund's operations (for example, if
the redemption represents more than 1% of the Fund's assets).
DISTRIBUTION AND TAXES
Income and Capital Gains Distributions
Each Fund pays its shareholders dividends from its net investment
income twice a year, and generally distributes substantially all of its net
realized capital gains to shareholders once a year, usually in October. The
amount distributed will depend on the amount of capital gains realized from
the sale of the Fund's portfolio securities. Dividend and capital gain
distributions are declared and paid as cash dividends and reinvested in
additional shares at the net asset value, as calculated after payment of
the distribution, at the close of business on the dividend payment date,
unless you have elected to receive the capital gain distribution in cash.
13
<PAGE>
Tax Effect of Distributions and Transactions
The dividends and distributions of each Fund are taxable to most
investors unless the shareholder is exempt from federal or state income
taxes or the investment is in a tax-advantaged account. The tax status of
any distribution is the same regardless of how long you have been in the
Fund and whether you reinvest your distributions or take them as income. In
general, distributions are taxable as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
Taxability of Distributions
Type of Tax Rate for Tax Rate for
Distribution 15% Bracket 28% Bracket or Higher
------------ ----------- ---------------------
<S> <C> <C>
Income Dividends Ordinary Income Rate Ordinary Income Rate
Short Term Capital Gains Ordinary Income Rate Ordinary Income Rate
Long Term Capital Gains 10% 20%
----------------------------------------------------------------------------
</TABLE>
Each Fund expects that, as a result of its investment objective to
achieve capital appreciation, its distributions will consist primarily of
capital gains. Each year the Fund's will send you information detailing the
amount of ordinary income and capital gains distributed to you for the
previous year.
The sale of shares in your account may produce a gain or loss and is a
taxable event. For tax purposes, an exchange of shares of a Fund for shares
of another fund managed by the Adviser is the same as a sale.
------------------------------------------------------
Your investment in a Fund could have additional tax
consequences. Please consult your tax professional for
assistance.
------------------------------------------------------
14
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT THE FUNDS
- --------------------------------------------------------------------------------
PORTFOLIO SECURITIES
Small Cap Fund
In seeking its investment goal, the Fund will invest at least 65% of
the value of its total assets in common stocks or on securities convertible
into common stocks of small cap companies. Securities convertible into
common stock may include both debt securities and preferred stock. The Fund
may also invest in warrants, which are options to buy a stated number of
underlying securities at a specified price any time during the life of the
warrants.
Although at the date of this Prospectus the Adviser considers any
company with an aggregate market valuation of less than $1 billion to be
"small cap," upon notice to shareholders, the definition of small cap may
change if the Adviser determines, based on changes in market levels and
accepted industry definitions, that a different market capitalization is
more appropriate. There is no minimum aggregate market valuation for a
company to be considered an appropriate investment for the Fund. The Fund
may, however, invest up to 35% of the value of the Fund's total assets in
the securities of larger, more established companies when these securities
offer capital appreciation potential that is generally comparable to small
cap securities.
International Stock Fund
Although the Fund intends to invest at least 75% of the Fund's assets
in equity securities of well capitalized, seasoned companies (i.e.,
companies with an aggregate market valuation over $500 million), the Fund
may invest in smaller, less seasoned companies when these securities offer
attractive opportunities consistent with the Fund's investment objective.
These investments are subject to the risks of investing in small cap
companies discussed in the Risk/Return Summary of the Small Cap Fund.
The Fund intends to invest principally in the equity securities of
companies located in the following countries: Belgium, Brazil, Denmark,
Finland, France Germany, Italy, India, The Netherlands, Norway, Spain,
Sweden, Switzerland, the United Kingdom, Australia, Hong Kong, Japan, New
Zealand, Singapore, Canada, and Mexico.
The value of the International Stock Fund is maintained in U.S.
dollars and will fluctuate as a result of changes in the exchange rates
between the U.S. dollar and the currencies in which the foreign securities
or bank deposits held by the Fund are denominated. To reduce or limit
exposure to adverse change in
15
<PAGE>
currency exchange rates (referred to as "hedging"), the Fund may enter into
forward currency exchange contracts that in effect lock in a rate of
exchange during the period of the forward contract. The Fund will only
enter into forward contracts for hedging and not for purposes of
speculation. When required by the Investment Company Act or the SEC, the
Fund may "cover" its commitment under the forward contracts by segregating
cash or liquid, high-grade securities with the Fund's custodian in an
amount not less than the value of the Fund's total assets committed to the
forward contracts. Under normal market conditions, no more than 25 percent
of the Fund's assets may be committed to currency exchange contracts.
The International Stock Fund may also purchase or sell foreign
currencies on a "spot" (cash) basis or on a forward basis to lock in the
U.S. dollar value of a transaction at the exchange rate or rates then
prevailing. The Fund may use this hedging technique in an attempt to
insulate itself against possible losses resulting from a change in the
relationship between the U.S. dollar and the relevant foreign currency
during the period between the date the security is purchased or sold and
the date on which payment is made or received.
In addition to investing directly in foreign equity securities, the
International Stock Fund may also purchase such securities in the form of
American Depository Receipts ("ADRs") and Global Depository Receipts
("GDRs"). ADRs in registered form are dollar-denominated foreign securities
designed for use in the U.S. securities markets. ADRs are sponsored and
issued by domestic banks, represent and may be converted into underlying
foreign securities deposited with the domestic bank or a correspondent
bank. ADRs do not eliminate the risks inherent in investing in the
securities of foreign issuers. By investing in ADRs rather than directly in
the foreign security, however, the Fund may avoid currency risks during the
settlement period for either purchases or sales. There is a large, liquid
market in the United States for most ADRs. GDRs are receipts representing
an arrangement with a European bank similar to that for ADRs. GDRs are not
necessarily denominated in the currency of the underlying security.
Changes to Investment Objective and Temporary Investments
The investment objective of both Funds may be changed by the Board of
Trustees, without shareholder approval, upon 30 days written notice.
Additionally, under adverse market conditions, a Fund may depart from its
principal investment strategy by taking temporary defensive positions in
response to adverse economic or market conditions. When a Fund assumes a
temporary defensive position, it is not invested in securities designed to
achieve its stated investment objective.
16
<PAGE>
INVESTMENT STRATEGY
Small Stock Fund
In identifying attractive securities for investment in the Fund, the
Adviser begins with a bottom up, fundamental analysis of individual
companies. The bottom up analysis is intended to provide insights about the
financial condition and growth prospects of a company whose stocks are
under consideration. As part of this intensive research process, the
Adviser evaluates a company's balance sheets and income statements to draw
conclusions about earnings growth and profitability. The Adviser also
examines quality of management, investment in research and development, as
well as the potential for new products or services. In addition, the
Adviser looks at sales trends and factor affecting stock price, such as
price earnings and price to book ratios. To round out the bottom up
research, the Advisor uses top down analysis to determine how macro changes
in the economy may affect the prospects for the industry in which the
company under consideration is operating.
International Stock Fund
For the International Stock Fund, the Adviser uses a top down sector
rotation emphasis to identify attractive sectors and securities for
investment. As part of this approach, the Adviser conducts an ongoing
evaluation of the global economic and investment environments to anticipate
how potential change may influence the prospects for particular global
regions, countries and the industries in those countries. This is because
even small shifts in such macro economic factors as interest rates,
inflation, government regulation, political activity, flows of capital and
international monetary policy can all affect the overall economic health of
an entire global region or a country -- and thereby the industries in that
region or country. Once the Adviser has successfully identified attractive
regions, countries and industries for emphasis through the top down
approach, bottom up fundamental research is used to evaluate the merits of
individual companies whose stock is under consideration.
OTHER RISKS
In addition to the certain risks stated in the section titled "INVESTMENT
ABOUT THE FUNDS" in this Prospectus, there are other risks of investing in the
Funds such as:
17
<PAGE>
Foreign Securities. The International Stock Fund may invest a portion of
its assets in developing countries or in countries with new or developing
capital markets, such as countries in Eastern Europe, Latin America, South
America or Southeast Asia. The considerations noted above concerning the risk of
investing in foreign securities are generally more significant for these
investments. These countries may have relatively unstable governments and
securities markets in which only a small number of securities trade. Markets of
developing countries may generally be more volatile than markets of developed or
emerging countries. Investments in these markets may involve significantly
greater risks, as well as the potential for greater gains.
Additional costs may be incurred in connection with the International Stock
Fund's foreign investments. Foreign brokerage commissions are generally higher
than those in the United States. Expenses may also be incurred on currency
conversions when the Fund moves investments from one country to another.
Increased custodian costs as well as administrative difficulties may be
experienced in connection with maintaining assets in foreign jurisdictions.
Year 2000. Many of the services provided to the Funds by CMC and other
service providers depend on the proper functioning of their computer software
systems and those of their outside service providers. Many computer software
systems in use today cannot distinguish the year 2000 from the year 1900 because
of the way dates are encoded and calculated. Such an event could have a negative
impact on handling securities trades, payments of interest and dividends,
pricing and account services. Although, at this time, there can be no assurance
that there will be no adverse impact on the Funds, CMC has informed the Funds
that it has been actively working on necessary changes to its computer systems
to prepare for the year 2000 and expects the Fund's systems, and those of the
Funds' outside service providers, will be ready for the year 2000.
Conversion to Euro. On January 1, 1999, the European Monetary Union ("EMU")
plans to introduce a new single currency, the Euro, which will replace the
national currencies of the participating member nations. As of the date of this
Prospectus, the eleven member nations are Austria, Belgium, Finland, France,
Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain. If the
International Stock Fund holds investments in countries with currencies replaced
by the Euro, the investment process, including trading, foreign exchange,
payments, settlements, cash accounts, custody and accounting will be impacted.
The Adviser is taking steps that it believes appropriately and reasonably
address the issues involved in the introduction of the Euro. Nevertheless,
because this change to a single currency is new and untested, the establishment
of the Euro may result in market volatility. For the same reason, it is not
possible to predict the impact of the Euro on the business or financial
condition of European issuers or on the International Stock Fund. To the extent
the Fund holds non-U.S. dollar (Euro or other) denominated securities, it will
still be exposed to currency risk due to fluctuations in those currencies versus
the U.S. dollar.
18
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
You can find additional information on the Funds' structure and performance
in the following documents:
o Annual/Semiannual Reports. While the Prospectus describes the Funds'
potential investments, these reports detail the Funds' actual
investments as of the report date. Reports include a discussion by
Fund management of recent market conditions, economic trends, and Fund
strategies that significantly affected the Fund's performance during
the reporting period.
o Statement of Additional Information ("SAI"). A supplement to the
Prospectus, the SAI contains further information about each Fund and
its investment restrictions, risks and polices. It also includes the
most recent annual report and the independent accountants report.
A current SAI for the Fund's is on file with the Securities and Exchange
Commission and is incorporated by reference in (is legally part of) this
Prospectus.
A copy of the SAI and current annual report and may be attached to this
Prospectus. If it is not, or to obtain additional copies of the SAI or copies of
the current annual/semiannual report, without charge, or to make inquiries of
the Fund, you may contact:
CMC FUND TRUST
1300 S.W. Sixth Avenue
Portland, Oregon 97201
Telephone: 1-800-547-1037
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, D.C. (telephone 1-800-SEC-0330) or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009. Reports and other information regarding the Fund's are also on the
SEC's Internet website at http://www.sec.gov.
19
SEC file number: 811-5857
<PAGE>
Part B-I
Reg. Nos. 33-30394/811-5857
- --------------------------------------------------------------------------------
CMC SMALL CAP FUND
CMC INTERNATIONAL STOCK FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
CMC Fund Trust
1300 SW Sixth Avenue
PO Box 1350
Portland, Oregon 97207
(503) 222-3600
This Statement of Additional Information contains information relating to
CMC Fund Trust (the "Trust") and two portfolios of the Trust, CMC Small Cap Fund
and CMC International Stock Fund (each a "Fund" and together the "Funds").
This Statement of Additional Information is not a Prospectus. It relates to
a Prospectus dated ______________, 1998 (the "Prospectus") and should be read in
conjunction with the Prospectus. Copies of the Prospectus are available without
charge upon request to the Trust or by calling calling 1-800-547-1037.
TABLE OF CONTENTS
Description of the Fund....................................................... 2
Management....................................................................10
Investment Advisory and Other Fees Paid to Affiliates.........................12
Portfolio Transactions........................................................13
Capital Stock and Other Securities............................................15
Purchase Redemption and Pricing of Shares.....................................16
Custodians....................................................................18
Independent Accountants.......................................................18
Taxes.........................................................................18
Yield and Performance.........................................................23
Financial Statements..........................................................24
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE FUNDS
- --------------------------------------------------------------------------------
The Trust is an Oregon business trust established under a Restated
Declaration of Trust, dated October 13, 1993, as amended. The Trust is an
open-end management investment company comprised of separate portfolios, each of
which is treated as a separate fund. There are four portfolios established under
the Trust: the Funds, CMC High Yield Fund and CMC Short Term Bond Fund. Each
Fund is diversified, which means that, with respect to 75% of its total assets,
the Fund will not invest more than 5% of its assets in the securities of any
single issuer. The investment adviser for each of the Funds is Columbia
Management Co. (the "Adviser"). See the section entitled "INVESTMENT ADVISORY
AND OTHER FEES PAID TO AFFILIATES" for further information about the Adviser.
INVESTMENT OBJECTIVE AND POLICIES
CMC SMALL CAP FUND
As stated in the Prospectus, the Small Cap Fund's investment objective is
capital appreciation. The Fund's investment objective may be changed by the
Trustees without shareholder approval upon 30 days written notice. There is no
assurance that the Fund will achieve its investment objective.
To achieve its investment objective, the Fund will generally invest at
least 65% of the value of its total assets in common stocks or securities
convertible into common stock of companies with an aggregate market valuation of
less than $1 billion. The Fund may, however, invest from time to time up to 35%
of the value of its total assets in the securities of larger companies when the
Adviser believes these securities offer capital appreciation potential that is
generally comparable to small cap securities.
CMC INTERNATIONAL STOCK FUND
As stated in the Prospectus, the International Stock Fund's investment
objective is capital appreciation. The Fund's investment objective may be
changed by the Trustees without shareholder approval upon 30 days written
notice. There is no assurance that the Fund will achieve its investment
objective.
To achieve its investment objective, under normal conditions, the Fund will
invest at least 75 percent of the Fund's assets in equity securities, including
securities convertible into equity securities, of issuers located outside the
United States that each have an aggregate market valuation of at least $500
million. The Fund may invest in smaller, less seasoned companies when the
Adviser believes these companies offer attractive opportunities consistent with
the Fund's overall investment objective. As discussed further below, an
investment in a less seasoned company may involve greater risks than an
investment in a larger, more established company.
2
<PAGE>
INVESTMENTS HELD BY THE FUNDS
Under normal conditions both Funds will invest in equity securities,
including securities convertible into equity securities. Additional information
with respect to certain securities in which the Funds may invest is set forth
below.
Options and Financial Futures Transactions
Each Fund may invest up to 5 percent of its net assets in premiums on put
and call exchange-traded options. A call option gives the holder (buyer) the
right to purchase a security at a specified price (the exercise price) at any
time until a certain date (the expiration date). A put option gives the buyer
the right to sell a security at the exercise price at any time until the
expiration date. The Funds may also purchase options on securities indices.
Options on securities indices are similar to options on a security except that,
rather than the right to take or make delivery of a security at a specified
price, an option on a securities index gives the holder the right to receive, on
exercise of the option, an amount of cash if the closing level of the securities
index on which the option is based is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. The Funds may
enter into closing transactions, exercise its options, or permit the options to
expire. The Funds may only write call options that are covered. A call option on
a security is covered if written on a security the Fund owns or if the Fund has
an absolute and immediate right to acquire that security without additional cash
consideration upon conversion or exchange of other securities held by the Fund.
If additional cash consideration is required, that amount will be held in a
segregated account by the Fund's custodian bank. A call option on a securities
index is covered if the Fund owns securities whose price changes, in the opinion
of the Adviser, are expected to be substantially similar to those of the index.
A call option may also be covered in any other manner in accordance with the
rules of the exchange upon which the option is traded and applicable laws and
regulations. A call option is covered if it is written on a security the Fund
owns. Each Fund may write such options on up to 25 percent of its net assets.
The Funds may engage in financial futures transactions, including interest
rate futures transactions. Financial futures contracts are commodity contracts
that obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security or the cash value of a
securities index, during a specified future period at a specified price. The
Funds' investment restrictions do not limit the percentage of the Funds' assets
that may be invested in financial futures transactions. Each Fund, however, does
not intend to enter into financial futures transactions for which the aggregate
initial margin exceeds 5 percent of the net assets of the Fund after taking into
account unrealized profits and unrealized losses on any such transactions it has
entered into. The Funds may engage in futures transactions only on commodities
exchanges or boards of trade.
The Funds will not engage in transactions in index options, financial
futures contracts, or related options for speculation, but only as an attempt to
hedge against market conditions affecting the values of securities that the Fund
owns or intends to purchase. When a Fund purchases a put on a stock index or on
a stock index future not held by the Fund, the put protects the Fund against a
decline in the value of all securities held by it to the extent that the stock
index moves in a similar pattern to the prices of the securities held. The
correlation, however, between indices and price movements of the securities in
which a Fund will
3
<PAGE>
generally invest may be imperfect. Each Fund expects, nonetheless, that the use
of put options that relate to such indices will, in certain circumstances,
protect against declines in values of specific portfolio securities or a Fund's
portfolio generally. Although the purchase of a put option may partially protect
a Fund from a decline in the value of a particular security or its portfolio
generally, the cost of a put will reduce the potential return on the security or
the portfolio if either increases in value.
Upon entering into a futures contract, each Fund will be required to
deposit with its custodian in a segregated account cash or certain U.S.
government securities, or any other portfolio assets as permitted by the
Securities and Exchange commission rules and regulations in an amount known as
the "initial margin." This amount, which is subject to change, is in the nature
of a performance bond or a good faith deposit on the contract and would be
returned to the Fund upon termination of the futures contract, if all
contractual obligations have been satisfied.
The principal risks of options and futures transactions are: (a) possible
imperfect correlation between movements in the prices of options, currencies, or
futures contracts and movements in the prices of the securities or currencies
hedged or used for cover; (b) lack of assurance that a liquid secondary market
will exist for any particular option or futures contract when needed; (c) the
need for additional skills and techniques beyond those required for normal
portfolio management; and (d) losses on futures contracts resulting from market
movements not anticipated by the Adviser.
Foreign Securities
The Small Cap Fund may invest up to one-third of its total assets in
securities of foreign issuers in developed foreign countries, primarily
companies in Canada, Western Europe and Asia, including securities issued by
foreign governments, denominated in U.S. dollars. Investments in foreign
securities may involve a greater degree of risk than those in domestic
securities. For a discussion of the risks of investing in foreign securities,
see the summary of the International Stock Fund in the Prospectus under
"INFORMATION ABOUT THE FUNDS" and "MORE ABOUT THE FUNDS, OTHER RISKS."
Repurchase Agreements
Each Fund may invest in repurchase agreements, which are agreements by
which the Fund purchases a security and simultaneously commits to resell that
security to the seller (a commercial bank or recognized securities dealer) at a
stated price within a number of days (usually not more than seven) from the date
of purchase. The resale price reflects the purchase price plus a rate of
interest which is unrelated to the coupon rate or maturity of the purchased
security. Repurchase agreements may be considered loans by the Fund
collateralized by the underlying security. The obligation of the seller to pay
the stated price is in effect secured by the underlying security. The seller
will be required to maintain the value of the collateral underlying any
repurchase agreement at a level at least equal to the price of the repurchase
agreement. In the case of default by the seller, the Fund could incur a loss. In
the event of a bankruptcy proceeding commenced against the seller, the Fund may
incur costs and delays in realizing upon the collateral. Each Fund will enter
into repurchase agreements only with those banks or securities dealers who are
deemed creditworthy pursuant to criteria
4
<PAGE>
adopted by the Trustees of the Trust. There is no limit on the portion of a
Fund's assets that may be invested in repurchase agreements with maturities of
seven days or less.
Illiquid Securities
No illiquid securities will be acquired by the Funds if upon the purchase
more than 10 percent of the value of the Fund's net assets would consist of
these securities. "Illiquid securities" are securities that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price used to determine the Fund's net asset value. Under
current interpretations of the Staff of the Securities and Exchange Commission
("SEC"), the following instruments in which the Fund may invest will be
considered illiquid: (1) repurchase agreements maturing in more than seven days;
(2) restricted securities (securities whose public resale is subject to legal
restrictions); (3) options, with respect to specific securities, not traded on a
national securities exchange that are not readily marketable; and (4) any other
securities in which the Fund may invest that are not readily marketable.
The International Stock Fund may purchase without limit, however, certain
restricted securities that can be resold to qualifying institutions pursuant to
a regulatory exemption under Rule 144A ("Rule 144A securities"). If a dealer or
institutional trading market exists for Rule 144A securities, these securities
are considered to be liquid and thus not subject to the Fund's 10 percent
limitation on the investment in restricted or other illiquid securities. Under
the supervision of the Trustees of the Trust, the Adviser determines the
liquidity of Rule 144A securities and, through reports from the Adviser, the
Trustees monitor trading activity in these securities. In reaching liquidity
decisions, the Adviser will consider, among other things, the following factors:
(1) the frequency of trades and quotes for the security; (2) the number of
dealers willing to purchase or sell the security and the number of other
potential purchasers; (3) dealer undertakings to make a market in the security;
and (4) the nature of the security and the marketplace trades (e.g., the time
needed to dispose of the security, the method of soliciting offers, and the
procedures for the transfer). Because institutional trading in Rule 144A
securities is relatively new, it is difficult to predict accurately how these
markets will develop. If institutional trading in Rule 144A securities declines,
the Fund's liquidity could be adversely affected to the extent it is invested in
such securities.
Convertible Securities and Warrants
Both Funds may invest in convertible debentures and convertible preferred
stock, each convertible into common stock. Convertible debentures are
interest-bearing debt securities, typically unsecured, that represent an
obligation of the corporation providing the owner with claims to the
corporation's earnings and assets before common and preferred stock owners,
generally on par with unsecured creditors. If unsecured, claims of convertible
debenture owners would be inferior to claims of secured debt holders.
Convertible preferred stocks are securities that represent an ownership interest
in a corporation providing the owner with claims to the corporation's earnings
and assets before common stock owners, but after bond owners. Investments by the
Funds in convertible debentures or convertible preferred stock would be a
substitute for an investment in the underlying common stock, primarily either in
circumstances where only the convertible security is available in quantities
necessary to satisfy the Fund's investment needs (for example, in the case of a
new issuance of convertible securities) or where, because of financial market
conditions, the conversion price of the
5
<PAGE>
convertible security is comparable to the price of the underlying common stock,
in which case a preferred position with respect to the corporation's earnings
and assets may be preferable to holding common stock.
The Funds may also invest in warrants, which are options to buy a stated
number of underlying securities at a specified price any time during the life of
the warrants. The securities underlying these warrants will be the same types of
securities that each Fund will invest in to achieve its investment objective of
capital appreciation. The purchaser of a warrant expects the market price of the
underlying security will exceed the purchase price of the warrant plus the
exercise price of the warrant, thus resulting in a profit. If the market price
never exceeds the purchase price plus the exercise price of the warrant before
the expiration date of the warrant, the purchaser will suffer a loss equal to
the purchase price of the warrant.
Investments in Small and Unseasoned Companies
The Funds may invest in companies that are unseasoned; that is, these
companies may have limited or unprofitable operating histories, limited
financial resources, and inexperienced management. In addition, they often face
competition from larger or more established firms that have greater resources.
Securities of small and unseasoned companies are frequently traded in the
over-the-counter market or on regional exchanges where low trading volumes may
result in erratic or abrupt price movements. To dispose of these securities, the
Funds may need to sell them over an extended period or below the original
purchase price. Investments by the Funds in these small or unseasoned companies
may also be regarded as speculative. The Small Cap Fund has a fundamental policy
not to invest more than 10 percent of its total assets in companies that have a
record of less than three years of continuous operations. The International
Stock Fund limits investments in small and unseasoned companies to 5 percent of
its total assets.
Temporary Investments
When, as a result of market conditions, the Adviser determines a temporary
defensive position is warranted to help preserve capital, a Fund may without
limit temporarily retain cash, or invest in prime commercial paper, high-grade
debt securities, securities of the U.S. Government and its agencies and
instrumentalities, and high-quality money market instruments, including
repurchase agreements. The International Stock Fund may invest in such
securities issued by entities organized in the United States or any foreign
country, denominated in U.S. dollars or foreign currency. When a Fund assumes a
temporary defensive position, it is not invested in securities designed to
achieve its investment objective of capital appreciation.
INVESTMENT RESTRICTIONS
The following is a list of investment restrictions applicable to the Funds.
If a percentage limitation is adhered to at the time of the investment, a later
increase or decrease in percentage resulting from any change in value or net
assets will not result in a violation of such restriction. The Trust may not
change these restrictions without a majority vote of the outstanding securities
of the applicable Fund.
6
<PAGE>
The Small Cap Fund may not:
1. Buy or sell commodities. The Fund may, however, invest in futures
contracts relating to broadly based stock indices, subject to the restrictions
in paragraph 15.
2. Concentrate investments in any industry. The Fund, however, may (a)
invest up to 25 percent of the value of its total assets in any one industry and
(b) invest for temporary defensive purposes up to 100% of the value of the total
assets in securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities.
3. Buy or sell real estate.
4. Make loans to other persons (except by purchase of short-term commercial
paper, repurchase agreements, bonds, debentures, or other debt securities
constituting part of an issue). For purposes of this restriction, the making of
a loan by the Fund will not include the purchase of a portion of an issue of
publicly distributed bonds, debentures, or other securities, whether or not the
purchase is made upon the original issuance of the securities.
5. Purchase illiquid securities, if upon the purchase more than 10% of the
value of the Fund's net assets would consist of these securities. See
"DESCRIPTION OF THE FUNDS, INVESTMENTS IN THE FUNDS" for a complete discussion
of illiquid securities.
6. Purchase the securities of any issuer if the purchase, at the time
thereof, would cause more than 10 percent of the outstanding voting securities
of that issuer to be held in the Fund.
7. Purchase the securities of any issuer if the purchase, at the time
thereof, would cause more than 5 percent of the value of the total assets of the
Fund at market value to be invested in the securities of that issuer (other than
obligations of the U.S. Government and its agencies and instrumentalities), with
reference to 75 percent of the assets of the Fund.
8. Purchase securities of other open-end investment companies. The Fund
may, however, purchase securities of closed-end investment companies so long as
the Fund does not own in the aggregate more than 10 percent of the outstanding
voting securities of such investment company.
9. Issue senior securities, bonds, or debentures.
10. Underwrite securities of other issuers, except the Fund may acquire
portfolio securities in circumstances where, if the securities are later
publicly offered or sold by the Fund, it might be deemed to be an underwriter
for purposes of the Securities Act of 1933, as amended ("1933 Act").
11. Borrow money in excess of 5 percent of its net asset value. Any
borrowing must only be temporary, from banks, and for extraordinary or emergency
purposes.
7
<PAGE>
12. Invest its assets in the securities of any company if the purchase, at
the time thereof, would cause more than 10 percent of the value of the Fund's
total assets to be invested in companies which have a record of less than three
years of continuous operation including the operation of predecessors and
parents.
13. Invest in companies for the purpose of exercising control or
management.
14. Engage in short sales of securities except to the extent that such
sales are "against the box"; that is, only to the extent the Fund owns the
securities sold short or owns other securities convertible into an equivalent
amount of securities sold short. Such transactions may only be made to protect a
profit in or to attempt to minimize a loss with respect to convertible
securities. In any event, no more than 10% of the value of the Fund's net assets
taken at market may, at the time, be held as collateral for such sales.
15. Buy and sell puts and calls on stock index futures, or financial
futures or options on financial futures, unless such options are written by
other persons and the options or futures are offered through the facilities of a
national securities association or are listed on a national securities or
commodities exchange.
The International Stock Fund may not:
1. Buy or sell commodities. However, the Fund may invest in futures
contracts or options on such contracts relating to broadly based stock indices,
subject to the restrictions in paragraph 15, and may enter into foreign currency
transactions.
2. Concentrate investments in any industry. However, the Fund may (a)
invest up to 25 percent of the value of its assets in any one industry and (b)
invest for temporary defensive purposes up to 100 percent of the value of its
assets in securities issued or guaranteed by the United States or its agencies
or instrumentalities.
3. Buy or sell real estate. However, the Fund may purchase or hold readily
marketable securities issued by companies, such as real estate investment
trusts, which deal in real estate or interests therein.
4. Make loans to other persons, except by purchase of short-term commercial
paper, bonds, repurchase agreements, debentures, or other debt securities
constituting part of an issue and except to the extent the entry into repurchase
agreements in accordance with the Fund's investment restrictions may be deemed a
loan.
5. Purchase illiquid securities, if upon the purchase more than 10% of the
value of the Fund's assets (taken at current value) would consist of these
securities. See "DESCRIPTION OF THE FUNDS, INVESTMENTS IN THE FUNDS" for a
complete discussion of illiquid securities.
6. Purchase the securities of any issuer if the purchase, at the time
thereof, would cause more than 10 percent of the outstanding voting securities
of that issuer to be held by the Fund.
8
<PAGE>
7. Purchase the securities of any issuer (including any foreign government
issuer) if the purchase, at the time thereof, would cause more than 5 percent of
the value of the total assets of the Fund at market value to be invested in the
securities of that issuer (other than obligations of the U.S. government and its
agencies and instrumentalities), with reference to 75 percent of the assets of
the Fund.
8. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition, or reorganization, or by purchase in
the open market of securities of closed-end investment companies where no
underwriter or dealer's commission or profit, other than customary broker's
commission, is involved and only if immediately thereafter not more than (i) 3
percent of the total outstanding voting stock of such company is owned by the
Fund, (ii) 5 percent of the Fund's total assets would be invested in any one
such company, and (iii) 10 percent of the Fund's total assets would be invested
in such securities.
9. Issue senior securities, bonds, or debentures.
10. Underwrite securities of other issuers, except that the International
Stock Fund may acquire portfolio securities in circumstances where, if the
securities are later publicly offered or sold by the Fund, it might be deemed to
be an underwriter for purposes of the 1933 Act.
11. Borrow money, except temporarily for extraordinary or emergency
purposes. For all amounts borrowed, the Fund will maintain an asset coverage of
300 percent. The Fund will not make any additional investments while borrowings
exceed 5 percent of the Fund's total assets.
12. Invest its funds in the securities of any company if the purchase would
cause more than 5 percent of the value of the Fund's total assets to be invested
in companies which have a record of less than three years of continuous
operation, including operation of predecessors and parents.
13. Invest in companies for the purpose of exercising control or
management.
14. Engage in short sales of securities except to the extent that the Fund
owns other securities convertible into an equivalent amount of such securities.
Such transactions may only be made to protect a profit in or to attempt to
minimize a loss with respect to convertible securities. In any event, no more
than 5 percent of the value of the Fund's net assets taken at market may, at any
time, be held as collateral for such sales.
15. Buy and sell puts and calls on securities, stock index futures, or
options on stock index futures, or financial futures or options on financial
futures, unless such options are written by other persons and the options or
futures are offered through the facilities of a recognized securities
association or are listed on a recognized securities or commodities exchange or
similar entity.
9
<PAGE>
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Funds are managed under the general supervision of the Trustees of the
Trust. The trustees and officers of the Trust are listed below, together with
their principal business occupations. All principal business positions have been
held for more than five years, except as follows: Columbia Small Cap Fund, Inc.
since August 1996; Columbia Real Estate Equity Fund, Inc. since April 1994; and
except as otherwise indicated. The term "Columbia Funds" refers to Columbia High
Yield Fund, Inc., Columbia Balanced Fund, Inc., Columbia Common Stock Fund,
Inc., Columbia International Stock Fund, Inc., Columbia Municipal Bond Fund,
Inc., Columbia Real Estate Equity Fund, Inc., Columbia U.S. Government
Securities Fund, Inc., Columbia Special Fund, Inc., Columbia Growth Fund, Inc.,
Columbia Daily Income Company, Columbia Small Cap Fund, Inc., and Columbia Fixed
Income Securities Fund, Inc.
J. JERRY INSKEEP, JR.,* Chairman, President, and Trustee of the Trust; Chairman,
President, and Director of each of the Columbia Funds; Consultant with Fleet
Financial Group, Inc. (since December 1997); formerly Chairman and a Director of
Columbia Management Co., Columbia Funds Management Company ("CFMC"), Columbia
Trust Company (the "Trust Company"), the Fund's transfer agent; and formerly a
Director of Columbia Financial Center Incorporated ("Columbia Financial"). Mr.
Inskeep's business address is 1300 S.W. Sixth Avenue, P.O. Box 1350, Portland,
Oregon 97207.
JAMES C. GEORGE, Trustee of the Trust (since December 1997) and Director of each
of the Columbia Funds (since June 1994). Mr. George, former investment manager
of the Oregon State Treasury (1962-1992), is an investment consultant. Mr.
George's business address is 1001 S.W. Fifth Avenue, Portland, Oregon 97204.
THOMAS R. MACKENZIE, Trustee of the Trust (since December 1997); Director of
each of the Columbia Funds; and Chairman of the Board of Directors of Group
Mackenzie (architecture, planning, interior design and engineering). Mr.
Mackenzie's address is 0690 S.W. Bancroft Street, Portland, Oregon 97201.
ROBERT J. MOORMAN, * Secretary of each of the Columbia Funds and the Trust
(since January 1998); attorney with Stoel Rives LLP. Mr. Moorman's business
address is 900 S.W. Fifth Avenue, Suite 2600, Portland, Oregon 97204-1268.
RICHARD L. WOOLWORTH, Trustee of the Trust; Director of each of the Columbia
Funds; Chairman and Chief Executive Officer of Blue Cross and Blue Shield of
Oregon; and Chairman and Chief Executive Officer of the Regence Group, health
insurers. Mr. Woolworth's address is 100 S. W. Market Street, Portland, Oregon
97201.
*Mr. Inskeep and Mr. Moorman are each an "interested person" as defined by the
Investment Company Act of 1940 (the "1940 Act") and receive no trustee fees or
salaries from the Trust or the Funds.
The following table sets forth the compensation received by the disinterested
trustees of the Trust for the fiscal year ended October 31, 1998.
10
<PAGE>
<TABLE>
<CAPTION>
Total Compensation from the
Trustee Compensation From Trust** Trust and Columbia Funds
- ------- ------------------------- ---------------------------
<S> <C> <C>
Richard L. Woolworth $ $
Thomas R. Mackenzie $ $
James C. George $ $
**Mr. Mackenzie and Mr. George became Trustees of the Trust on December 10,
1997. Therefore, their compensation is for a partial year.
</TABLE>
At September 30, 1998, to the knowledge of the Trust, the following persons
owned of record or beneficially more than 5 percent of the outstanding shares of
the Fund:
<TABLE>
<CAPTION>
Shares Beneficially Owned
Name and Address at September 30, 1998
- ---------------- -------------------------
<S> <C> <C>
CMC Small Cap Fund
Hanford Operations and Engineering 1,360,485 (24.94%)
Pension Plan
PO Box 1970, H36-08
Richland, WA 99352
Locals 302 & 612 Operating Engineers 459,599 (8.43%)
Employers Retirement Fund
Welfare & Pension Administration Services, Inc.
P.O. Box 34203
Seattle, WA 98124
Legacy Health System Employees 307,955 (5.65%)
Retirement Plan
Corporate Financial Admin. Services
1919 N.W. Lovejoy
Portland, OR 97209
CMC International Stock Fund
Freightliner Corporation Pension Plan 76,309 (20.09%)
4747 North Channel Avenue
Portland, OR 97217
Lumber Industry Pension Fund 120,030 (31.60%)
Associated Administrators, Inc.
2929 N.W. 31st Avenue
Portland, OR 97205
11
<PAGE>
Shares Beneficially Owned
Name and Address at September 30, 1998
- ---------------- -------------------------
<S> <C> <C>
AECOM Technology Corp. Pension Plan 28,409 (7.48%)
3250 Wilshire Blvd., 5th Floor
Los Angeles, CA 90010
</TABLE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND OTHER FEES PAID TO AFFILIATES
- --------------------------------------------------------------------------------
The investment adviser to the Funds is Columbia Management Co. (the
"Adviser"). The Adviser has entered into an investment contract with each Fund.
Pursuant to the investment contract the Adviser provides research, advice, and
supervision with respect to investment matters and determines what securities to
purchase or sell and what portion of the Fund's assets to invest. The Adviser
and the Trust Company are indirect wholly owned subsidiaries of Fleet Financial
Group, Inc. ("Fleet"). Fleet and its affiliates provide a wide range of banking,
financial, and investment products and services to individuals and businesses.
Their principal activities include customer and commercial banking, mortgage
lending and servicing, trust administration, investment management, retirement
plan services, brokerage and clearing services, securities underwriting, private
and corporate financing and advisory activities, and insurance services.
The Adviser provides office space and pays all executive salaries and
executive expenses of each Fund. Each Fund assumes its costs relating to trust
matters, cost of services to shareholders, transfer and dividend paying agent
fees, custodian fees, legal and auditing expenses, disinterested trustees fees,
taxes and governmental fees, interest, broker's commissions, transaction
expenses, cost of stock certificates and any other expenses (including clerical
expenses) of issue, sale, repurchase, or redemption of its shares, expenses of
registering or qualifying its shares for sale, transfer taxes, and all other
expenses of preparing its registration statement, prospectuses, and reports.
For its services provided to each Fund, the Adviser charges an advisory
fee, which is accrued daily and paid monthly. The advisory fee for each Fund
equals the annual rate of .75 of 1 percent of its daily net assets. While
comparable to the advisory fees paid by other mutual funds with similar
investment objectives, these fees are higher than the advisory fees paid by most
other mutual funds. Advisory fees paid by the Small Cap Fund to the Adviser were
__________, $354,620, and $214,819 for fiscal year 1998, fiscal year 1997, and
fiscal year 1996, respectively. Advisory fees paid by the International Stock
Fund to the Adviser were __________, $686,166, and $508,330 for fiscal year
1998, fiscal year 1997, and fiscal year 1996, respectively.
The Trust Company acts as transfer agent and dividend crediting agent for
each Fund. Its address is 1301 SW Fifth Avenue, P.O. Box 1350, Portland, Oregon
97207. It issues certificates for shares of the Fund, if requested, and records
and disburses dividends for the Fund. The Trust pays the Trust
12
<PAGE>
Company a per account fee of $1 per month for each shareholder account with the
Funds existing at any time during the month, with a minimum aggregate fee of
$1,500 per month for each Fund. In addition, the Trust pays the Trust Company
for extra administrative services performed at cost in accordance with a
schedule set forth in the agreement between the Trust Company and the Trust and
reimburses the Trust Company for certain out-of-pocket expenses incurred in
carrying out its duties under that agreement. The Trust paid $18,000 on behalf
of each Fund to the Trust Company for services performed for fiscal 1998 under
the respective transfer agent agreement relating to that Fund.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
Each Fund will not generally invest in securities for short-term capital
appreciation but, when business and economic conditions, market prices, or the
Fund's investment policy warrant, individual security positions may be sold
without regard to the length of time they have been held.
The Funds may purchase their portfolio securities through a securities
broker and pay the broker a commission, or they may purchase the securities
directly from a dealer which acts as principal and sells securities directly for
its own account without charging a commission. The purchase price of securities
purchased from dealers serving as market makers will include the spread between
the bid and asked prices. The Funds may also purchase securities from
underwriters, the price of which will include a commission or discount paid by
the issuer to the underwriter.
Prompt execution of orders at the most favorable price will be the primary
consideration of the Funds in transactions where brokerage fees are involved.
Additional factors considered by the Adviser in selecting brokers to execute a
transaction include: (i) professional capability of the executing broker and the
value and quality of the brokerage services provided; (ii) size and type of
transaction; (iii) timing of transaction in the context of market prices and
trends; (iv) nature and character of markets for the security to be purchased or
sold; (v) the broker's execution efficiency and settlement capability; (vi) the
broker's experience and financial stability and the execution services it
renders to the Adviser on a continuing basis; and (vii) reasonableness of
commission.
Research, statistical, and other services offered by the broker also may be
taken into consideration in selecting broker-dealers. These services may
include: advice concerning the value of securities, the advisability of
investing in, purchasing, or selling securities, and the availability of
securities or the purchasers or sellers of securities; and furnishing analyses
and reports concerning issuers, industries, securities, economic factors and
trends, portfolio strategies, and performance of accounts. A commission in
excess of the amount of commission another broker or dealer would have charged
for effecting a transaction may be paid by the Fund if the Adviser determines in
good faith that the commission is reasonable in relation to the value of the
brokerage and research services provided, viewed in terms of either that
particular transaction or management's overall responsibilities with respect to
the Fund.
The Adviser receives a significant amount of proprietary research from a
number of brokerage firms, in most cases on an unsolicited basis. The Adviser
does not make any commitments to allocate brokerage for proprietary research.
The value of that research, however, is considered along with other factors in
the selection of brokers. This research is
13
<PAGE>
considered supplemental to the Adviser's own internal research and does not,
therefore, materially reduce the overall expenses incurred by the Adviser for
its research. On a semi-annual basis, the Adviser's research analysts and
portfolio managers participate in a detailed internal survey regarding the value
of proprietary research and the skills or contributions made by the various
brokerage analysts to the Adviser's investment process. Firms are then
confidentially ranked based on that survey.
In limited circumstances, the Adviser may use a Fund's commissions to
acquire third party research that is not available through its full service
brokers. In these arrangements, the Adviser pays an executing broker a
commission equal to the average rate paid on all other trades (e.g., $0.06) and
achieves what it believes is best execution on the trade. The executing broker
then uses a portion of the commission to pay for a specific research service or
product provided to the Adviser. Proposed research to be acquired in this manner
must be approved by the Adviser's Chief Investment Officer, who is responsible
for determining that the research provides appropriate assistance to the Adviser
in connection with its investment management of the Funds and that the price
paid with broker commissions is fair and reasonable.
The receipt of research services from brokers or dealers might be useful to
the Adviser and its affiliates in rendering investment management services to
the Fund or other clients; and, conversely, information provided by brokers or
dealers who have executed orders on behalf of other clients might be useful to
the Adviser in carrying out its obligations to the Funds. Total brokerage
commissions paid by the Small Cap Fund for the last three fiscal years were
________, $1,285,537 and $1,254,580 for fiscal year 1998, fiscal year 1997, and
for fiscal year 1996, respectively. Total brokerage commissions paid by the
International Stock Fund for the last three fiscal years were ________, $577,355
and $437,587 for fiscal year 1998, fiscal year 1997, and fiscal year 1996,
respectively. Of the commissions paid in the fiscal year ended in 1998, the
Small Cap Fund paid ________ and the International Fund paid ________ for third
party research provided by brokerage firms.
The Adviser may use research services provided by and place agency
transactions with affiliated broker-dealers, if the commissions are fair and
reasonable and comparable to commissions charged by non-affiliated qualified
brokerage firms.
Investment decisions for the Funds are made independently from those of the
other portfolios of the Trust or accounts managed by the Adviser or its
affiliate, Columbia Funds Management Company. The same security is sometimes
held in the portfolio of more than one fund or account. Simultaneous
transactions are inevitable when several funds or accounts are managed by the
same investment adviser, particularly when the same security is suitable for the
investment objective of more than one fund or account. In the event of
simultaneous transactions, allocations among the Fund or accounts will be made
on an equitable basis.
Both the Trust and the Adviser have adopted a Code of Ethics (the "Code")
that sets forth general and specific standards relating to the securities
trading activities of all their employees. The purpose of the Code is to ensure
that all employees conduct their personal transactions in a manner that does not
interfere with the portfolio transactions of the Fund or the Adviser's other
clients or take unfair advantage of their relationship with the Adviser. The
specific standards in the Code include, among others, a requirement that all
employee trades
14
<PAGE>
be pre-cleared; a prohibition on investing in initial public offerings; required
pre-approval of an investment in private placements; a prohibition on portfolio
managers trading in a security seven days before or after a trade in the same
security by an account over which the manager exercises investment discretion;
and a prohibition on realizing any profit on the trading of a security held less
than 60 days. Certain securities and transactions, such as mutual fund shares or
U. S. Treasuries and purchases of options on securities indexes or securities
under an automatic dividend reinvestment plan, are exempt from the restrictions
in the Code because they present little or no potential for abuse. Certain
transactions involving the stocks of large capitalization companies are exempt
from the seven day black-out period and short-term trading prohibitions because
such transactions are highly unlikely to affect the price of these stocks. In
addition to the trading restrictions, the Code contains reporting obligations
that are designed to ensure compliance and allow the Adviser's Ethics Committee
to monitor that compliance.
The Trust and the Adviser have also adopted a Policy and Procedures
Designed to Detect and Prevent Insider Trading (the "Insider Trading Policy").
The Insider Trading Policy prohibits any employee from trading, either
personally or on behalf of others (including a client account), on the basis of
material nonpublic information. All employees are required to certify each year
that they have read and complied with the provisions of the Code and the Insider
Trading Policy.
- --------------------------------------------------------------------------------
CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------
The Trust may establish separate series of investment portfolios under its
Restated Declaration of Trust. The Funds, CMC Short Term Bond Fund and CMC High
Yield Fund are the only series established under the Trust. Shares of each
series vote together, except as provided in the Trust's Declaration of Trust and
under applicable law. It is expected that shares of a series would vote
separately by series on any changes in fundamental investment policies relating
to that series. All shares of each series of the Trust, including the Funds,
have equal rights as to voting, redemption, dividends and distributions. All
issued and outstanding shares of a Fund are fully paid and nonassessable. Shares
have no preemptive or conversion rights. Fractional shares have the same rights
proportionately as full shares. The shares of a Fund do not have cumulative
voting rights, which means that the holders of more than 50 percent of the
shares of the Fund and any other portfolio of the Trust, voting for the election
of Trustees, can elect all the Trustees if they choose to do so. In certain
circumstances, Trustees may be removed by action of the Trustees or the
shareholders.
Any reference to the phrase "vote of a majority of the outstanding voting
securities of the Fund" means the vote at any meeting of shareholders of a Fund
of (i) 67 percent or more of the shares present or represented by proxy at the
meeting, if the holders of more than 50 percent of the outstanding shares are
present or represented by proxy, or (ii) more than 50 percent of the outstanding
shares, whichever is less.
15
<PAGE>
- --------------------------------------------------------------------------------
PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
PURCHASES
Shareholders of the Fund are investment advisory clients of the Adviser.
Investments in each Fund are made directly by clients of the Adviser or by the
Adviser in its role as discretionary investment adviser over a portion of the
shareholder's assets. With respect to assets of an investment advisory client of
the Adviser invested in the Fund, that client will pay no fee pursuant to its
separate management contract with the Adviser (for the period during which the
assets are invested in the Fund).
If the Adviser is deemed to be a fiduciary with respect to a prospective
shareholder of a Fund pursuant to the Employee Retirement Income Security Act of
1974 ("ERISA"), certain conditions must be satisfied before assets may be
invested in the Fund by the Adviser on behalf of the shareholder. These
conditions are set forth by the U. S. Department of Labor in Prohibited
Transaction Class Exemption No. 77-4 (the "Exemption"). The Exemption permits
the Adviser to direct investments of ERISA-qualified plans to a mutual fund,
such as the Fund, for which the Adviser serves as an investment adviser if,
after review of the Prospectus and disclosure relating to fees of the Fund and
fees under the advisory contract, another fiduciary, as determined under ERISA,
with respect to that shareholder approves investments in the Fund. The second
fiduciary must be independent of and unrelated to the Adviser under standards
set forth by the U. S. Department of Labor in the Exemption.
The second, independent fiduciary that must approve investments in the Fund
by the Adviser must not be engaged as a second fiduciary only in contemplation
of a possible investment in the Fund. Rather, the second, independent fiduciary
is almost always a committee appointed by the employee benefit plan sponsor and
has oversight responsibility for appointment of CMC as an investment adviser
with respect to certain plan assets. This committee is almost always made up of
one or more employees of the plan sponsor, and, as such, these employees receive
compensation from the plan sponsor but are not compensated out of plan assets.
The transfer agent for the Funds may, at its discretion, permit investors
to purchase shares through the exchange of securities they hold. Any securities
exchanged must meet the investment objective, policies, and limitations of the
Fund, must have a readily ascertainable market value, must be liquid, and must
not be subject to restrictions on resale. The market value of any securities
exchanged, plus any cash, must be at least $100,000. Shares purchased in
exchange for securities generally may not be redeemed or exchanged until the
transfer has settled - usually within 15 days following the purchase by
exchange. The basis of the exchange will depend upon the relative net asset
value of the shares purchased and securities exchanged. Securities accepted by a
Fund will be valued in the same manner as the Fund values its assets. Any
interest earned on securities following their delivery to the transfer agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription, or other rights attached to the securities
become the property of the Fund, along with the securities. Before engaging in
an exchange, investors should consult their tax advisers concerning the tax
consequences to them of the exchange.
16
<PAGE>
REDEMPTIONS
Redemptions of all or any portion of a shareholder's investment can be made
at any time. Redemption of shares are at the net asset value next computed after
receipt of a redemption order on a day the New York Stock Exchange ("NYSE") is
open for business. Payment will be made within seven days of the date of
redemption, except as provided by the rules of the SEC. The Trust may suspend
the determination of net asset value of a Fund and the right of redemption for
any period (1) when the NYSE is closed, other than customary weekend and holiday
closings, (2) when trading on the NYSE is restricted, (3) when an emergency
exists as a result of which sale of securities owned by the Fund is not
reasonably practicable or it is not reasonably practicable for the Trust to
determine the value of the Fund's net assets, or (4) as the SEC may by order
permit for the protection of security holders, provided the Trust complies with
rules and regulations of the SEC which govern as to whether the conditions
prescribed in (2) or (3) exist. The NYSE observes the following holidays: New
Year's Day, Martin Luther King, Jr.'s Birthday, Washington's Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
In the case of suspension of the right to redeem, shareholders may withdraw
their redemption request or receive payment based upon the net asset value
computed upon the termination of the suspension.
Each Fund reserves the right to redeem Fund shares in cash or in kind. The
Trust has elected, however, to be governed by Rule 18f-1 under the Investment
Company Act of 1940 (the "1940 Act"), pursuant to which the Fund is obligated to
redeem, during any 90-day period, shares of a shareholder solely for cash up to
the lesser of $250,000 or 1 percent of the net asset value of the Fund. A
shareholder who is redeemed in kind may incur brokerage fees upon the sale of
any securities distributed upon redemption.
PRICING OF SHARES
The net asset value per share of each Fund is determined by the Adviser,
under procedures approved by the trustees of the Trust, as of the close of
regular trading (normally 4:00 p.m. New York time) on each day the NYSE is open
for business and at other times determined by the Board of Trustees. The net
asset value per share is computed by dividing the value of all assets of the
Fund, less its liabilities, by the number of shares outstanding.
Each Fund's securities are valued at the last sale price on the securities
exchange or national securities markets at which such securities primarily are
traded. Securities not listed on an exchange or national securities market, or
securities in which there were no transactions, are valued using the last bid
price. Any assets or liabilities initially expressed in a foreign currency will,
on a daily basis, be converted into U.S. dollars. Foreign securities will be
valued based upon the most recent closing price on their principal exchange, or
based upon the most recent price obtained by the Fund, if the price is not
priced on an exchange, even if the close of that exchange or price determination
is earlier than the time of the Funds' NAV calculation. In the case of such
foreign security, if an event that is likely to affect materially the value of a
portfolio security occurs between the time the foreign price is determined and
the time the Fund's NAV is calculated, it may be necessary to value the security
in light of that event.
17
<PAGE>
- --------------------------------------------------------------------------------
CUSTODIANS
- --------------------------------------------------------------------------------
United States National Bank of Oregon, 321 SW Sixth Avenue, Portland,
Oregon 97208, acts as general custodian of the Trust (a "Custodian"). Chase
Manhattan Bank ("Chase" or a "Custodian"), One Pierrepont Plaza, Brooklyn, New
York 11201, has entered into a custodian agreement with the Trust in respect of
the purchase of foreign securities by each of the Funds. The Custodians hold all
securities and cash of the Funds, receive and pay for securities purchased,
deliver against payment securities sold, receive and collect income from
investments, make all payments covering expenses of the Funds, and perform other
administrative duties, all as directed by authorized officers of the Trust. The
Custodians do not exercise any supervisory function in the purchase and sale of
portfolio securities or payment of dividends.
Portfolio securities purchased outside the United States by the Funds are
maintained in the custody of foreign banks, trust companies, or depositories
that have sub-custodian arrangements with Chase (the "foreign sub-custodians").
Each of the domestic and foreign custodial institutions that may hold portfolio
securities of the Funds has been approved by the Trustees of the Trust or a
delegate of the Trustees in accordance with regulations under the 1940 Act.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 1300 S.W. Fifth Avenue, Suite 3100, Portland,
Oregon 97201, serves as the Trust's independent accountants and, in addition to
examining the annual financial statements of the Trust, assists in the
preparation of the tax returns of the Trust and in certain other matters.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
Federal Income Taxes
Each Fund intends and expects to meet continuously the tests for
qualification as a regulated investment company under Part I of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). Each Fund believes
it satisfies the tests to qualify as a regulated investment company.
To qualify as a regulated investment company for any taxable year, a Fund
must, among other things:
(a) derive at least 90 percent of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, or other income
(including but not limited to gains from options, futures,
18
<PAGE>
or forward contracts) derived with respect to its business of investing in such
stock, securities, or currencies (the "90 Percent Test"); and
(b) diversify its holdings so that at the end of each quarter (i) 50
percent or more of the value of the assets of the Fund is represented by cash,
government securities, and other securities limited, in respect of any one
issuer of such other securities, to an amount not greater than 5 percent of the
value of the assets of the Fund and 10 percent of the outstanding voting
securities of such issuer, and (ii) not more than 25 percent of the value of the
assets of the Fund is invested in the securities (other than government
securities) of any one issuer or of two or more issuers that the Fund "controls"
within the meaning of Section 851 of the Code and that meet certain
requirements. In addition, the Fund must file, or have filed, a proper election
with the Internal Revenue Service.
Part I of Subchapter M of the Code will apply to the Funds during a taxable
year only if it meets certain additional requirements. Among other things, a
Fund must: (a) have a deduction for dividends paid (without regard to capital
gain dividends) at least equal to the sum of 90 percent of its investment
company taxable income (computed without any deduction for dividends paid) and
90 percent of its tax-exempt interest in excess of certain disallowed deductions
(unless the Internal Revenue Service waives this requirement) and (b) either (i)
have been subject to Part I of Subchapter M for all taxable years ending after
November 8, 1983 or (ii) as of the close of the taxable year have no earnings
and profits accumulated in any taxable year to which Part I of Subchapter M did
not apply.
The Trust currently has four portfolios, including the Funds. The Trust may
establish additional funds in the future. Federal income tax laws generally will
treat each Fund as a separate corporation (provided that each Fund consists of a
segregated portfolio of assets the beneficial interests in which are owned by
the holders of a class or series of stock that is preferred over all other
classes or series in respect of that portfolio of assets).
A regulated investment company that meets the requirements described above
is taxed only on its "investment company taxable income," which generally equals
the undistributed portion of its ordinary net income and any excess of net
short-term capital gain over net long-term capital loss. In addition, any excess
of net long-term capital gain over net short-term capital loss that is not
distributed is taxed to each Fund at corporate capital gain tax rates. The
policy of each Fund is to apply capital loss carry-forwards as a deduction
against future capital gains before making a capital gain distribution to
shareholders.
If any net long-term capital gains in excess of net short-term capital
losses are retained by a Fund, requiring federal income taxes to be paid thereon
by the Fund, the Fund may elect to treat such capital gains as having been
distributed to shareholders. In the case of such an election, shareholders will
be taxed on such amounts as long-term capital gains, will be able to claim their
proportional share of the federal income taxes paid by the Fund on such gains as
a credit against their own federal income tax liabilities, and generally will be
entitled to increase the adjusted tax basis of their shares in the Fund by the
differences between their pro rata shares of such gains and their tax credits.
Shareholders of each Fund are taxed on distributions of net investment
income, or of any excess of net short-term capital gain over net long-term
capital loss, as ordinary income.
19
<PAGE>
Distributions of any excess of net long-term capital gain over net short-term
capital loss from a Fund are ineligible for the dividends-received deduction.
Distributions properly designated by a Fund as representing the excess of
net long-term capital gain over net short-term capital loss are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by shareholders. For noncorporate taxpayers,
the highest rate that applies to long-term capital gains is lower than the
highest rate that applies to ordinary income. Any loss that is realized and
allowed on redemption of shares of the Fund six months or less from the date of
purchase of the shares and following the receipt of a capital gain dividend will
be treated as a long-term capital loss to the extent of the capital gain
dividend. For this purpose, Section 852(b)(4) of the Code contains special rules
on the computation of a shareholder's holding period.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether paid in shares or in cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. Within 60 days after the close of each taxable
year (October 31), each Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
prior taxable year's distributions which the Fund has designated to be treated
as long-term capital gain.
A distribution may be taxable to a shareholder even if the distribution
reduces the net asset value of the shares held below their cost (and is in an
economic sense a return of the shareholder's capital). This tax result is most
likely when shares are purchased shortly before an annual distribution of
capital gains or other earnings.
If a Fund declares a dividend in October, November, or December payable to
shareholders of record on a certain date in such a month and pays the dividend
during January of the following year, the shareholders will be taxed as if they
had received the dividend on December 31 of the year in which the dividend was
declared. Thus, a shareholder may be taxed on the dividend in a taxable year
prior to the year of actual receipt.
A special tax may apply to a Fund if it fails to make sufficient
distributions during the calendar year. The required distributions for each
calendar year generally equal the sum of (a) 98 percent of the ordinary income
for the calendar year plus (b) 98 percent of the capital gain net income for the
one-year period that ends on October 31 during the calendar year, plus (c) an
adjustment relating to any shortfall for the prior taxable year. If the actual
distributions are less than the required distributions, a tax of 4 percent
applies to the shortfall.
The Code allows the deduction by certain individuals, trusts, and estates
of "miscellaneous itemized deductions" only to the extent that such deductions
exceed 2 percent of adjusted gross income. The limit on miscellaneous itemized
deductions will not apply, however, with respect to the expenses incurred by any
"publicly offered regulated investment company." Each Fund believes that it is a
publicly offered regulated investment company because its shares are
continuously offered pursuant to a public offering (within the meaning of
section 4 of the 1933 Act. Therefore, the limit on miscellaneous itemized
deductions should not apply to expenses incurred by either Fund.
20
<PAGE>
Special Aspects of 90 Percent Test with Respect to Foreign Currency. For
purposes of the 90 Percent Test, foreign currency gains that are not directly
related to a Fund's principal business of investing in stocks or securities (or
options and futures with respect to stock or securities) may be excluded from
qualifying income by regulation. No such regulations, however, have been issued.
Unless an exception applies, a Fund may be required to recognize some
income with respect to foreign currency contracts under the mark-to-market rules
of Section 1256 of the Code even though that income is not realized. Special
rules under Sections 1256 and 988 of the Code determine the character of any
income, gain, or loss on foreign currency contracts.
Two possible exceptions to marking-to-market relate to hedging transactions
and mixed straddles. A hedging transaction is defined for purposes of Section
1256 as a transaction that (1) a Fund properly identifies as a hedging
transaction, (2) is entered into in the normal course of business primarily to
reduce the risk of price changes or currency fluctuations with respect to the
Fund's investments, and (3) results in ordinary income or loss. A mixed straddle
is a straddle where (1) at least one (but not all) of the straddle positions are
Section 1256 contracts and (2) the Fund properly identifies each position
forming part of the straddle. A straddle for these purposes generally is
offsetting positions with respect to personal property. A Fund holds offsetting
positions generally if there is a substantial diminution of the Fund's risk of
loss from holding a position by reason of its holding one or more other
positions.
Foreign Income Taxes. The International Stock Fund invests in the
securities of foreign corporations and issuers. Foreign countries may impose
income taxes, generally collected by withholding, on foreign-source dividends
and interest paid to a Fund. These foreign taxes will reduce the International
Stock Fund's distributed income. That Fund generally expects to incur, however,
no foreign income taxes on gains from the sale of foreign stocks and securities.
The United States has entered into income tax treaties with many foreign
countries to reduce or eliminate the foreign taxes on certain dividends and
interest received from corporations in those countries. The International Stock
Fund intends to take advantage of such treaties where possible. It is impossible
to predict with certainty the effective rate of foreign taxes that will be paid
by that Fund since the amount invested in particular countries will fluctuate
and the amounts of dividends and interest relative to total income will
fluctuate.
U.S. Foreign Tax Credits or Deductions for Shareholders of the
International Stock Fund. Section 853 of the Code allows a regulated investment
company to make a special election relating to foreign income taxes if more than
50 percent of the value of the company's total assets at the close of its
taxable year consists of stock or securities in foreign corporations and the
company satisfies certain holding period requirements. The International Stock
Fund generally expects, if necessary, to qualify for and to make the election
permitted under Section 853 of the Code. Although the International Stock Fund
intends to meet the requirements of the Code to "pass through" such foreign
taxes, there can be no assurance that the Fund will be able to do so. The
International Stock Fund will elect
21
<PAGE>
under Section 853 of the Code only if it believes that it is in the best
interests of its shareholders to do so.
If the International Stock Fund elects pursuant to Section 853,
shareholders of that Fund will be required to include in income (in addition to
other taxable distributions) and will be allowed a credit or deduction for,
their pro rata portions of the income taxes paid by the Fund to foreign
countries. A shareholder's use of the credits resulting from the election will
be subject to the limits of Section 904 of the Code. In general, those limits
will prevent a shareholder from using foreign tax credits to reduce U.S. taxes
on U.S. source income. Each shareholder should discuss the use of foreign tax
credits and the Section 904 limits with the shareholder's tax adviser.
No deduction for foreign taxes may be claimed under the Code by individual
shareholders who do not elect to itemize deductions on their federal income tax
returns, although such a shareholder may claim a credit for foreign taxes and in
any event will be treated as having taxable income in the amount of the
shareholder's pro rata share of foreign taxes paid by the Fund.
Each year, the International Stock Fund will provide a statement to each
shareholder showing the amount of foreign taxes for which a credit or a
deduction may be available.
Investment in Passive Foreign Investment Companies. If a Fund invests in an
entity that is classified as a "passive foreign investment company" ("PFIC") for
federal income tax purposes, the application of certain provisions of the Code
applying to PFICs could result in the imposition of certain federal income taxes
on the Fund. It is anticipated that any taxes on a Fund with respect to
investments in PFICs would be insignificant.
State Income Taxes
The state tax consequences of investments in the Fund are beyond the scope
of the tax discussions in the Prospectus and this Statement of Additional
Information.
Additional Information
The foregoing summary and the summary included in the Prospectus under
"Taxes" of tax consequences of investment in the Fund are necessarily general
and abbreviated. No attempt has been made to present a complete or detailed
explanation of tax matters. Furthermore, the provisions of the statutes and
regulations on which they are based are subject to change by legislative or
administrative action. State and local taxes are beyond the scope of this
discussion. Prospective investors in the Fund are urged to consult their own tax
advisers regarding specific questions as to federal, state, or local taxes.
22
<PAGE>
- --------------------------------------------------------------------------------
PERFORMANCE
- --------------------------------------------------------------------------------
The Trust may from time to time advertise or quote total return performance
for the Funds. These figures represent historical data and are calculated
according to SEC rules standardizing such computations. The investment return on
and the value of shares of the Fund will fluctuate so that the shares when
redeemed may be worth more or less than their original cost.
The Trust may publish average annual total return quotations for recent 1,
5, and 10-year periods (or a fractional portion thereof) computed by finding the
average annual compounded rates of return over the 1, 5, and 10-year periods
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1000 payment made at the beginning of the 1,
5, and 10-year periods (or a fraction portion
thereof)
Total return figures may also be published for recent 1, 5, and 10-year
periods (or a fractional portion thereof) where the total return figures
represent the percentage return for the 1, 5, and 10-year periods that would
equate the initial amount invested to the ending redeemable value. If the
Trust's registration statement under the 1940 Act with respect to the Fund has
been in effect less than 1, 5 or 10 years, the time period during which the
registration statement with respect to that Fund has been in effect will be
substituted for the periods stated. For the period ended October 31, 1998, the
average annual return for the Small Cap Fund for the 1 year and 5 year periods
and since inception (August 30, 1989) was ___%, ___% and ___%, respectively. For
the period ended October 31, 1998, the average annual return for the
International Stock Fund for the 1 year period and since inception (February 1,
1994) was ___% and ___%, respectively.
The Funds may compare their performance to other mutual funds with similar
investment objectives and to the mutual fund industry as a whole, as quoted by
ranking services and publications of general interest. Examples of these
services or publications include Lipper Analytical Services, Inc., Barron's
Business Week, The Financial Times, Financial World, Forbes, Investor's Business
Daily, Money, Morningstar Mutual Funds, Personal Investor, The Economist, The
Wall Street Journal and USA Today. (Lipper Analytical Services, Inc. is an
independent rating service that ranks over 1000 mutual funds based on total
return performance. These ranking services and publications may rank the
performance of the Fund against all other funds over specified categories.
23
<PAGE>
The Funds may also compare their performance to that of a recognized
unmanaged index of investment results, including the S&P 500, Dow Jones
Industrial Average, Russell 2000, and Nasdaq stock indices and with respect to
the International Stock Fund other suitable international indices, such as the
Morgan Stanley Capital International Europe, Australia, Far East Index or the
FT-S&P Actuaries Europe-Pacific Index . The comparative material found in
advertisements, sales literature, or in reports to shareholders may contain past
or present performance ratings. This is not to be considered representative or
indicative of future results or future performance.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements listed below are included in the Fund's 1998
Annual Report to Shareholders for the year ended October 31, 1998 (filed
electronically on _________, accession number _________) and are included in and
incorporated by reference into this Statement of Additional Information. [To be
filed by post-effective amendment]
24
<PAGE>
Part A-II
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
[Logo]
Columbia
CMC HIGH YIELD FUND
CMC High Yield Fund (the "Fund") is a portfolio of CMC Fund Trust seeking
to provide investors a high level of current income.
As with all mutual funds, the Securities and Exchange Commission does not
guarantee that the information in this Prospectus is accurate or complete, nor
has it judged the Fund for investment merit. It is a criminal offense to state
otherwise.
______________, 1998
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Information About the Fund.................................................... 2
Goal...................................................................... 2
Strategy ................................................................. 2
Risk Factors.............................................................. 3
Historical Performance.................................................... 5
Expenses ................................................................. 6
Financial Highlights...................................................... 7
Management................................................................ 7
Information About Your Investment............................................. 8
Your Account.............................................................. 8
Buying Shares......................................................... 8
Selling Shares........................................................ 9
Distribution and Taxes.................................................... 9
Income and Capital Gains Distributions................................ 9
Tax Effect of Distributions and Transactions..........................10
More About the Fund...........................................................11
Investment Strategy.......................................................11
Other Risks...............................................................12
Zero-Coupon and Pay-in-Kind Securities................................12
Year 2000.............................................................12
For More Information..........................................................13
- --------------------------------------------------------------------------------
INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
GOAL
What are the Fund's Investment Goals?
The Fund seeks to provide investors a high level of current income.
Capital appreciation is a secondary objective when consistent with a high
level of current income.
STRATEGY
What investment strategies does the Fund use to pursue these goals?
The Fund invests primarily in non-investment grade corporate debt
obligations, commonly referred to as "junk bonds." Under normal market
conditions, the Fund invests at least 80% of its total assets in high yield
corporate debt obligations rated Ba or B by Moody's Investors Services,
Inc. ("Moody's") or
2
<PAGE>
BB or B by Standard and Poor's Corporation ("S&P"). The Fund will not
invest in fixed income securities rated below Caa by Moody's or CCC by S&P,
and the Fund will not invest more than 10% of the Fund's total assets in
securities with Caa or CCC ratings.
------------------------------------------------------------
By concentrating on corporate debt obligations rated Ba or B
by Moody's or BB or B by S&P, the Fund intends to invest
primarily in "upper tier" non-investment grade securities.
By emphasizing the "upper tier" of non-investment grade
securities, the Fund seeks to provide investors with access
to higher yielding bonds without assuming all the risk
associated with the broader "junk bond" market. A
DESCRIPTION OF FIXED INCOME SECURITIES RATINGS IS CONTAINED
IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION.
------------------------------------------------------------
Columbia Management Co., the investment adviser for the Fund ("CMC" or
"Adviser") uses a "top down, sector rotation" emphasis, supplemented by a
bottom up" company analysis in selecting securities for the Fund. Using
this approach, the Adviser's investment team conducts an ongoing evaluation
of the economic and market environment to guide the selection of individual
bonds. Such an analysis helps the Adviser anticipate how economic and
market change, like movement in interest rates, inflation, government
regulation and demographics, may affect certain industries and specific
market sectors within those industries, and thereby the companies making up
that industry or market sector. After determining what industries and
market sectors to invest in, the Adviser conducts intensive, fundamental
research to identify attractive individual securities within the targeted
industries and market sectors. See "MORE ABOUT THE FUNDS" for more about
the strategy of the Fund.
RISK FACTORS
What are the principal risks of investing in the Fund?
The fixed income securities held in the Fund's investment portfolio
are subject to market risk and credit risk, both of which could cause the
value of your investment to go down.
INTEREST RATE RISK refers to the possibility that the value of the
Fund's investments will decline due to an increase in interest rates.
3
<PAGE>
------------------------------------------------------------
When interest rates go up, the value of the Fund's portfolio
will likely decline because fixed income securities in the
portfolio are paying a lower interest rate than what
investors could obtain in the current market. When interest
rates go down, the value of the Fund's portfolio will likely
rise, because fixed income securities in the portfolio are
paying a higher interest rate than newly issued fixed income
securities.
------------------------------------------------------------
The amount of change in the value of the Fund's portfolio depends upon
several factors, including the maturity date of the bonds in the portfolio.
In general, the price of fixed income securities with longer maturities are
more sensitive to interest rate changes than the price of fixed income
securities with shorter maturities.
CREDIT RISK refers to the ability of the issuer of the bond to meet
interest and principal payments when due. Generally, higher yielding bonds,
such as those purchased by the Fund, are subject to greater credit risk
than higher quality, lower yielding bonds. High yield bonds may be issued
in connection with corporate restructurings, such as leveraged buyouts,
mergers, acquisitions, debt recapitalizations, or similar events. High
yield bonds are often issued by smaller, less creditworthy companies or by
companies with substantial debt. Since the price of a high yield bond is
generally very sensitive to the financial conditions of the issuer, the
market for high yield bonds can behave more like the equity market. Adverse
changes in economic conditions, an issuer's financial condition, and
increases in interest rates may negatively affect the market for
lower-rated debt securities, more than higher-rated debt securities. In
addition, the secondary markets for lower-rated securities may be less
liquid and less active than markets for higher-rated securities, which may
limit the ability of the Fund to sell lower-rated securities at their
expected value.
You could lose money as a result of your investment in the Fund. You
should invest in this Fund only if you are willing to accept significant
fluctuations in the value of your investment in exchange for the
opportunity to achieve a high level of current income. An investment in
this Fund should be part of a balanced investment program.
A description of other investment restrictions and certain investment
practices of the Fund are included in the Statement of Additional
Information.
4
<PAGE>
HISTORICAL PERFORMANCE
How has the Fund historically performed?
The bar chart and table below illustrate the Fund's annual returns as
well as its long term performance. The bar chart shows how the Fund's
performance has varied from year to year. The table compares the Fund's
performance over time to that of the Merrill High Yield BB Index, a widely
recognized unmanaged index used as a benchmark for high yield bond
performance. Both the bar chart and the table assume the reinvestment of
dividends and distributions. The Fund's historical performance does not
indicate how the Fund will perform in the future.
Year by Year Total Return as of 12/31 each year
Year Total Return Percentage
---- -----------------------
1994* 1.19
1995 19.86
1996 9.70
1997 12.12
*Fund began operations July 6, 1994
Best Quarter: Q2 95 5.72%
Worst Quarter: Q2 96 0.08%
Average Annual Total Return as of 12/31/97
Since Fund's
Inception on
1 Year July 6, 1994
------ ------------
Fund 12.12% 12.10%
Merrill High Yield BB Index 12.96% 52.61%
The Fund's total return for the nine month period ended September 30, 1998
was 4.25%.
5
<PAGE>
EXPENSES
What expenses do I pay as an investor in the Fund?
The table below describes the fees and expenses that you may pay if
you buy and hold shares of the Fund. As a shareholder, you pay no
transaction fees in connection with your investment in the Fund. Annual
fund operating expenses described in the table are paid out of Fund assets
and are therefore reflected in the share price.
---------------------------------------------------------
The fund has no sales charge (load) or 12b-1 distribution
fees.
---------------------------------------------------------
- --------------------------------------------------------------------------------
Fee Table
Shareholder transaction fees None
Annual Fund Operating Expenses (expenses that
are paid out of Fund assets)
Management Fees 0.40%
Distribution and/or Service (12b-1) Fees None
Other Expenses ____%
Total Fund Operating Expenses ____%
- --------------------------------------------------------------------------------
Expense Example
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return
each year and that the Fund's operating expenses remain constant as a
percentage of net assets. Your actual costs may be higher or lower,
but based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$__________ $__________ $__________ $__________
6
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance since inception. Certain information reflects
financial results for a single fund share. The total returns in the table
represent the rate of return an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the Fund's financial statements, are included in the
Statement of Additional Information under "Financial Statements."
<TABLE>
<CAPTION>
Fiscal Year Ended October 31,
---------------------------------------------------------
1998 1997 1996 1995 1994 (1)
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................. $35.95 $36.24 $34.48 $35.00
------ ------ ------ ------
Income From Investment Operations:
Net Investment Income ................................ 3.18 3.23 3.31 0.94
Net Realized and Unrealized Gain (Loss)
on Investments...................................... 1.28 0.10 2.11 (0.52)
------ ------ ------ ------
Total From Investment Operations................. 4.46 3.33 5.42 0.42
------ ------ ------ ------
Less Distributions:
Dividends (from net investment income)................ (3.18) (3.23) (3.31) (0.94)
Distributions (from capital gains).................... (0.38) (0.39) (0.35)
------ ------ ------ ------
Total Distributions.............................. (3.56) (3.62) (3.66) (0.94)
------ ------ ------ ------
Net Asset Value, End of Period........................ $36.85 $35.95 $36.24 $34.48
====== ====== ====== ======
Total Return.......................................... 12.90% 9.61% 16.49% 1.21% (2)
Ratios/Supplemental Data
Net Assets, End of Period (in thousands).............. $119,196 $69,614 $42,192 $9,602
Ratio of Expenses to Average Net Assets............... 0.45% 0.50% 0.54% 0.54%
Ratio of Net Investment Income to Average
Net Assets ...................................... 8.60% 8.90% 9.36% 9.86%
Portfolio Turnover Rate............................... 68.96% 56.06% 45.64% 72.67%
(1) From inception of operations on July 6, 1994. Ratios and portfolio turnover
rates are annualized.
(2) Not annualized.
</TABLE>
MANAGEMENT
The Fund's investment adviser is Columbia Management Co., 1300 S.W. Sixth
avenue, P.O. Box 1350, Portland, Oregon 97207-1350 ("CMC" or Adviser). CMC has
acted as an investment adviser since 1969.
The Fund has contracted with CMC to provide research, advice and
supervision with respect to investment matters and to determine what securities
to purchase or sell
7
<PAGE>
and what portion of the Fund's assets to invest. For the fiscal year ended
October 31, 1998, the Fund paid CMC a management fee, expressed as a percentage
of average net assets, of 0.40%.
CMC uses an investment team approach to analyze investment themes and
strategies for the Fund. Members of the investment team are responsible for the
analysis of particular industries and market sectors within those industries,
and for recommendations on individual securities within those industries and
market sectors. Mr. Jeffrey L. Rippey, a Vice President of CMC and a Chartered
Financial Analyst, has the responsibility of implementing, on a daily basis, the
investment strategies developed for the Fund. Mr. Rippey has been employed by
CMC, and has been part of the investment team, since 1981.
- --------------------------------------------------------------------------------
INFORMATION ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
YOUR ACCOUNT
Buying Shares
The Fund enables clients of CMC to invest in a diversified portfolio
of lower-rated fixed income securities in a pooled environment, rather than
purchasing securities on an individual basis.
If you want to invest in the Fund, contact your CMC representative at
1-800-547-1037. In addition, an independent fiduciary for a CMC client
account, after careful review of this Prospectus, including the Fund's
expenses and consistency with the client's written investment guidelines,
may approve the investment in the Fund. Upon approving the investment, the
independent fiduciary will authorize CMC to invest a portion of the
client's portfolio in the Fund, at CMC's discretion, and subject to
limitations imposed by the independent fiduciary.
-----------------------------------------------------------
If CMC is considered to be a fiduciary of your assets,
including the account with the Fund, under the Employee
Retirement Income Security Act of 1974, certain conditions
must be satisfied before assets may be invested in the Fund
by CMC on your behalf. See the Statement of Additional
Information for more detail.
-----------------------------------------------------------
The price for Fund shares is the Fund's net asset value per share
("NAV"), which is generally calculated as of the close of trading on the
New York Stock Exchange (usually 4:00 p.m., Eastern time), every day the
exchange is open.
8
<PAGE>
Your order will be priced at the next NAV calculated after your order is
accepted by the Fund.
The Fund uses market value to value its securities as quoted by
dealers who are market makers in these securities or by an independent
pricing service, unless the Adviser determines that a fair value
determination should be made using procedures and guidelines established by
and under the general supervision of the Fund's Board of Trustees. Market
values are based on the average of bid and ask prices, or by reference to
other securities with comparable ratings, interest rates and maturities.
The Fund constantly monitors the prices received from market makers and its
pricing service and, at times, will manually price its securities using
procedures established by and under the general supervision of the Fund's
Board of Trustees.
Although the Fund has no policy with respect to initial or subsequent
minimum investments, purchase orders may be refused at the discretion of
the Fund.
Selling Shares
You may sell shares at any time. Upon redemption you will receive the
Fund's NAV next calculated after your order is accepted by the Fund's
transfer agent. Any certificates representing Fund shares being sold must
be returned with your redemption request. You can request a redemption by
calling your CMC Representative at 1-800-547-1037. Redemption proceeds are
normally transmitted in the manner specified in the redemption request on
the business day following the effective date of the redemption. Except as
provided by rules of the Securities and Exchange Commission, redemption
proceeds must be transmitted to you within seven days of the redemption
date.
The Fund also reserves the right to make a "redemption in kind" - pay
you in portfolio securities rather than cash - if the amount you are
redeeming is large enough to affect the Fund's operations (for example, if
the redemption represents more than 1% of the Fund's assets).
DISTRIBUTION AND TAXES
Income and Capital Gains Distributions
Income dividends, consisting of net investment income, are declared
daily and paid monthly by the Fund. All income dividends paid by the Fund
will be reinvested in additional shares of the Fund at the net asset value
on the dividend payment date, unless you have elected to receive the
dividends in cash. If all of your shares in the Fund are redeemed, the
undistributed dividends on the redeemed shares will be paid at that time.
The Fund generally distributes
9
<PAGE>
substantially all of its net realized capital gains to shareholders once a
year, usually in October. The amount distributed will depend on the amount
of capital gains realized from the sale of the Fund's portfolio securities.
Capital gain distributions are declared and paid as cash dividends and
reinvested in additional shares at the net asset value, as calculated after
payment of the distribution, at the close of business on the dividend
payment date, unless you have elected to receive the capital gain
distribution in cash.
Tax Effect of Distributions and Transactions
The dividends and distributions of the Fund are taxable to most
investors unless the shareholder is exempt from state or federal income
taxes or your investment is in a tax-advantaged account. The tax status of
any distribution is the same regardless of how long you have been in the
Fund and whether you reinvest your distributions or take them as income. In
general, distributions are taxable as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
Taxability of Distributions
Type of Tax Rate for Tax Rate for
Distribution 15% Bracket 28% Bracket or Higher
------------ ----------- ---------------------
<S> <C> <C>
Income Dividends Ordinary Income Rate Ordinary Income Rate
Short Term Capital Gains Ordinary Income Rate Ordinary Income Rate
Long Term Capital Gains 10% 20%
-----------------------------------------------------------------------------
</TABLE>
The Fund expects that, as a result of its investment objective to
achieve a high level of current income, its distributions will consist
primarily of income dividends. Each year the Fund will send you information
detailing the amount of ordinary income and capital gains distributed to
you for the previous year.
The sale of shares in your account may produce a gain or loss and is a
taxable event. For tax purposes, an exchange of shares of a Fund for shares
of another fund managed by the Adviser is the same as a sale.
------------------------------------------------------
Your investment in the Fund could have additional tax
consequences. Please consult your tax professional for
assistance.
------------------------------------------------------
10
<PAGE>
- --------------------------------------------------------------------------------
MORE ABOUT THE FUND
- --------------------------------------------------------------------------------
INVESTMENT STRATEGY
In selecting investments, and to supplement the credit rating analysis
supplied by Moody's and S&P, the Adviser uses a "top down, sector rotation"
emphasis supplemented by a "bottom up" company analysis. Top down analysis
begins with an overall evaluation of the investment environment, which allows
the Adviser to determine specific industries and market sectors within those
industries, and desired levels of portfolio quality, maturity and duration to
emphasize. Factors the Adviser considers in its top down analysis include:
o economic growth
o inflation
o interest rates
o federal reserve policy
o corporate profits
o demographics
o money flows
Once individual sectors, types of instruments and markets have been
identified, the Adviser employs fundamental analysis to select individual
securities. Fundamental analysis includes the evaluation of:
o a company's financial condition
o quality of management
o industry dynamics
o earnings growth and profit margins
o sales trends
o potential for new product development
o financial ratios
o investment in research and development
Although under normal market conditions the Fund will invest at least 80%
of its total assets in high yielding corporate debt obligations rated Ba or B by
Moody's or BB or B by S&P, under adverse market conditions, the Fund may depart
from its principal investment strategy by taking temporary defensive positions
in response to adverse market, economic or political conditions. When a Fund
assumes a temporary defensive position, it is not invested in securities
designed to achieve its stated investment objective.
11
<PAGE>
OTHER RISKS
In addition to the certain risks stated in the section titled "INFORMATION
ABOUT THE FUND" in this Prospectus, there are other risks of investing in the
Fund such as:
Zero-Coupon and Pay-in-Kind Securities
The Fund may invest in lower-rated debt securities structured as
zero-coupon or pay-in-kind securities. A zero-coupon security does not pay
periodic interest. Instead, the issuer sells the security at a substantial
discount from its stated value at maturity. The interest equivalent
received by the investor from holding this security to maturity is the
difference between the stated maturity value and the purchase price.
Pay-in-kind securities are securities that pay interest in either cash or
additional securities, at the issuer's option, for a specified period. The
price of pay-in-kind securities are more volatile than cash pay securities.
Additionally, the Fund accrues taxable income on zero-coupon and pay-
in-kind securities prior to the receipt of cash payments. The Fund intends
to distribute substantially all of its income to its shareholders to
qualify for pass through treatment under the tax laws and may, therefore,
need to use its cash reserves to satisfy distribution requirements.
Year 2000
Many of the services provided to the Funds by the Adviser and other
service providers depend on the proper functioning of their computer
software systems and those of their outside service providers. Many
computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated.
Such an event could have a negative impact on handling securities trades,
payments of interest and dividends, pricing and account services. Although,
at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Adviser has informed the Fund that it has been
actively working on necessary changes to its computer systems to prepare
for the year 2000 and expects that its systems, and those of the Fund's
outside service providers, will be ready for the year 2000.
12
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
You can find additional information on the Fund's structure and its
performance in the following documents:
o Annual/Semiannual Reports. While the Prospectus describes the Fund's
potential investments, these reports detail the Fund's actual
investments as of the report date. Reports include a discussion by
Fund management of recent market conditions, economic trends, and Fund
strategies that significantly affected the Fund's performance during
the reporting period.
o Statement of Additional Information ("SAI"). A supplement to the
Prospectus, the SAI contains further information about the Fund and
its investment restrictions, risks and polices. It also includes the
most recent annual report and the independent accountants' report.
A current SAI for the Fund is on file with the Securities and Exchange
Commission and is incorporated by reference in (is legally part of) this
Prospectus.
A copy of the SAI and current annual report may be attached to this
Prospectus. If it is not, or to obtain additional copies of the SAI or copies of
the current annual/semiannual report without charge, or to make inquiries of the
Fund, you may contact:
CMC Fund Trust
1300 S.W. Sixth Avenue
Portland, Oregon 97201
Telephone: 1-800-547-1037.
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, D.C. (telephone 1-800-SEC-0330) or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009. Reports and other information regarding the Fund are also on the
SEC's Internet website at http://www.sec.gov.
SEC file number: 811-5857
13
<PAGE>
Part B-II
Reg. Nos. 33-30394/811-5857
- --------------------------------------------------------------------------------
CMC HIGH YIELD FUND
A Portfolio of CMC Fund Trust
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
CMC Fund Trust
1300 SW Sixth Avenue
PO Box 1350
Portland, Oregon 97207
(503) 222-3600
This Statement of Additional Information contains information relating to
CMC Fund Trust (the "Trust") and a portfolio of the Trust, CMC High Yield Fund
(the "Fund").
This Statement of Additional Information is not a Prospectus. It relates to
a Prospectus dated ______________, 1998 (the "Prospectus") and should be read in
conjunction with the Prospectus. Copies of the Prospectus are available without
charge upon request to the Trust or by calling 1-800-547-1037.
TABLE OF CONTENTS
Description of the Fund....................................................... 2
Management....................................................................16
Investment Advisory and Other Fees Paid to Affiliates.........................18
Portfolio Transactions........................................................19
Capital Stock and Other Securities............................................21
Purchase Redemption and Pricing of Shares.....................................21
Custodians....................................................................23
Independent Accountants.......................................................24
Taxes.........................................................................24
Yield and Performance.........................................................27
Financial Statements..........................................................29
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE FUND
- --------------------------------------------------------------------------------
The Trust is an Oregon business trust established under a Restated
Declaration of Trust, dated October 13, 1993, as amended. The Trust is an
open-end management investment company comprised of separate portfolios, each of
which is treated as a separate fund. There are four portfolios established under
the Trust: the Fund, CMC Short Term Bond Fund, CMC Small Cap Fund, and CMC
International Stock Fund. The Fund is diversified, which means that, with
respect to 75% of its total assets, the Fund will not invest more than 5% of its
assets in the securities of any single issuer. The investment adviser to the
Fund is Columbia Management Co. (the "Adviser").
INVESTMENT OBJECTIVE, POLICIES AND RISK
As stated in the Prospectus, the Fund's primary investment objective is to
provide shareholders with a high level of current income. The Fund's objective
may not be changed without a vote of the outstanding voting securities of the
Fund. There is no assurance that the Fund will achieve its investment objective.
To achieve its investment objective, the Fund generally will invest at
least 80% of its total assets in high yielding corporate debt obligations rated
Ba or B by Moody's Investors Services, Inc. ("Moody's) or BB or B by Standard
and Poor's Corporation ("S&P"). The Fund may not invest in any fixed income
securities rated below Caa by Moody's or CCC by S&P, and the Fund will not
invest more than 10% of its total assets in corporate debt obligations rated Caa
or CCC. The Fund may also invest in unrated securities when it believes the
security is of comparable quality to that of securities eligible for purchase by
the Fund. Securities rated Ba or less by Moody's or BB or less by S&P, commonly
referred to as "junk bonds," are considered noninvestment grade securities,
subject to a high degree of risk, and considered speculative by the major credit
rating agencies with respect to the issuer's ability to meet principal and
interest payments. The Fund is designed for investors who are willing to assume
substantial risks of significant fluctuations in principal value. The Fund
should represent only a portion of a balanced investment program. See the
Prospectus "INFORMATION ABOUT THE FUND, Risk Factors," for a description of the
principal risks of investing in lower-rated securities. Bond ratings are
described below under "INVESTMENTS IN THE FUND."
The securities ratings by Moody's and S&P are based largely on the issuer's
historical financial condition and the rating agency's investment analysis at
the time of the rating. As a result, the rating assigned to a security does not
necessarily reflect the issuer's current financial condition, which may be
better or worse than the rating indicates. Credit ratings are only one factor
the Adviser relies on in evaluating lower-rated fixed income securities. The
analysis by the Adviser of a lower-rated security may also include consideration
of the issuer's experience and managerial strength, changing financial
condition, borrowing requirements or debt maturity schedules, regulatory
concerns, and responsiveness to changes in business conditions and interest
rates. The Adviser also may consider relative values based on anticipated cash
flow, interest or dividend coverage, balance sheet analysis, and earnings
prospects. Because of the number of investment considerations involved in
investing in lower-rated securities,
2
<PAGE>
achievement of the Fund's investment objective may be more dependent upon the
Adviser's credit analysis than is the case with investing in higher quality debt
securities.
There are no limitations on the dollar weighted average maturity of the
Fund's portfolio. Although a substantial portion of the lower-rated debt
securities that may be purchased by the Fund have maturities ranging from less
than one year to 10 years, the Fund may also purchase securities with maturities
of up to 30 years. Securities will be selected on the basis of the Fund's
assessment of interest rate trends and the liquidity of various instruments
under prevailing market conditions. Shifting the average maturity of the
portfolio in response to anticipated changes in interest rates generally will be
carried out through the sale of securities and the purchase of different
securities within the desired maturity range. This may result in greater
realized capital gains and losses than would be the case if the Fund generally
held all securities to maturity. Portfolio decisions will be made solely on the
basis of investment, rather than tax, considerations.
Depending upon the prevailing market conditions, debt securities may be
purchased at a discount from face value, producing a yield of more than the
coupon rate, or at a premium over face value, producing a yield of less than the
coupon rate. In making investment decisions, the Fund will consider factors
other than current yield, such as preservation of capital, maturity, and yield
to maturity.
An economic downturn or increase in interest rates is likely to have a
greater negative effect on the ability of the issuers of the Fund's securities
to pay principal and interest, meet projected business goals, and obtain
additional financing than issuers of higher-rated securities. These
circumstances also may result in a higher incidence of defaults compared to
higher-rated securities. In addition to general economic conditions, the price
of a lower-rated debt security is more sensitive to the financial condition of
the issuer than is the case with higher-rated debt securities. Consequently, the
market for lower-rated bonds often behaves more like the market for equity
securities. Adverse changes in economic conditions or an issuer's financial
condition and increases in interest rates may adversely affect the market for
lower-rated debt securities, the value of such securities in the Fund's
portfolio, and, therefore, the Fund's net asset value. As a result, investment
in the Fund is more speculative than investment in shares of a fund that invests
primarily in higher-rated debt securities.
The markets for lower-rated securities may be less liquid and less active
than markets for higher-rated securities. These factors may limit the ability of
the Fund to sell lower-rated securities at their expected value. Adverse
publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated debt securities,
especially in a thinly traded market. If market quotations are not readily
available for the Fund's lower-rated or nonrated securities, these securities
will be valued by a method the Board of Trustees believes accurately reflects
fair value. Judgment plays a greater role in valuing lower-rated debt securities
than it does in valuing securities for which more extensive quotations and last
sale information are available.
INVESTMENTS HELD BY THE FUND
In addition to corporate debt obligations such as bonds, debentures and
notes, securities held by the Fund may include a variety of fixed income debt
securities, such as
3
<PAGE>
bonds, debentures, notes, equipment trust certificates, short-term obligations
(those having maturities of 12 months or less), such as prime commercial paper
and bankers' acceptances, domestic certificates of deposit, obligations of or
guaranteed by the U.S. Government and its agencies or instrumentalities,
Government National Mortgage Association ("GNMA") mortgage-backed certificates
and other similar securities representing ownership in a pool of loans
("pass-through securities"), and repurchase agreements with banks or securities
dealers relating to these securities. Portfolio securities may have variable or
"floating" interest rates. Investments may also be made in fixed income
preferred stocks. Debt securities and preferred stocks may be convertible into,
or exchangeable for, common stocks, and may have warrants attached. Additional
information with respect to certain of the securities in which the Fund may
invest is set forth below.
Securities Rating Agencies
The following is a description of the bond ratings used by Moody's and S&P.
Subsequent to its purchase by the Fund, a security may cease to be rated, or its
rating may be reduced below the criteria set forth for the Fund. Neither event
would require the elimination of bonds from the Fund's portfolio, but the
Adviser will consider that event in its determination of whether the Fund should
continue to hold such security in its portfolio.
Bond Ratings. Moody's -- The following is a description of Moody's bond
ratings:
Aaa - Best quality; smallest degree of investment risk.
Aa - High quality by all standards; Aa and Aaa are known as high-grade
bonds.
A - Many favorable investment attributes; considered upper medium-grade
obligations.
Baa - Medium-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time.
Ba - Speculative elements; future cannot be considered well assured.
Protection of interest and principal payments may be very moderate and not well
safeguarded during both good and bad times over the future.
B - Generally lack characteristics of a 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 - Poor standing, may be in default; elements of danger with respect to
principal or interest.
S&P -- The following is a description of S&P's bond ratings:
AAA - Highest rating; extremely strong capacity to pay principal and
interest.
4
<PAGE>
AA - Also high-quality with a very strong capacity to pay principal and
interest; differ from AAA issues only by a small degree.
A - Strong capacity to pay principal and interest; somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions.
BBB - Adequate capacity to pay principal and interest; normally exhibit
adequate protection parameters, but adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay principal
and interest than for higher-rated bonds.
Bonds rated AAA, AA, A, and BBB are considered investment grade bonds.
BB - Less near-term vulnerability to default than other speculative grade
debt; face major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions that could lead to inadequate capacity to meet
timely interest and principal payment.
B - Greater vulnerability to default but presently have the capacity to
meet interest payments and principal repayments; adverse business, financial, or
economic conditions would likely impair capacity or willingness to pay interest
and repay principal.
CCC - Current identifiable vulnerability to default and dependent upon
favorable business, financial, and economic conditions to meet timely payments
of interest and repayments of principal. In the event of adverse business,
financial, or economic conditions, they are not likely to have the capacity to
pay interest and repay principal.
Bonds rated BB, B, and CCC are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and CCC a higher 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.
Certificates of Deposit
Certificates of Deposit are receipts issued by a U.S. bank in exchange for
the deposit of funds. The bank agrees to pay the amount deposited, plus
interest, to the bearer of the receipt on the date specified on the certificate.
Because the certificate is negotiable, it can be traded in the secondary market
before maturity. Under current FDIC regulations, $100,000 is the maximum
insurance payable on Certificates of Deposit issued to the Fund by any one bank.
Therefore, Certificates of Deposit purchased by the Fund may not be fully
insured.
Bankers' Acceptances
Time drafts are drawn on a U.S. bank by an exporter or importer to obtain a
stated amount of funds to pay for specific merchandise or, less frequently,
foreign exchange. The draft is then "accepted" by the U.S. bank (the drawee),
which in effect unconditionally guarantees to pay the face value of the
instrument on its maturity date. The face of the
5
<PAGE>
instrument specifies the dollar amount involved, the maturity date, and the
nature of the underlying transaction.
Letters of Credit
Letters of Credit are issued by banks and authorize the beneficiary to draw
drafts upon such banks for acceptance and payment under specified conditions.
Commercial Paper
Commercial paper is an unsecured short-term note of indebtedness issued in
bearer form by business or banking firms to finance their short-term credit
needs.
Government Securities
Government securities may be either direct obligations of the U.S. Treasury
or may be the obligations of an agency or instrumentality of the United States.
Treasury Obligations. The U.S. Treasury issues a variety of marketable
securities that are direct obligations of the U.S. Government. These securities
fall into three categories - bills, notes, and bonds distinguished primarily by
their maturity at time of issuance. Treasury bills have maturities of one year
or less at the time of issuance, while Treasury notes currently have maturities
of 1 to 10 years. Treasury bonds can be issued with any maturity of more than 10
years.
Obligations of Agencies and Instrumentalities. Agencies and
instrumentalities of the U.S. Government are created to fill specific
governmental roles. Their activities are primarily financed through securities
whose issuance has been authorized by Congress. Agencies and instrumentalities
include Export Import Bank, Federal Housing Administration, Government National
Mortgage Association, Tennessee Valley Authority, Banks for Cooperatives,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Land Banks, Federal National Mortgage Association, Federal
Home Loan Mortgage Corp., U.S. Postal System, and Federal Finance Bank. Although
obligations of "agencies" and "instrumentalities" are not direct obligations of
the U.S. Treasury, payment of the interest or principal on these obligations is
generally backed directly or indirectly by the U.S. Government. This support can
range from backing by the full faith and credit of the United States or U.S.
Treasury guarantees to the backing solely of the issuing instrumentality itself.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Fund may also invest in mortgage-backed securities, which are interests
in pools of mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
Fund may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
6
<PAGE>
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages and expose the Fund to a lower rate of return upon
reinvestment. To the extent that mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities. When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
price volatility, affecting the price volatility of the Fund's shares.
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying property, refinancing or foreclosure, net of fees or
costs which may be incurred. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. Because principal may be prepaid at
any time, mortgage-backed securities involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks, and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market value or yield
of mortgage-backed securities or to the value of the Fund's shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to regulation by the Secretary of Housing and Urban Development. FNMA
purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
7
<PAGE>
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA, but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was created
by Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers also create
pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There is no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the originators/services and poolers, the Adviser determines that the securities
meet the Fund's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
The Fund may invest in CMOs, which are hybrids between mortgage-backed
bonds and mortgage pass-through securities. Similar to a bond, interest and
prepaid principal are paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially protected against a sooner than desired return
of principal by the sequential
8
<PAGE>
payments. The prices of certain CMOs, depending on their structure and the rate
of prepayments, can be volatile. Some CMOs may also not be as liquid as other
securities.
In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to be paid currently. With some CMOs, the
issuer serves as a conduit to allow loan originators (primarily builders or
savings and loan associations) to borrow against their loan portfolios.
The Fund will invest only in those CMOs whose characteristics and terms are
consistent with the average maturity and market risk profile of the other fixed
income securities held by the Fund.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investment in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Adviser will, consistent
with the Fund's investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgage-backed securities
are being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, including automobile
loans, computer leases and credit card and other types of receivables, are being
securitized in pass-through structures similar to mortgage pass-through
structures described above or in a structure similar to the CMO structure.
Consistent with the Fund's investment objectives and policies, the Fund may
invest in these and other types of asset-backed securities that may be developed
in the future. In general, the collateral supporting these securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of state and
federal consumer credit laws, many of which give debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There
9
<PAGE>
is the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of direct parties. To reduce the effect of failures
by obligors on underlying assets to make payments, the securities may contain
elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor or the underlying assets. Liquidity protection refers to the
making of advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantee policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information respecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
Floating or Variable Rate Securities
Floating or variable rate securities have interest rates that periodically
change according to the rise and fall of a specified interest rate index or a
specific fixed-income security that is used as a benchmark. The interest rate
typically changes every six months, but for some securities the rate may
fluctuate weekly, monthly, or quarterly. The index used is often the rate for 90
or 180-day Treasury Bills. Variable-rate and floating-rate securities may have
interest rate ceilings or caps that fix the interest rate on such a security if,
for example, a specified index exceeds a predetermined interest rate. If an
interest rate on a security held by the Fund becomes fixed as a result of a
ceiling or cap provision, the interest income received by the Fund will be
limited by the rate of the ceiling or cap. In addition, the principal values of
these types of securities will be adversely affected if market interest rates
continue to exceed the ceiling or cap rate.
Loan Transactions
Loan transactions involve the lending of securities to a broker-dealer or
institutional investor for its use in connection with short sales, arbitrage, or
other securities transactions. Loans of portfolio securities of the Fund will be
made (if at all) in conformity with applicable federal and state rules and
regulations. The purpose of a qualified loan transaction is to afford the Fund
the opportunity to continue to earn income on the securities loaned and at the
same time to earn income on the collateral held by it.
It is the view of the Staff of the SEC that the Fund is permitted to engage
in loan transactions only if the following conditions are met: (1) the Fund must
receive at least 100 percent collateral in the form of cash, cash equivalents,
e.g., U.S. Treasury bills or notes, or an irrevocable letter of credit; (2) the
borrower must increase the collateral whenever the market value of the
securities loaned (determined on a daily basis) rises above the level of the
10
<PAGE>
collateral; (3) the Fund must be able to terminate the loan, after notice, at
any time; (4) the Fund must receive reasonable interest on the loan or a flat
fee from the borrower, as well as amounts equivalent to any dividends, interest,
or other distributions on the securities loaned and any increase in market
value; (5) the Fund may pay only reasonable custodian fees in connection with
the loan; (6) voting rights on the securities loaned may pass to the borrower;
however, if a material event affecting the investment occurs, the Trustees must
be able to terminate the loan and vote proxies or enter into an alternative
arrangement with the borrower to enable the Trustees to vote proxies. Excluding
items (1) and (2), these practices may be amended from time to time as
regulatory provisions permit.
While there may be delays in recovery of loaned securities or even a loss
of rights in collateral supplied if the borrower fails financially, loans will
be made only to firms deemed by the Adviser to be of good standing and will not
be made unless, in the judgment of the Adviser, the consideration to be earned
from such loans would justify the risk.
Options and Financial Futures Transactions
The Fund may invest up to 5 percent of its net assets in premiums on put
and call exchange-traded options. A call option gives the holder (buyer) the
right to purchase a security at a specified price (the exercise price) at any
time until a certain date (the expiration date). A put option gives the buyer
the right to sell a security at the exercise price at any time until the
expiration date. The Fund may also purchase options on securities indices.
Options on securities indices are similar to options on a security except that,
rather than the right to take or make delivery of a security at a specified
price, an option on a securities index gives the holder the right to receive, on
exercise of the option, an amount of cash if the closing level of the securities
index on which the option is based is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. The Fund may
enter into closing transactions, exercise its options, or permit the options to
expire. The Fund may only write call options that are covered. A call option on
a security is covered if written on a security the Fund owns or if the Fund has
an absolute and immediate right to acquire that security without additional cash
consideration upon conversion or exchange of other securities held by the Fund.
If additional cash consideration is required, that amount will be held in a
segregated account by the Fund's custodian bank. A call option on a securities
index is covered if the Fund owns securities whose price changes, in the opinion
of the Adviser, are expected to be substantially similar to those of the index.
A call option may also be covered in any other manner in accordance with the
rules of the exchange upon which the option is traded and applicable laws and
regulations. Each Fund may write such options on up to 25 percent of its net
assets.
The Fund may engage in financial futures transactions, including interest
rate futures transactions. Financial futures contracts are commodity contracts
that obligate the long or short holder to take or make delivery of a specified
quantity of a financial instrument, such as a security or the cash value of a
securities index, during a specified future period at a specified price. The
Fund's investment restrictions do not limit the percentage of the Fund's assets
that may be invested in financial futures transactions. The Fund, however, does
not intend to enter into financial futures transactions for which the aggregate
initial margin exceeds 5 percent of the net assets of the Fund after taking into
account unrealized profits and
11
<PAGE>
unrealized losses on any such transactions it has entered into. The Fund may
engage in futures transactions only on commodities exchanges or boards of trade.
The Fund will not engage in transactions in index options, financial
futures contracts, or related options for speculation, but only as an attempt to
hedge against market conditions affecting the values of securities that the Fund
owns or intends to purchase. When the Fund purchases a put on a stock index or
on a stock index future not held by the Fund, the put protects the Fund against
a decline in the value of all securities held by it to the extent that the stock
index moves in a similar pattern to the prices of the securities held. The
correlation, however, between indices and price movements of the securities in
which the Fund will generally invest may be imperfect. The Fund expects,
nonetheless, that the use of put options that relate to such indices will, in
certain circumstances, protect against declines in values of specific portfolio
securities or the Fund's portfolio generally. Although the purchase of a put
option may partially protect the Fund from a decline in the value of a
particular security or its portfolio generally, the cost of a put will reduce
the potential return on the security or the portfolio if either increases in
value.
Upon entering into a futures contract, the Fund will be required to deposit
with its custodian in a segregated account cash or certain U.S. government
securities, or any other portfolio assets as permitted by the Securities and
Exchange Commission rules and regulations in an amount known as the "initial
margin." This amount, which is subject to change, is in the nature of a
performance bond or a good faith deposit on the contract and would be returned
to the Fund upon termination of the futures contract, assuming all contractual
obligations have been satisfied.
The principal risks of options and futures transactions are: (a) possible
imperfect correlation between movements in the prices of options, currencies, or
futures contracts and movements in the prices of the securities or currencies
hedged or used for cover; (b) lack of assurance that a liquid secondary market
will exist for any particular options or futures contract when needed; (c) the
need for additional skills and techniques beyond those required for normal
portfolio management; (d) losses on futures contracts resulting from market
movements not anticipated by the investment adviser; and (e) possible need to
defer closing out certain options or futures contracts to continue to qualify
for beneficial tax treatment afforded "regulated investment companies" under the
Code.
Foreign Securities
The Fund may invest up to 10% of its total assets in fixed income
securities of foreign issuers, including securities issued by foreign
governments, denominated in U.S. dollars. Foreign securities may be subject to
foreign taxes that would reduce their effective yield. Certain foreign
governments levy withholding taxes against dividend and interest income.
Although in some countries a portion of these taxes is recoverable, the
unrecovered portion of any foreign withholding taxes would reduce the income the
Fund receives from its foreign investments. Foreign investments involve certain
other risks, including possible political or economic instability, the
possibility of currency exchange controls, reduced availability of public
information about a foreign company, and the lack of uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. In addition, with respect to certain foreign countries,
there is a possibility of expropriation,
12
<PAGE>
nationalization, confiscatory taxation, or diplomatic developments that could
affect investments in those countries. Finally, in the event of default on a
foreign debt obligation, it may be more difficult for the Fund to obtain or
enforce a judgment against the issuers of the obligation.
Repurchase Agreements
The Fund may invest in repurchase agreements, which are agreements by which
the Fund purchases a security and simultaneously commits to resell that security
to the seller (a commercial bank or recognized securities dealer) at a stated
price within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus a rate of interest
which is unrelated to the coupon rate or maturity of the purchased security.
Repurchase agreements may be considered loans by the Fund collateralized by the
underlying security. The obligation of the seller to pay the stated price is in
effect secured by the underlying security. The seller will be required to
maintain the value of the collateral underlying any repurchase agreement at a
level at least equal to the price of the repurchase agreement. In the case of
default by the seller, the Fund could incur a loss. In the event of a bankruptcy
proceeding commenced against the seller, the Fund may incur costs and delays in
realizing upon the collateral. The Fund will enter into repurchase agreements
only with those banks or securities dealers who are deemed creditworthy pursuant
to criteria adopted by the Trustees of the Trust. There is no limit on the
portion of the Fund's assets that may be invested in repurchase agreements with
maturities of seven days or less.
Illiquid Securities
No illiquid securities will be acquired by the Fund if upon the purchase
more than 10 percent of the value of the Fund's net assets would consist of
these securities. "Illiquid securities" are securities that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price used to determine the Fund's net asset value. Under
current interpretations of the Staff of the SEC, the following instruments in
which the Fund may invest will be considered illiquid: (1) repurchase agreements
maturing in more than seven days; (2) restricted securities (securities whose
public resale is subject to legal restrictions); (3) options, with respect to
specific securities, not traded on a national securities exchange that are not
readily marketable; and (4) any other securities in which the Fund may invest
that are not readily marketable.
The Fund may purchase without limit, however, certain restricted securities
that can be resold to qualifying institutions pursuant to a regulatory exemption
under Rule 144A ("Rule 144A securities"). If a dealer or institutional trading
market exists for Rule 144A securities, such securities are deemed to be liquid
and thus not subject to the Fund's 10 percent limitation on the investment in
restricted or other illiquid securities. Under the supervision of the Trustees
of the Trust, the Fund's adviser determines the liquidity of Rule 144A
securities and, through reports from the adviser, the Trustees monitor trading
activity in these securities. In reaching liquidity decisions, the adviser will
consider, among other things, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting
13
<PAGE>
offers, and the procedures for the transfer). Because institutional trading in
Rule 144A securities is relatively new, it is difficult to predict accurately
how these markets will develop. If institutional trading in Rule 144A securities
declines, the Fund's liquidity could be adversely affected to the extent it is
invested in such securities.
Convertible Securities and Warrants
The Fund may invest in corporate debt securities or preferred stocks that
are convertible into or exchangeable for common stock. The Fund may also acquire
common stock in the following circumstances: In connection with the purchase of
a unit of securities that include both fixed income securities and common stock;
when fixed income securities held by the Fund are converted by the issuer into
common stock; upon the exercise of warrants attached to fixed income securities
held by the Fund; and if purchased in the context of a corporate transaction in
which the holders of common stock will receive newly issued fixed income
securities. Common stock acquired by the Fund in these circumstances may be held
by the Fund to permit an orderly disposition or to establish long term holding
periods for income tax purposes.
- --------------------------------------------------------------------------------
Temporary Investments
When, as a result of market conditions, the Fund determines a temporary
defensive position is warranted to help preserve capital, the Fund may, without
limit, temporarily retain cash or invest in prime commercial paper, high-grade
debt securities, securities of the U.S. Government and its agencies and
instrumentalities, and high-quality money market instruments, including
repurchase agreements. When the Fund assumes a temporary defensive position, it
is not invested in securities designed to achieve its investment objective of
providing investors a high level of current income.
- --------------------------------------------------------------------------------
INVESTMENT RESTRICTIONS
The following is a list of investment restrictions applicable to the Fund.
If a percentage limitation is adhered to at the time of the investment, a later
increase or decrease in percentage resulting from any change in value or net
assets will not result in a violation of such restriction. The Trust may not
change these restrictions without a majority vote of the outstanding securities
of the Fund.
The Fund may not:
1. Buy or sell commodities or commodity futures contracts.
2. Concentrate investments in any industry. However, it may invest up to 25
percent of the value of its total assets in any one industry and more than 25
percent of the value of its total assets in cash, cash equivalents, or
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities. Commitments to purchase securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities on a "when-issued"
basis may not exceed 20 percent of the total assets of the Fund. Emphasis on
investments in securities of a particular industry will be shifted whenever the
adviser determines that such
14
<PAGE>
action is desirable for investment reasons. The Trustees will periodically
review these decisions of the Adviser.
3. Buy or sell real estate. However, the Fund may purchase or hold
securities issued by companies, such as real estate investment trusts, that deal
in real estate or interests therein, and participation interests in pools of
real estate mortgage loans.
4. Make loans to other persons (except by purchase of short-term commercial
paper, bonds, debentures, repurchase agreements or other debt securities
constituting part of an issue). The Fund may lend portfolio securities to
broker-dealers or other institutional investors if, as a result thereof, the
aggregate value of all securities loaned does not exceed 33 1/3 percent of its
total assets.
5. Purchase illiquid securities, if upon the purchase more than 10% of the
value of the Fund's net assets would consist of these securities. See
"DESCRIPTION OF THE FUND, INVESTMENTS IN THE FUND" for a complete discussion of
illiquid securities.
6. Purchase the securities of any issuer if the purchase, at the time
thereof, would cause more than 10 percent of the outstanding voting securities
of that issuer to be held in the Fund.
7. Purchase the securities of any issuer if the purchase, at the time
thereof, would cause more than 5 percent of the value of its total assets at
market value to be invested in the securities of that issuer (other than
obligations of the U.S. Government and its instrumentalities), with reference to
75 percent of the assets of the Fund.
8. Purchase or retain securities of an issuer if those officers or
directors of the Fund or the Adviser who individually own more than 1/2 of 1% of
the outstanding securities of that issuer together own more than 5% of such
securities.
9. Purchase securities of other open-end investment companies.
10. Issue senior securities, bonds, or debentures.
11. Underwrite securities of other issuers, except the Fund may acquire
portfolio securities in circumstances where, if the securities are later
publicly offered or sold by the Fund, it might be deemed to be an underwriter
for purposes of the 1933 Act.
12. Borrow money except as a temporary measure for extraordinary or
emergency purposes. Its borrowings may not exceed 5 percent of the gross assets
of the Fund valued at the lesser of cost or market value, nor may it pledge,
mortgage, or hypothecate assets valued at market to an extent greater than 10
percent of the gross assets valued at cost of the Fund.
13. Invest in the securities of any company if the purchase, at the time
thereof, would cause more than 5 percent of the value of the Fund's total assets
to be invested in companies which, including predecessors and parents, have a
record of less than three years of continuous operation.
15
<PAGE>
14. Invest in companies to exercise control or management.
15. Buy any securities or other property on margin, except for short-term
credits necessary for clearing transactions and except that margin payments and
other deposits in connection with transactions in options, futures, and forward
contracts shall not be deemed to constitute purchasing securities on margin.
16. Engage in short sales of securities except to the extent that it owns
other securities convertible into an equivalent amount of such securities. These
short sales may only be made to protect a profit in or to attempt to minimize a
loss with respect to convertible securities. In any event no more than 10
percent of the Fund's net assets valued at market may, at any time, be held as
collateral for such sales.
17. Invest directly in oil, gas, or other mineral development or
exploration programs or leases; although, the Fund may own securities of
companies engaged in those businesses.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Fund is managed under the general supervision of the Trustees of the
Trust. The trustees and officers of the Trust are listed below, together with
their principal business occupations. All principal business positions have been
held for more than five years, except as follows: Columbia Small Cap Fund, Inc.
since August 1996; Columbia Real Estate Equity Fund, Inc. since April 1994; and
except as otherwise indicated. The term "Columbia Funds" refers to Columbia High
Yield Fund, Inc., Columbia Balanced Fund, Inc., Columbia Common Stock Fund,
Inc., Columbia International Stock Fund, Inc., Columbia Municipal Bond Fund,
Inc., Columbia Real Estate Equity Fund, Inc., Columbia U.S. Government
Securities Fund, Inc., Columbia Special Fund, Inc., Columbia Growth Fund, Inc.,
Columbia Daily Income Company, Columbia Small Cap Fund, Inc., and Columbia Fixed
Income Securities Fund, Inc.
J. JERRY INSKEEP, JR.,* Chairman, President, and Trustee of the Trust; Chairman,
President, and Director of each of the Columbia Funds; Consultant with Fleet
Financial Group, Inc. (since December 1997); formerly Chairman and a Director of
Columbia Management Co., Columbia Funds Management Company ("CFMC"), Columbia
Trust Company (the "Trust Company"), the Fund's transfer agent; and formerly a
Director of Columbia Financial Center Incorporated ("Columbia Financial"). Mr.
Inskeep's business address is 1300 S.W. Sixth Avenue, P.O. Box 1350, Portland,
Oregon 97207.
JAMES C. GEORGE, Trustee of the Trust (since December 1997) and Director of each
of the Columbia Funds (since June 1994). Mr. George, former investment manager
of the Oregon State Treasury (1962-1992), is an investment consultant. Mr.
George's business address is 1001 S.W. Fifth Avenue, Portland, Oregon 97204.
THOMAS R. MACKENZIE, Trustee of the Trust (since December 1997); Director of
each of the Columbia Funds; and Chairman of the Board of Directors of Group
Mackenzie (architecture, planning, interior design, engineering). Mr.
Mackenzie's address is 0690 S.W. Bancroft Street, Portland, Oregon 97201.
16
<PAGE>
ROBERT J. MOORMAN, * Secretary of the Trust and each of the Columbia Funds
(since January 1998); attorney with Stoel Rives LLP. Mr. Moorman's business
address is 900 S.W. Fifth Avenue, Suite 2600, Portland, Oregon 97204-1268.
RICHARD L. WOOLWORTH, Trustee of the Trust; Director of each of the Columbia
Funds; Chairman and Chief Executive Officer of Blue Cross and Blue Shield of
Oregon; and Chairman and Chief Executive Officer of the Regence Group, health
insurers. Mr. Woolworth's address is 100 S. W. Market Street, Portland, Oregon
97201.
*Mr. Inskeep and Mr. Moorman are each an "interested person" as defined by
the Investment Company Act of 1940 (the "1940 Act") and receive no trustee fees
or salaries from the Trust or the Fund.
The following table sets forth the compensation received by the
disinterested trustees of the Trust for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
Total Compensation from the
Trustee Compensation From Trust* Trust and Columbia Funds
- ------- ------------------------ ---------------------------
<S> <C> <C>
Richard L. Woolworth $ $
Thomas R. Mackenzie $ $
James C. George $ $
*Mr. Mackenzie and Mr. George became Trustees of the Trust on December 10, 1997.
Therefore, their compensation is for a partial year.
</TABLE>
At September 30, 1998, to the knowledge of the Trust, the following persons
owned of record or beneficially more than 5 percent of the outstanding shares of
the Fund:
<TABLE>
<CAPTION>
Shares Beneficially Owned
Name and Address at September 30, 1998
- ---------------- -------------------------
<S> <C> <C>
Legacy Health Systems Employees 772,584 (10.38%)
Retirement Plan-Fixed
Legacy Health Systems
1919 N.W. Lovejoy
Portland, OR 97209
Legacy Fixed Income Investment Fund 1,141,094 (15.33%)
Legacy Health Systems
Corporate Financial Administrative Services
1919 N.W. Lovejoy
Portland, OR 97209
Legacy Industry Pension Fund 395,487 (5.31%)
2929 N.W. 31st Avenue
Portland, OR 97210
</TABLE>
17
<PAGE>
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND OTHER FEES PAID TO AFFILIATES
- --------------------------------------------------------------------------------
The investment adviser to the Fund is Columbia Management Co. (the
"Adviser"). The Adviser has entered into an investment contract with the Fund.
Pursuant to the investment contract the Adviser provides research, advice, and
supervision with respect to investment matters and determines what securities to
purchase or sell and what portion of the Fund's assets to invest. The Adviser
and the Trust Company are indirect wholly owned subsidiaries of Fleet Financial
Group, Inc. ("Fleet"). Fleet and its affiliates provide a wide range of banking,
financial, and investment products and services to individuals and businesses.
Their principal activities include customer and commercial banking, mortgage
lending and servicing, trust administration, investment management, retirement
plan services, brokerage and clearing services, securities underwriting, private
and corporate financing and advisory activities, and insurance services.
The Adviser provides office space and pays all executive salaries and
executive expenses of the Fund. The Fund assumes its costs relating to trust
matters, cost of services to shareholders, transfer and dividend paying agent
fees, custodian fees, legal and auditing expenses, disinterested trustees fees,
taxes and governmental fees, interest, broker's commissions, transaction
expenses, cost of stock certificates and any other expenses (including clerical
expenses) of issue, sale, repurchase, or redemption of its shares, expenses of
registering or qualifying its shares for sale, transfer taxes, and all other
expenses of preparing its registration statement, prospectuses, and reports.
For its services provided to the Fund, the Adviser charges an advisory fee,
which is accrued daily and paid monthly. The advisory fee for the Fund equals
the annual rate of .40 of 1 percent of its daily net assets. Advisory fees paid
by the Fund to the Adviser were __________, $354,620, and $214,819 for fiscal
year 1998, fiscal year 1997, and fiscal year 1996, respectively.
The Trust Company acts as transfer agent and dividend crediting agent for
the Fund. Its address is 1301 SW Fifth Avenue, P.O. Box 1350, Portland, Oregon
97207. It issues certificates for shares of the Fund, if requested, and records
and disburses dividends for the Fund. The Trust pays the Trust Company a per
account fee of $1 per month for each shareholder account with the Fund existing
at any time during the month, with a minimum aggregate fee of $1,500 per month.
In addition, the Trust pays the Trust Company for extra administrative services
performed at cost in accordance with a schedule set forth in the agreement
between the Trust Company and the Trust and reimburses the Trust Company for
certain out-of-pocket expenses incurred in carrying out its duties under that
agreement. The Trust paid $18,000 to the Trust Company for services performed
for fiscal 1998 under the transfer agent agreement relating to the Fund.
18
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
The Fund will not generally invest in securities for short-term capital
appreciation but, when business and economic conditions, market prices, or the
Fund's investment policy warrant, individual security positions may be sold
without regard to the length of time they have been held.
There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price paid
by the Fund usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Fund includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Fund of negotiated brokerage commissions. Such commissions vary among different
brokers, and a particular broker may charge different commissions according to
such factors as the difficulty and size of the transaction.
Prompt execution of orders at the most favorable price will be the primary
consideration of the Fund in transactions where fees or commissions are
involved. Additional factors considered in the process of selecting a
broker-dealer to execute a transaction include: (i) professional capability of
the executing broker-dealer and the value and quality of the services provided
by the broker-dealer; (ii) size and type of the transaction; (iii) timing of the
transaction in the context of market prices and trends; (iv) nature and
character of markets for the security to be purchased or sold; (v) the
broker-dealer's execution efficiency and settlement capability; (vi) the
executing broker-dealer's stability and the execution services it renders to the
Adviser on a continuing basis; and (vii) reasonableness of commission. Research,
statistical, and other services also may be taken into consideration in
selecting broker-dealers. These services may include: advice concerning the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or the purchasers or sellers of
securities; and furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategies, and performance
of accounts.
Allocation of transactions to obtain research services for the Adviser
enables the Adviser to supplement its own research and analysis with the
statistics, information, and views of others. While it is not possible to place
a dollar value on these services, it is the opinion of the Adviser that the
receipt of such services will not reduce the overall expenses for its research
or those of its affiliated companies. The fees paid to the Adviser by the Fund
would not be reduced as a result of the receipt of such information and services
by the Fund. The receipt of research services from brokers or dealers might be
useful to the Adviser and its affiliates in rendering investment management
services to the Fund or other clients; and, conversely, information provided by
brokers or dealers who have executed orders on behalf of other clients might be
useful to the Adviser in carrying out its obligations to the Fund. As permitted
by Section 28(e) of the Securities Exchange Act of 1934, the Adviser may cause
the Fund to pay a broker-dealer which provides "brokerage and research services"
(as defined in the Act) to the Adviser an amount of undisclosed commission for
effecting a securities transaction for the Trust in excess of the commission
which another broker-dealer would have
19
<PAGE>
charged for effecting that transaction. No brokerage commissions were paid by
the Fund during the last three fiscal years.
The Adviser may use research services provided by, and place agency
transactions with, affiliated broker-dealers if the commissions are fair and
reasonable and comparable to commissions charged by non-affiliated qualified
brokerage firms.
Investment decisions for the Fund are made independently from those of the
other portfolios of the Trust or accounts managed by the Adviser or its
affiliates, including Columbia Funds Management Company. The same security is
sometimes held in the portfolio of more than one fund or account. Simultaneous
transactions are inevitable when several funds or accounts are managed by the
same investment adviser, particularly when the same security is suitable for the
investment objective of more than one fund or account. In the event of
simultaneous transactions, allocations among the Fund, and the other portfolios
of the Trust and other accounts will be made on an equitable basis.
Both the Trust and the Adviser have adopted a Code of Ethics (the "Code")
that sets forth general and specific standards relating to the securities
trading activities of all their employees. The purpose of the Code is to ensure
that all employees conduct their personal transactions in a manner that does not
interfere with the portfolio transactions of the Fund or the Adviser's other
clients or take unfair advantage of their relationship with the Adviser. The
specific standards in the Code include, among others, a requirement that all
employee trades be pre-cleared; a prohibition on investing in initial public
offerings; required pre-approval of an investment in private placements; a
prohibition on portfolio managers trading in a security seven days before or
after a trade in the same security by an account over which the manager
exercises investment discretion; and a prohibition on realizing any profit on
the trading of a security held less than 60 days. Certain securities and
transactions, such as mutual fund shares or U. S. Treasuries and purchases of
options on securities indexes or securities under an automatic dividend
reinvestment plan, are exempt from the restrictions in the Code because they
present little or no potential for abuse. Certain transactions involving the
stocks of large capitalization companies are exempt from the seven day black-out
period and short-term trading prohibitions because such transactions are highly
unlikely to affect the price of these stocks. In addition to the trading
restrictions, the Code contains reporting obligations that are designed to
ensure compliance and allow the Adviser's Ethics Committee to monitor that
compliance.
The Trust and the Adviser have also adopted a Policy and Procedures
Designed to Detect and Prevent Insider Trading (the "Insider Trading Policy").
The Insider Trading Policy prohibits any employee from trading, either
personally or on behalf of others (including a client account), on the basis of
material nonpublic information. All employees are required to certify each year
that they have read and complied with the provisions of the Code and the Insider
Trading Policy.
20
<PAGE>
- --------------------------------------------------------------------------------
CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------
The Trust may establish separate series of investment portfolios under its
Restated Declaration of Trust. The Fund, CMC Small Cap Fund, CMC International
Stock Fund, and CMC Short Term Bond Fund are the only series established under
the Trust. Shares of each series vote together, except as provided in the
Trust's Declaration of Trust and under applicable law. It is expected that
shares of a series would vote separately by series on any changes in fundamental
investment policies relating to that series. All shares of each series of the
Trust, including the Fund, have equal rights as to voting, redemption, dividends
and distributions. All issued and outstanding shares of the Fund are fully paid
and nonassessable. Shares have no preemptive or conversion rights. Fractional
shares have the same rights proportionately as full shares. The shares of the
Fund do not have cumulative voting rights, which means that the holders of more
than 50 percent of the shares of the Fund and any other portfolio of the Trust,
voting for the election of Trustees, can elect all the Trustees if they choose
to do so. In certain circumstances, Trustees may be removed by action of the
Trustees or the shareholders.
Any reference to the phrase "vote of a majority of the outstanding voting
securities of the Fund" means the vote at any meeting of shareholders of the
Fund of (i) 67 percent or more of the shares present or represented by proxy at
the meeting, if the holders of more than 50 percent of the outstanding shares
are present or represented by proxy, or (ii) more than 50 percent of the
outstanding shares, whichever is less.
- --------------------------------------------------------------------------------
PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
PURCHASES
Shareholders of the Fund are investment advisory clients of the Adviser.
However, with respect to assets of an investment advisory client of the Adviser
invested in the Fund, that client will pay no fee pursuant to its separate
management contract with the Adviser (for the period during which the assets are
invested in the Fund).
If the Adviser is deemed to be a fiduciary with respect to a prospective
shareholder of the Fund pursuant to the Employee Retirement Income Security Act
of 1974 ("ERISA"), certain conditions must be satisfied before assets may be
invested in the Fund by the Adviser on behalf of the shareholder. These
conditions are set forth by the U. S. Department of Labor in Prohibited
Transaction Class Exemption No. 77-4 (the "Exemption"). The Exemption permits
the Adviser to direct investments of ERISA-qualified plans to a mutual fund,
such as the Fund, for which the Adviser serves as an investment adviser if,
after review of the Prospectus and disclosure relating to fees of the Fund and
fees under the advisory contract, another fiduciary, as determined under ERISA,
with respect to that shareholder approves investments in the Fund. The second
fiduciary must be independent of and unrelated to the Adviser under standards
set forth by the U. S. Department of Labor in the Exemption.
21
<PAGE>
The second, independent fiduciary that must approve investments in the Fund
by the Adviser must not be engaged as a second fiduciary only in contemplation
of a possible investment in the Fund. Rather, the second, independent fiduciary
is almost always a committee appointed by the employee benefit plan sponsor and
has oversight responsibility for appointment of CMC as an investment adviser
with respect to certain plan assets. This committee is almost always made up of
one or more employees of the plan sponsor, and, as such, these employees receive
compensation from the plan sponsor but are not compensated out of plan assets.
The transfer agent for the Fund may, at its discretion, permit investors to
purchase shares through the exchange of securities they hold. Any securities
exchanged must meet the investment objective, policies, and limitations of the
Fund, must have a readily ascertainable market value, must be liquid, and must
not be subject to restrictions on resale. The market value of any securities
exchanged, plus any cash, must be at least $100,000. Shares purchased in
exchange for securities generally may not be redeemed or exchanged until the
transfer has settled - usually within 15 days following the purchase by
exchange. The basis of the exchange will depend upon the relative net asset
value of the shares purchased and securities exchanged. Securities accepted by
the Fund will be valued in the same manner as the Fund values its assets. Any
interest earned on securities following their delivery to the transfer agent and
prior to the exchange will be considered in valuing the securities. All
interest, dividends, subscription, or other rights attached to the securities
become the property of the Fund, along with the securities. Before engaging in
an exchange, investors should consult their tax advisers concerning the tax
consequences to them of the exchange.
REDEMPTIONS
Redemptions of all or any portion of a shareholder's investment can be made
at any time. Redemption of shares are at the net asset value next computed after
receipt of a redemption order on a day the New York Stock Exchange ("NYSE") is
open for business. Payment will be made within seven days of the date of
redemption, except as provided by the rules of the SEC. The Trust may suspend
the determination of net asset value of the Fund and the right of redemption for
any period (1) when the New York Stock Exchange is closed, other than customary
weekend and holiday closings, (2) when trading on the New York Stock Exchange is
restricted, (3) when an emergency exists as a result of which sale of securities
owned by the Fund is not reasonably practicable or it is not reasonably
practicable for the Trust to determine the value of the Fund's net assets, or
(4) as the Securities and Exchange Commission ("SEC") may by order permit for
the protection of security holders, provided the Trust complies with rules and
regulations of the SEC which govern as to whether the conditions prescribed in
(2) or (3) exist. The New York Stock Exchange observes the following holidays:
New Year's Day, Martin Luther King, Jr.'s Birthday, Washington's Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
In the case of suspension of the right to redeem, shareholders may withdraw
their redemption request or receive payment based upon the net asset value
computed upon the termination of the suspension.
The Fund reserves the right to redeem Fund shares in cash or in kind. The
Trust has elected, however, to be governed by Rule 18f-1 under the Investment
Company Act of 1940 (the "1940 Act"), pursuant to which the Fund is obligated to
redeem, during any 90-day
22
<PAGE>
period, shares of a shareholder solely for cash up to the lesser of $250,000 or
1 percent of the net asset value of the Fund. A shareholder who is redeemed in
kind may incur brokerage fees upon the sale of any securities distributed upon
redemption.
PRICING OF SHARES
The net asset value per share of the Fund is determined by the Adviser,
under procedures approved by the trustees of the Trust, as of the close of
regular trading (normally 4:00 p.m. New York time) on each day the NYSE is open
for business and at other times determined by the trustees. The net asset value
per share is computed by dividing the value of all assets of the Fund, less its
liabilities, by the number of shares outstanding. The Fund's portfolio
securities and other assets for which market quotations are readily available
are stated at market value. Market value is determined on the basis of last
reported sales prices, or if no sales are reported, as is the case for most
securities traded over-the-counter, at the average between representative bid
and asked quotations obtained from a third party pricing service or from
established market makers. Fixed income securities, including those to be
purchased under firm commitment agreements (other than obligations having a
maturity of 60 days or less), are normally valued on the basis of quotations
obtained from brokers and dealers or pricing services, which take into account
appropriate factors such as institutional-sized trading in similar groups of
securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data. Short-term investments having a maturity
of 60 days or less are valued at amortized cost, when the Board of Trustees
determines that amortized cost is their fair value.
Certain fixed income securities for which daily market quotations are not
readily available, or for which the Adviser believes do not accurately value the
security in question, may be valued by the Adviser, pursuant to guidelines
established by the Board of Trustees, with reference to fixed income securities
whose prices are more readily obtainable and whose durations are comparable to
the securities being valued. Subject to the foregoing, other securities for
which market quotations are not readily available are valued at fair value as
determined in good faith by the Board of Trustees.
- --------------------------------------------------------------------------------
CUSTODIANS
- --------------------------------------------------------------------------------
United States National Bank of Oregon, 321 SW Sixth Avenue, Portland,
Oregon 97208, acts as general custodian of the Trust (a "Custodian"). Chase
Manhattan Bank ("Chase" or a "Custodian"), One Pierrepont Plaza, Brooklyn, New
York 11201, has entered into a custodian agreement with the Trust in respect of
the purchase of foreign securities by the Fund. The Custodians hold all
securities and cash of the Fund, receive and pay for securities purchased,
deliver against payment securities sold, receive and collect income from
investments, make all payments covering expenses of the Fund, and perform other
administrative duties, all as directed by authorized officers of the Trust. The
Custodians do not exercise any supervisory function in the purchase and sale of
portfolio securities or payment of dividends.
23
<PAGE>
The Fund is authorized to invest up to 10% of its total assets in fixed
income securities of foreign issuers, denominated in U.S. dollars. Portfolio
securities purchased outside the United States by the Fund are maintained in the
custody of foreign banks, trust companies, or depositories that have
sub-custodian arrangements with Chase (the "foreign sub-custodians"). Each of
the domestic and foreign custodial institutions that may hold portfolio
securities of the Fund has been approved by the Trustees of the Trust or a
delegate of the Trustees in accordance with regulations under the 1940 Act.
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 1300 S.W. Fifth Avenue, Suite 3100, Portland,
Oregon 97201, serves as the Trust's independent accountants and, in addition to
examining the annual financial statements of the Trust, assists in the
preparation of the tax returns of the Trust and in certain other matters.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
Federal Income Taxes
The Fund intends and expects to meet continuously the tests for
qualification as a regulated investment company under Part I of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund believes it
satisfies the tests to qualify as a regulated investment company.
To qualify as a regulated investment company for any taxable year, the Fund
must, among other things:
(a) derive at least 90 percent of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, or other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "90 Percent Test"); and
(b) diversify its holdings so that at the end of each quarter (i) 50
percent or more of the value of the assets of the Fund is represented by cash,
government securities, and other securities limited, in respect of any one
issuer of such other securities, to an amount not greater than 5 percent of the
value of the assets of the Fund and 10 percent of the outstanding voting
securities of such issuer, and (ii) not more than 25 percent of the value of the
assets of the Fund is invested in the securities (other than government
securities) of any one issuer or of two or more issuers that the Fund "controls"
within the meaning of Section 851 of the Code and that meet certain
requirements. In addition, the Fund must file, or have filed, a proper election
with the Internal Revenue Service.
24
<PAGE>
Part I of Subchapter M of the Code will apply to the Fund during a taxable
year only if it meets certain additional requirements. Among other things, the
Fund must: (a) have a deduction for dividends paid (without regard to capital
gain dividends) at least equal to the sum of 90 percent of its investment
company taxable income (computed without any deduction for dividends paid) and
90 percent of its tax-exempt interest in excess of certain disallowed deductions
(unless the Internal Revenue Service waives this requirement) and (b) either (i)
have been subject to Part I of Subchapter M for all taxable years ending after
November 8, 1983 or (ii) as of the close of the taxable year have no earnings
and profits accumulated in any taxable year to which Part I of Subchapter M did
not apply.
The Trust currently has four portfolios, including the Fund. The Trust may
establish additional funds in the future. Federal income tax laws generally will
treat each fund as a separate corporation (provided that each fund consists of a
segregated portfolio of assets the beneficial interests in which are owned by
the holders of a class or series of stock that is preferred over all other
classes or series in respect of that portfolio of assets).
A regulated investment company that meets the requirements described above
is taxed only on its "investment company taxable income," which generally equals
the undistributed portion of its ordinary net income and any excess of net
short-term capital gain over net long-term capital loss. In addition, any excess
of net long-term capital gain over net short-term capital loss that is not
distributed is taxed to the Fund at corporate capital gain tax rates. The policy
of the Fund is to apply capital loss carry-forwards as a deduction against
future capital gains before making a capital gain distribution to shareholders.
If any net long-term capital gains in excess of net short-term capital
losses are retained by the Fund, requiring federal income taxes to be paid
thereon by the Fund, the Fund may elect to treat such capital gains as having
been distributed to shareholders. In the case of such an election, shareholders
will be taxed on such amounts as long-term capital gains, will be able to claim
their proportional share of the federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liabilities, and
generally will be entitled to increase the adjusted tax basis of their shares in
the Fund by the differences between their pro rata shares of such gains and
their tax credits.
Shareholders of the Fund are taxed on distributions of net investment
income, or of any excess of net short-term capital gain over net long-term
capital loss, as ordinary income. Income distributions from the Fund are
unlikely to qualify for the dividends-received deduction for corporate
shareholders because the income of the Fund consists largely or entirely of
interest rather than dividends. Distributions of any excess of net long-term
capital gain over net short-term capital loss from the Fund are ineligible for
the dividends-received deduction.
Distributions properly designated by the Fund as representing the excess of
net long-term capital gain over net short-term capital loss are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by shareholders. For noncorporate taxpayers,
the highest rate that applies to long-term capital gains is lower than the
highest rate that applies to ordinary income. Any loss that is realized and
allowed on redemption of shares of the Fund six months or less from the date of
purchase of the shares and following the receipt of a capital gain dividend will
be treated as a
25
<PAGE>
long-term capital loss to the extent of the capital gain dividend. For this
purpose, Section 852(b)(4) of the Code contains special rules on the computation
of a shareholder's holding period.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether paid in shares or in cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. Within 60 days after the close of each taxable
year (October 31), the Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
prior taxable year's distributions which the Fund has designated to be treated
as long-term capital gain.
A distribution may be taxable to a shareholder even if the distribution
reduces the net asset value of the shares held below their cost (and is in an
economic sense a return of the shareholder's capital). This tax result is most
likely when shares are purchased shortly before an annual distribution of
capital gains or other earnings.
If the Fund declares a dividend in October, November, or December payable
to shareholders of record on a certain date in such a month and pays the
dividend during January of the following year, the shareholders will be taxed as
if they had received the dividend on December 31 of the year in which the
dividend was declared. Thus, a shareholder may be taxed on the dividend in a
taxable year prior to the year of actual receipt.
The Fund may purchase zero coupon bonds and payment-in-kind ("PIK") bonds.
With respect to zero coupon bonds, the Fund recognizes original-issue-discount
income ratably over the life of the bond even though the Fund receives no
payments on the bond until the bond matures. With respect to PIK bonds, the Fund
recognizes interest income equal to the fair market value of the bonds
distributed as interest. Because the Fund must distribute 90 percent of its
income to remain qualified as a registered investment company, the Fund may need
to use its cash reserves or be forced to liquidate a portion of its portfolio to
generate cash to distribute to its shareholders with respect to
original-issue-discount income from zero coupon bonds and interest income from
PIK bonds.
The Fund may invest up to 10 percent of its total assets in the securities
of foreign corporations and issuers. Foreign countries may impose income taxes,
generally collected by withholding, on foreign-source dividends and interest
paid to the Fund. These foreign taxes will reduce the Fund's distributed income.
The Fund generally expects to incur, however, no foreign income taxes on gains
from the sale of foreign securities. The United States has entered into income
tax treaties with many foreign countries to reduce or eliminate the foreign
taxes on certain dividends and interest received from corporations in those
countries. The Fund intends to take advantage of such treaties where possible.
It is impossible to predict with certainty in advance the effective rate of
foreign taxes that will be paid by the Fund since the amount invested in
particular countries will fluctuate and the amounts of dividends and interest
relative to total income will fluctuate.
A special tax may apply to the Fund if it fails to make sufficient
distributions during the calendar year. The required distributions for each
calendar year generally equal the sum of (a) 98 percent of the ordinary income
for the calendar year plus (b) 98 percent of the capital
26
<PAGE>
gain net income for the one-year period that ends on October 31 during the
calendar year, plus (c) an adjustment relating to any shortfall for the prior
taxable year. If the actual distributions are less than the required
distributions, a tax of 4 percent applies to the shortfall.
The Code allows the deduction by certain individuals, trusts, and estates
of "miscellaneous itemized deductions" only to the extent that such deductions
exceed 2 percent of adjusted gross income. The limit on miscellaneous itemized
deductions will not apply, however, with respect to the expenses incurred by any
"publicly offered regulated investment company." The Fund believes that it is a
publicly offered regulated investment company because its shares are
continuously offered pursuant to a public offering (within the meaning of
section 4 of the Securities Act of 1933 (the "1933 Act"), as amended).
Therefore, the limit on miscellaneous itemized deductions should not apply to
expenses incurred by the Fund.
State Income Taxes
The state tax consequences of investments in the Fund are beyond the scope
of the tax discussions in the Prospectus and this Statement of Additional
Information.
Additional Information
The foregoing summary of tax consequences of investment in the Fund are
necessarily general and abbreviated. No attempt has been made to present a
complete or detailed explanation of tax matters. Furthermore, the provisions of
the statutes and regulations on which they are based are subject to change by
legislative or administrative action. State and local taxes are beyond the scope
of this discussion. Prospective investors in the Fund are urged to consult their
own tax advisers regarding specific questions as to federal, state, or local
taxes.
- --------------------------------------------------------------------------------
YIELD AND PERFORMANCE
- --------------------------------------------------------------------------------
The Trust may from time to time advertise or quote current yield and total
return performance for the Fund. These figures represent historical data and are
calculated according to SEC rules standardizing such computations. The
investment return on and the value of shares of the Fund will fluctuate so that
the shares when redeemed may be worth more or less than their original cost.
Current yield of the Fund is calculated by dividing the net investment
income per share earned during an identified 30-day period by the maximum
offering price per share on the last day of the same period, according to the
following formula:
Yield = 2 [( a-b + 1)6 -1]
---
cd
27
<PAGE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period.
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last
day of the period.
The Fund uses generally accepted accounting principles in determining its
income, and these principles differ in some instances from SEC rules for
computing income for the above yield calculations. Therefore, the quoted yields
as calculated above may differ from the actual dividends paid. The current yield
of the Fund for the 30 day period ended October 31, 1998 was ___%.
The Trust may publish average annual total return quotations for recent 1,
5, and 10-year periods (or a fractional portion thereof) computed by finding the
average annual compounded rates of return over the 1, 5, and 10-year periods
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1000 payment made at the beginning of the 1,
5, and 10-year periods (or a fraction portion
thereof)
Total return figures may also be published for recent 1, 5, and 10-year
periods (or a fractional portion thereof) where the total return figures
represent the percentage return for the 1, 5, and 10-year periods that would
equate the initial amount invested to the ending redeemable value. If the
Trust's registration statement under the 1940 Act with respect to the Fund has
been in effect less than 1, 5 or 10 years, the time period during which the
registration statement with respect to that Fund has been in effect will be
substituted for the periods stated. For the period ended October 31, 1998, the
average annual return for the Fund for 1 year and since inception (July 6, 1994)
was ___% and ___%.
The Fund may compare its performance to other mutual funds with similar
investment objectives and to the mutual fund industry as a whole, as quoted by
ranking services and publications of general interest. Examples of these
services or publications include Lipper Analytical Services, Inc., Barron's
Business Week, The Financial Times, Financial World, Forbes, Investor's Business
Daily, Money, Morningstar Mutual Funds, Personal Investor, The Economist, The
Wall Street Journal and USA Today. (Lipper Analytical Services, Inc. is an
independent rating service
28
<PAGE>
that ranks over 1000 mutual funds based on total return performance. These
ranking services and publications may rank the performance of the Fund against
all other funds over specified categories.
The Fund may also compare its performance to that of a recognized unmanaged
index of investment results, including the S&P 500, Dow Jones Industrial
Average, Russell 2000, and Nasdaq stock indices and the Lehman Brothers and
Lipper Analytical bond indices. The comparative material found in
advertisements, sales literature, or in reports to shareholders may contain past
or present performance ratings. This is not to be considered representative or
indicative of future results or future performance.
The Fund may also compare its performance to other income producing
securities such as (i) money market funds; (ii) various bank products (based on
average rates of banks and thrift institution certificates of deposit, money
market deposit accounts, and NOW accounts as reported by the Bank Rate Monitor
and other financial reporting services, including newspapers); and (iii) U.S.
treasury bills or notes. There are differences between these income-producing
alternatives and the Fund other than their yields, some of which are summarized
below.
The yield of the Fund is not fixed and will fluctuate. The principal value
of your investment is not insured and its yield is not guaranteed. Although the
yields of bank money market deposit accounts and NOW accounts will fluctuate,
principal will not fluctuate and is insured by the Federal Deposit Insurance
Corporation up to $100,000. Bank passbook savings accounts normally offer a
fixed rate of interest and their principal and interest are also guaranteed and
insured. Bank certificates of deposit offer fixed or variable rates for a set
term. Principal and fixed rates are guaranteed and insured. There is no
fluctuation in principal value. Withdrawal of these deposits prior to maturity
will normally be subject to a penalty.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements listed below are included in the Fund's 1998
Annual Report to Shareholders for the year ended October 31, 1998 (filed
electronically on _________, accession number _________) and are included in and
incorporated by reference into this Statement of Additional Information. [To be
filed by post-effective amendment]
29
<PAGE>
Part A-III
PROSPECTUS AND STATEMENT OF ADDITIONAL INFORMATION
[Logo]
Columbia
CMC SHORT TERM BOND FUND
The CMC Short Term Bond Fund (the "Fund") is a portfolio of CMC Fund Trust
seeking to provide investors a high level of current income.
As with all mutual funds, the Securities and Exchange Commission does not
guarantee that the information in this Prospectus is accurate or complete, nor
has it judged the Fund for investment merit. It is a criminal offense to state
otherwise.
______________, 1998
<PAGE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Information About the Fund.................................................... 2
Goal..................................................................... 2
Strategy ................................................................ 3
Risk Factors............................................................. 4
Expenses ................................................................ 5
Financial Highlights..................................................... 6
Management.................................................................... 7
Information About Your Investment............................................. 7
Your Account............................................................. 7
Buying Shares....................................................... 7
Selling Shares...................................................... 8
Distribution and Taxes................................................... 9
Income and Capital Gains Distributions.............................. 9
Tax Effect of Distributions and Transactions........................ 9
More About the Fund...........................................................10
Portfolio Securities.....................................................10
Investment Strategy......................................................11
Other Risks..............................................................12
Mortgage Related Securities and CMOs................................12
Asset Backed Securities.............................................13
Year 2000...........................................................13
For More Information..........................................................14
- --------------------------------------------------------------------------------
INFORMATION ABOUT THE FUND
- --------------------------------------------------------------------------------
GOAL
What is the Fund's Goal?
The Fund seeks to provide investors a high level of current income
consistent with a high degree of principal stability.
2
<PAGE>
STRATEGY
What investment strategies does the Fund use to pursue this goal?
The Fund intends to invest primarily in high quality, short term fixed
income securities. The Fund's average portfolio duration will not exceed
three years. Under normal conditions, the Fund will invest in:
o Obligations of the U.S. Government, its agencies or
instrumentalities
o Corporate debt securities rated in either AAA, AA A or BBB by
Standard and Poor's, Inc. ("S&P") or Aaa, Aa, A or Baa by Moody's
Investor Services, Inc. ("Moody's")
o Unrated securities judged to be of comparable quality to the
securities listed above
To achieve its investment objective of a high level of current income
consistent with a high degree of principal stability, at least 50% of the
Fund's assets will be invested in:
o Obligations of the U.S. Government, its agencies or
instrumentalities
o Corporate debt securities rated in the two highest ratings
categories by S&P (AAA or AA) or Moody's (Aaa or Aa)
------------------------------------------------------------
A DESCRIPTION OF CORPORATE DEBT SECURITIES RATINGS IS
CONTAINED IN THE FUND'S STATEMENT OF ADDITIONAL INFORMATION.
------------------------------------------------------------
Columbia Management Co., the investment adviser for the Fund ("CMC" or
"Adviser"), uses a "top down, sector rotation" emphasis in selecting
securities. Using this approach, the Adviser's investment team conducts an
ongoing evaluation of the economic and market environment to determine the
emphasis to be placed by the Adviser on the different types of securities
in which the Fund may invest (for example, corporate bonds, Treasuries or
mortgage pass through securities). The Adviser will also evaluate the
desired levels of average quality, maturity and duration of the Fund's
portfolio based upon the current economic and market environment. After
selecting the types of securities and the desired level of quality,
maturity and duration of the portfolio, the Fund conducts intensive,
"bottom up", fundamental analysis to identify attractive securities
3
<PAGE>
within its target securities. See "MORE ABOUT THE FUNDS" for additional
information about the strategy of the Fund.
RISK FACTORS
What are the principal risks of investing in the Fund?
The fixed income securities held in the Fund's investment portfolio
are subject to market risk and credit risk, both of which could cause the
value of your investment to go down. You could lose money as a result of
your investment in the Fund.
INTEREST RATE risk refers to the possibility that the value of the
Fund's investments will decline due to an increase in interest rates.
------------------------------------------------------------
When interest rates go up, the value of the Fund's portfolio
will likely decline because fixed income securities in the
portfolio are paying a lower interest rate than what
investors could obtain in the current market. When interest
rates go down, the value of the Fund's portfolio will likely
rise, because fixed income securities in the portfolio are
paying a higher interest rate than newly issued fixed income
securities.
------------------------------------------------------------
The amount of change in the value of the Fund's portfolio depends upon
several factors, including the maturity date of the fixed income securities
in the portfolio. In general, the price of fixed income securities with
longer maturities are more sensitive to interest rate changes than the
price of fixed income securities with shorter maturities. The Fund's
average portfolio duration will not exceed three years.
CREDIT RISK refers to the ability of the issuer of the bond to meet
interest and principal payments when due. Although the Fund intends to
invest primarily in high-quality, short term fixed income securities, the
Fund may invest in securities rated BBB by S&P or Baa by Moody's.
Securities rated BBB by S&P are neither highly protected nor poorly
secured. These securities normally pay higher yields, but involve
potentially greater price variability than higher-quality securities. These
securities are regarded as having adequate capacity to repay principal and
pay interest, although adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to do so.
4
<PAGE>
-----------------------------------------------------------
By concentrating on short term, high quality fixed income
securities, the Fund offers less current yield than
securities of lower quality (rated below BBB/Baa) or longer
maturity. Lower quality securities, however, generally have
less liquidity. Furthermore, lower quality securities and
securities with longer maturities tend to have greater
credit risk and interest rate risk; consequently longer
term, lower quality securities generally exhibit more price
volatility.
-----------------------------------------------------------
A description of other investment restrictions and certain investment
practices of the Fund are included in the Statement of Additional
Information.
EXPENSES
What expenses do I pay as an investor in the Fund?
The table below describes the fees and expenses that you may pay if
you buy and hold shares of the Fund. As a shareholder, you pay no
transaction fees in connection with your investment in the Fund. Annual
fund operating expenses described in the table are paid out of Fund assets
and are therefore reflected in the share price.
---------------------------------------------------------
The fund has no sales charge (load) or 12b-1 distribution
fees.
---------------------------------------------------------
- --------------------------------------------------------------------------------
Fee Table
Shareholder transaction fees None
Annual Fund Operating Expenses (expenses that
are paid out of Fund assets)
Management Fees 0.25%
Distribution and/or Service (12b-1) Fees None
Other Expenses ___%
Total Fund Operating Expenses ___%
- --------------------------------------------------------------------------------
5
<PAGE>
----------------------------------------------------------------------
Things you should know about expenses
Administrative Services Agreement: In addition to the Annual Fund
Operating Expenses set forth below, each shareholder of the Fund
enters into a written Administrative Services Agreement (the
"Agreement") with Columbia Management Co., the Fund's Adviser (the
"Adviser" or "CMC"). Pursuant to the Agreement, the Adviser will
provide the shareholder specialized reports regarding the Fund's
portfolio and performance, market conditions and economic indicators.
For such services, each shareholder will pay the Adviser an annual fee
calculated as a percentage of the shareholder's net assets in the
Fund. The annual fee ranges from 0.05% to 0.20%.
Other Operating Expenses Fund Reimbursement: For the fiscal
period ended October 31, 1998, the Adviser assumed ordinary recurring
expenses of the Fund so that the actual Total Fund Operating Expenses
paid by the Fund was 0.25%, instead of 0.__% as set forth in the Fee
Table.
----------------------------------------------------------------------
- --------------------------------------------------------------------------------
Expense Example
This example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those
periods. The example also assumes that your investment has a 5% return
each year and that the Fund's operating expenses remain constant as a
percentage of net assets. Your actual costs may be higher or lower,
but based on these assumptions your costs would be:
1 Year 3 Years 5 Years 10 Years
$__________ $__________ $__________ $__________
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the
Fund's financial performance since inception. Certain information reflects
financial results for a single fund share. The total return in the table
represent the rate of return an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by PricewaterhouseCoopers LLP,
whose report, along with the Fund's financial statements, are included in the
Statement of Additional Information under "Financial Statements."
<PAGE>
[Insert financial highlights]
MANAGEMENT
The Fund's investment adviser is Columbia Management Co., 1300 S.W. Sixth
avenue, P.O. Box 1350, Portland, Oregon 97207-1350 ("Adviser" or "CMC"). CMC has
acted as an investment adviser since 1969.
The Fund has contracted with CMC to provide research, advice and
supervision with respect to investment matters and to determine what securities
to purchase or sell and what portion of the Fund's assets to invest. For the
fiscal year ended October 31, 1998, the Fund paid CMC a management fee,
expressed as a percentage of average net assets, of 0.25%.
CMC uses an investment team approach to analyze investment themes and
strategies for the Fund. Members of the investment team are responsible for the
analysis of particular industries and asset types and for recommendations on
individual securities within those industries and asset types. Mr. Leonard A.
Aplet, a Vice President of CMC and Chartered Financial Analyst, has the
responsibility of implementing on a daily basis the investment strategies
developed for the Fund. Mr. Aplet received a Masters of Business Administration
from the University of California at Berkeley prior to joining the investment
team in 1987.
- --------------------------------------------------------------------------------
INFORMATION ABOUT YOUR INVESTMENT
- --------------------------------------------------------------------------------
YOUR ACCOUNT
Buying Shares
The Fund enables clients of CMC to invest in a diversified portfolio
of high quality fixed income securities in a pooled environment, rather
than purchasing securities on an individual basis. Each investor enters
into an Administrative Services Agreement (an "Agreement") with CMC under
which CMC agrees to provide certain shareholder services, including
attendance at client meetings, preparation of a variety of client or
shareholder reports, and performance of other administrative tasks. Each
investor pays a fee under the Agreement that is expressed as a percentage
of assets it has invested in the Fund. This is in addition to any fees that
CMC or any CMC affiliate may receive from the Fund for services rendered to
the Fund.
If you want to directly invest in the Fund, contact your CMC
representative at 1-800-547-1037. In addition, an independent fiduciary for
a
7
<PAGE>
CMC client account, after careful review of this Prospectus, including the
Fund's expenses and consistency with the client's written investment
guidelines, may approve the investment in the Fund. Upon approving the
investment, the independent fiduciary will authorize CMC to invest a
portion of the client's portfolio in the Fund, at CMC's discretion, for the
client's portfolio, and subject to limitations imposed by the independent
fiduciary.
-----------------------------------------------------------
If CMC is considered to be a fiduciary of your assets,
including the account with the Fund, under the Employee
Retirement Income Security Act of 1974, certain conditions
must be satisfied before assets may be invested in the Fund
by CMC on your behalf. See the Statement of Additional
Information for more detail.
-----------------------------------------------------------
The price for Fund shares is the Fund's net asset value per share
("NAV"), which is generally calculated as of the close of trading on the
New York Stock Exchange (usually 4:00 p.m., Eastern time) every day the
exchange is open. Your order will be priced at the next NAV calculated
after your order is accepted by the Fund.
The Fund uses market value to value its securities as quoted by
dealers who are market makers in these securities or by an independent
pricing service, unless the Adviser determines that a fair value
determination should be made using procedures and guidelines established by
and under the general supervision of the Fund's Board of Trustees. Market
values are based on the average of bid and ask prices, or by reference to
other securities with comparable ratings, interest rates and maturities.
The Fund constantly monitors the price received from market makers and its
pricing service and, at times, will manually price its securities using
procedures established by and under the general supervision of the Fund's
Board of Trustees.
Although the Fund has no policy with respect to initial or subsequent
minimum investments, purchase orders may be refused at the discretion of
the Fund.
Selling Shares
You may sell shares at any time. Upon redemption you will receive the
Fund's NAV next calculated after your order is accepted by the Fund's
transfer agent. Any certificates representing fund shares being sold must
be returned with your redemption request. You can request a redemption by
calling your CMC Representative at 1-800-547-1037. Redemption proceeds are
normally transmitted in the manner specified in the redemption request on
the business day following the effective date of the redemption. Except as
provided by rules
8
<PAGE>
of the Securities and Exchange Commission, redemption proceeds must be
transmitted to you within seven days of the redemption date.
The Fund also reserves the right to make a "redemption in kind" - pay
you in portfolio securities rather than cash - if the amount you are
redeeming is large enough to affect the Fund's operations (for example, if
the redemption represents more than 1% of the Fund's assets).
DISTRIBUTION AND TAXES
Income and Capital Gains Distributions
Income dividends, consisting of net investment income, are declared
daily and paid monthly by the Fund. All income dividends paid by the Fund
will be reinvested in additional shares of the Fund at the net asset value
on the dividend payment date, unless you have elected to receive the
dividends in cash. If all of your shares in the Fund are redeemed, the
undistributed dividends on the redeemed shares will be paid at that time.
The Fund generally distributes substantially all of its net realized
capital gains to shareholders once a year, usually in October. The amount
distributed will depend on the amount of capital gains realized from the
sale of the Fund's portfolio securities. Capital gain distributions are
declared and paid as cash dividends and reinvested in additional shares at
the net asset value, as calculated after payment of the distribution, at
the close of business on the dividend payment date, unless you have elected
to receive the distribution in cash.
Tax Effect of Distributions and Transactions
The dividends and distributions of the Fund are taxable to most
investors unless the shareholder is exempt from state or federal income
taxes or your investment is in a tax-advantaged account. The tax status of
any distribution is the same regardless of how long you have been in the
Fund and whether you reinvest your distributions or take them as income. In
general, distributions are taxable as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
Taxability of Distributions
Type of Tax Rate for Tax Rate for
Distribution 15% Bracket 28% Bracket or Higher
------------ ----------- ---------------------
<S> <C> <C>
Income Dividends Ordinary Income Rate Ordinary Income Rate
Short Term Capital Gains Ordinary Income Rate Ordinary Income Rate
Long Term Capital Gains 10% 20%
------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
The Fund expects that, as a result of its investment objective to
achieve a high level of current income, its distributions will consist
primarily of income dividends. Each year the Fund will send you information
detailing the amount of ordinary income and capital gains distributed to
you for the previous year.
The sale of shares in your account may produce a gain or loss and is a
taxable event. For tax purposes, an exchange of shares of a Fund for shares
of another fund managed by the Adviser is the same as a sale.
------------------------------------------------------
Your investment in the Fund could have additional tax
consequences. Please consult your tax professional for
assistance.
------------------------------------------------------
- --------------------------------------------------------------------------------
MORE ABOUT THE FUND
- --------------------------------------------------------------------------------
PORTFOLIO SECURITIES
In addition to corporate debt securities and U.S. Government and agency
obligations as described above, the Fund may, from time to time, invest in
mortgage and other asset-backed securities, bank obligations, collateralized
bonds, loan and mortgage obligations, commercial paper, preferred stocks,
repurchase agreements, and savings and loan obligations.
Due to the inverse relationship between the price of a security and the
interest rate of that security (that is, when interest rates rise, the price of
fixed income securities generally fall and, conversely, when interests rates
fall, the price of fixed income securities generally rise) the value of the
Fund's portfolio will fluctuate with changes in interest rates. The Fund will
attempt to reduce the risk of principal fluctuations by adjusting the average
portfolio duration. In periods of rising interest rates and falling fixed income
prices, the Fund may maintain a shorter duration to reduce the impact of a
decline in the value of fixed income securities in the Fund's portfolio.
Conversely, during times of falling rates and rising prices, a longer average
portfolio duration of up to three years may be sought.
Mortgage-backed securities are securities representing interests in "pools"
of mortgages in which payments of both interest and principal on the securities
are made monthly, in effect, "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities).
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by the
10
<PAGE>
Government National Mortgage Association ("GNMA")) or guaranteed by agencies or
instrumentalities of the U.S. Government (in the case of securities guaranteed
by the Federal National Mortgage Association ("FNMA") or the Federal Home Loan
Mortgage Corporation ("FHLMC"), which are supported only by the discretionary
authority of the U.S. Government to purchase the agency's obligations). Mortgage
pass-through securities created by non-governmental issuers (such as commercial
banks, savings and loan institutions, private mortgage insurance companies,
mortgage bankers and other secondary market issuers) may be supported with
various credit enhancements such as pool insurance, guarantees issued by
governmental entities, a letter of credit from a bank or senior/subordinated
structures.
The Fund will usually invest some portion of its assets in Collateralized
Mortgage Obligations ("CMOs") issued by U.S. agencies or instrumentalities or in
privately issued CMOs that carry an investment grade rating. CMOs are hybrid
instruments with characteristics of both mortgage-backed bonds and mortgage
pass-through securities. Similar to a mortgage pass-through, interest and
prepaid principal on a CMO are paid, in most cases, monthly. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA. CMOs are structured in multiple classes, with each class bearing a
different stated maturity or interest rate. The Fund will invest in those CMOs
whose characteristics and terms are consistent with the average maturity and
market risk profile of the other fixed income securities held by the Fund.
The Fund is permitted to invest in asset-backed securities, subject to the
Fund's rating and quality requirements. Through the use of trusts and special
purpose subsidiaries, various types of assets, including home equity and
automobile loans and credit card and other types of receivables, as well as
purchase contracts, financing leases and sales agreements entered into by
municipalities, are being securitized in pass-through structures similar to the
mortgage pass-through structures described above. Consistent with the Fund's
investment objective policies and quality standards, the Fund may invest in
these and other types of asset-backed securities which may be developed in the
future.
INVESTMENT STRATEGY
In selecting investments, the Adviser uses a "top down, sector rotation"
emphasis, supplemented by a "bottom up" company analysis. Top down analysis
begins with an overall evaluation of the investment environment, and allows the
Adviser to determine specific industries, market sectors within those
industries, specific types of fixed income instruments (for example corporate
bonds, treasuries or mortgage pass
11
<PAGE>
through securities) and desired levels of portfolio quality, maturity and
duration to emphasize. Factors the Adviser considers in its top down analysis
include:
o economic growth
o inflation
o interest rates
o federal reserve policy
o corporate profits
o demographics
o money flows
Once individual sectors, types of instruments and markets have been
identified, the Adviser employs fundamental analysis to select individual
securities. Fundamental analysis includes the evaluation of:
o a company's financial condition
o quality of management
o industry dynamics
o earnings growth and profit margins
o sales trends
o potential for new product development
o dividend payment history and potential financial ratios
o investment in research and development
OTHER RISKS
In addition to the certain risks stated in the section titled "INFORMATION
ABOUT THE FUND" in this Prospectus, there are other risks of investing in the
Fund such as:
Mortgage Related Securities and CMOs
Mortgage related securities and CMOs are subject to risks relating to cash
flow uncertainty; that is, the risk that actual prepayment on the underlying
mortgages will not correspond to the prepayment rate assumed by the Fund.
Unscheduled or early payments on the underlying mortgages may shorten the
securities' effective maturities and reduce their growth potential. A decline in
interest rates may lead to a faster rate of repayment of the underlying mortgage
and expose the Fund to a lower rate of return on reinvestment. To the extent
that mortgage backed securities are held by the Fund, the prepayment right of
mortgages may limit the increase in net asset value of the Fund because the
value of the mortgage-backed securities held by the Fund may not appreciate as
rapidly as the price of non-callable debt securities. Additionally, The Fund may
agree to purchase or sell these securities with payment and delivery taking
place at a future date.
12
<PAGE>
Asset Backed Securities
In addition to prepayment risk as described above, asset back securities do
not usually contain the benefit of a complete security interest in the related
collateral.
Year 2000
Many of the services provided to the Fund by the Adviser and other service
providers depend on the proper functioning of their computer software systems
and those of their outside service providers. Many computer software systems in
use today cannot distinguish the year 2000 from the year 1900 because of the way
dates are encoded and calculated. Such an event could have a negative impact on
handling securities trades, payments of interest and dividends, pricing and
account services. Although, at this time, there can be no assurance that there
will be no adverse impact on the Fund, the Adviser has informed the Fund that is
has been actively working on necessary changes to its computer systems to
prepare for the year 2000 and expects that its systems, and those of the Fund's
outside service providers, will be ready for the year 2000.
13
<PAGE>
- --------------------------------------------------------------------------------
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
You can find additional information on the Fund's structure and its
performance in the following documents:
o Annual/Semiannual Reports. While the Prospectus describes the Fund's
potential investments, these reports detail the Fund's actual
investments as of the report date. Reports include a discussion by
Fund management of recent market conditions, economic trends, and Fund
strategies that significantly affected the Fund's performance during
the reporting period.
o Statement of Additional Information ("SAI"). A supplement to the
Prospectus, the SAI contains further information about the Fund and
its investment restrictions, risks and polices. It also includes the
most recent annual report and the independent accountants' report.
A current SAI for the Fund is on file with the Securities and Exchange
Commission and is incorporated by reference in (is legally part of) this
Prospectus.
A copy of the SAI and the current annual report may be attached to this
Prospectus. If it is not, or to obtain additional copies of the SAI or copies of
the current annual/semiannual report, without charge, or to make inquiries of
the Fund, you may contact:
CMC Fund Trust
1300 S.W. Sixth Avenue
Portland, Oregon 97201
Telephone: 1-800-547-1037
You can also obtain copies by visiting the SEC's Public Reference Room in
Washington, D.C. (telephone 1-800-SEC-0330) or by sending your request and a
duplicating fee to the SEC's Public Reference Section, Washington, D.C.
20549-6009. Reports and other information regarding the Fund are also on the
SEC's Internet website at http://www.sec.gov.
SEC file number: 811-5857
14
<PAGE>
Part B-III
Reg. Nos. 33-30394/811-5857
- ------------------------------------------------------------------------------
CMC SHORT TERM BOND FUND
A Portfolio of CMC Fund Trust
- ------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
CMC Fund Trust
1300 SW Sixth Avenue
PO Box 1350
Portland, Oregon 97207
(503) 222-3600
This Statement of Additional Information contains information relating to
CMC Fund Trust (the "Trust") and a portfolio of the Trust, CMC Short Term Bond
Fund (the "Fund").
This Statement of Additional Information is not a Prospectus. It relates to
a Prospectus dated December __, 1998 (the "Prospectus") and should be read in
conjunction with the Prospectus. Copies of the Prospectus are available without
charge upon request to the Trust or by calling calling 1-800-547-1037.
TABLE OF CONTENTS
Description of the Fund....................................................... 2
Management....................................................................15
Investment Advisory and Other Fees Paid to Affiliates.........................16
Portfolio Transactions........................................................17
Capital Stock and Other Securities............................................19
Purchase Redemption and Pricing of Shares.....................................20
Custodians....................................................................22
Independent Accountants.......................................................23
Taxes.........................................................................23
Yield and Performance.........................................................26
Financial Statements..........................................................28
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF THE FUND
- --------------------------------------------------------------------------------
The Trust is an Oregon business trust established under a Restated
Declaration of Trust, dated October 13, 1993, as amended. The Trust is an
open-end management investment company comprised of separate portfolios, each of
which is treated as a separate fund. There are four portfolios established under
the Trust: the Fund, CMC High Yield Fund, CMC Small Cap Fund, and CMC
International Stock Fund. The Fund is diversified, which means that, with
respect to 75% of its total assets, the Fund will not invest more than 5% of its
assets in the securities of any single issuer. The investment adviser for the
Fund is Columbia Management Co. (the "Adviser"). See the section entitled
"INVESTMENT ADVISORY AND OTHER FEES PAID TO AFFILIATES" for further discussion
regarding the Adviser.
INVESTMENT OBJECTIVE, POLICIES AND RISKS
As stated in the Prospectus, the Fund's primary investment object is to
provide shareholders with a high level of current income consistent with a high
degree of principal stability. The Fund's objective may not be changed without a
vote of the outstanding voting securities of the Fund. There is no assurance
that the Fund will achieve its investment objective.
To achieve its investment objective, the Fund expects to invest at least
50% of its assets in:
(i) U.S. Government securities, including bonds, notes and bills issued by
the U.S. Treasury, and securities issued by agencies and instrumentalities
of the U.S. Government;
(ii) corporate debt securities rated, at the time of purchase, in one of
the two highest ratings categories of Standard & Poor's ("S&P") (AAA or AA)
or Moody's Investor's Services, Inc. ("Moody's") (Aaa or Aa);
(iii) or, if not rated, judged to be of comparable quality.
Subject to the above restrictions, the Fund may invest in investment grade
debt securities, meaning securities which, at the time of purchase, are rated
Baa or higher by Moody's, BBB or higher by S&P, or, if unrated, believed to be
equivalent to securities with those ratings. Although bonds rated Baa or BBB are
believed to have adequate capacity to pay principal and interest, they have
speculative characteristics because they lack certain protective elements. In
addition, the price of such bonds may be more sensitive to adverse economic
changes or individual corporate developments than bonds with higher investment
ratings. The Fund will evaluate the appropriateness, in light of the existing
circumstances, of retaining any security whose credit rating drops below Baa or
BBB after its purchase by the Fund. Finally, up to 5% of the Fund's assets may
be invested in lower grade securities (rated Ba or B by Moody's or BB or B by
S&P), commonly referred to as "junk bonds," when the Adviser believes these
securities present attractive investment opportunities despite their speculative
characteristics. Bond ratings are described below under "INVESTMENTS IN THE
FUND."
2
<PAGE>
The Fund's average portfolio duration may not exceed 3 years. Securities
will be selected on the basis of the Adviser's assessment of interest rate
trends and the liquidity of various instruments under prevailing market
conditions. Shifting the average maturity of the portfolio in response to
anticipated changes in interest rates will generally be carried out through the
sale of securities and the purchase of different securities within the desired
maturity range. This may result in a greater level of realized capital gains and
losses than if the Fund held all securities to maturity.
Depending upon the prevailing market conditions, debt securities may be
purchased at a discount from face value, producing a yield of more than the
coupon rate, or at a premium over face value, producing a yield of less than the
coupon rate. In making investment decisions, the Fund will consider factors
other than current yield, such as preservation of capital, maturity, and yield
to maturity. Common stocks acquired through exercise of conversion rights or
warrants or acceptance of exchange or similar offers will not be retained in the
portfolio. Orderly disposition of these equity securities will be made
consistent with the Adviser's judgement as to the best obtainable price.
INVESTMENTS HELD BY THE FUND
Securities held by the Fund may include a variety of fixed income debt
securities, such as bonds, debentures, notes, equipment trust certificates,
short-term obligations (those having maturities of 12 months or less), such as
prime commercial paper and bankers' acceptances, domestic certificates of
deposit, obligations of or guaranteed by the U.S. Government and its agencies or
instrumentalities, Government National Mortgage Association ("GNMA")
mortgage-backed certificates and other similar securities representing ownership
in a pool of loans ("pass-through securities"), and repurchase agreements with
banks or securities dealers relating to these securities. Portfolio securities
may have variable or "floating" interest rates. Investments may also be made in
fixed income preferred stocks. Debt securities and preferred stocks may be
convertible into, or exchangeable for, common stocks, and may have warrants
attached. Additional information with respect to certain of the securities in
which the Fund may invest is set forth below.
Securities Rating Agencies
The following is a description of the bond ratings used by Moody's and S&P.
Subsequent to its purchase by the Fund, a security may cease to be rated, or its
rating may be reduced below the criteria set forth for the Fund. Neither event
would require the elimination of bonds from the Fund's portfolio, but the
Adviser will consider that event in its determination of whether the Fund should
continue to hold such security in its portfolio.
Bond Ratings. Moody's -- The following is a description of Moody's bond
ratings:
Aaa - Best quality; smallest degree of investment risk.
Aa - High quality by all standards; Aa and Aaa are known as high-grade
bonds.
A - Many favorable investment attributes; considered upper medium-grade
obligations.
3
<PAGE>
Baa - Medium-grade obligations; neither highly protected nor poorly
secured. Interest and principal appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable over
any great length of time.
Ba - Speculative elements; future cannot be considered well assured.
Protection of interest and principal payments may be very moderate and not well
safeguarded during both good and bad times over the future.
B - Generally lack characteristics of a 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 - Poor standing, may be in default; elements of danger with respect to
principal or interest.
S&P -- The following is a description of S&P's bond ratings:
AAA - Highest rating; extremely strong capacity to pay principal and
interest.
AA - Also high-quality with a very strong capacity to pay principal and
interest; differ from AAA issues only by a small degree.
A - Strong capacity to pay principal and interest; somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions.
BBB - Adequate capacity to pay principal and interest; normally exhibit
adequate protection parameters, but adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay principal
and interest than for higher-rated bonds.
Bonds rated AAA, AA, A, and BBB are considered investment grade bonds.
BB - Less near-term vulnerability to default than other speculative grade
debt; face major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions that could lead to inadequate capacity to meet
timely interest and principal payment.
B - Greater vulnerability to default but presently have the capacity to
meet interest payments and principal repayments; adverse business, financial, or
economic conditions would likely impair capacity or willingness to pay interest
and repay principal.
CCC - Current identifiable vulnerability to default and dependent upon
favorable business, financial, and economic conditions to meet timely payments
of interest and repayments of principal. In the event of adverse business,
financial, or economic conditions, they are not likely to have the capacity to
pay interest and repay principal.
Bonds rated BB, B, and CCC are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the
4
<PAGE>
least degree of speculation and CCC a higher 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.
Certificates of Deposit
Certificates of Deposit are receipts issued by a U.S. bank in exchange for
the deposit of funds. The bank agrees to pay the amount deposited, plus
interest, to the bearer of the receipt on the date specified on the certificate.
Because the certificate is negotiable, it can be traded in the secondary market
before maturity. Under current FDIC regulations, $100,000 is the maximum
insurance payable on Certificates of Deposit issued to the Fund by any one bank.
Therefore, Certificates of Deposit purchased by the Fund may not be fully
insured.
Bankers' Acceptances
Time drafts are drawn on a U.S. bank by an exporter or importer to obtain a
stated amount of funds to pay for specific merchandise or, less frequently,
foreign exchange. The draft is then "accepted" by the U.S. bank (the drawee),
which in effect unconditionally guarantees to pay the face value of the
instrument on its maturity date. The face of the instrument specifies the dollar
amount involved, the maturity date, and the nature of the underlying
transaction.
Letters of Credit
Letters of Credit are issued by banks and authorize the beneficiary to draw
drafts upon such banks for acceptance and payment under specified conditions.
Commercial Paper
Commercial paper is an unsecured short-term note of indebtedness issued in
bearer form by business or banking firms to finance their short-term credit
needs.
Commercial Paper Ratings. A1 and Prime 1 are the highest commercial paper
ratings issued by S&P and Moody's respectively.
Commercial paper rated A1 by S&P has the following characteristics: (1)
liquidity ratios are adequate to meet cash requirements; (2) long-term senior
debt is rated A or better; (3) the issuer has access to at least two additional
channels of borrowing; (4) basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances; (5) typically, the issuer's
industry is well established and the issuer has a strong position within the
industry; and (6) the reliability and quality of management are unquestioned.
Among the factors considered by Moody's in assigning ratings are the
following: (1) evaluation of the management of the issuer; (2) economic
evaluation of the issuer's industry or industries and an appraisal of
speculative-type risks which may be inherent in certain areas; (3) evaluation of
the issuer's products in relation to competition and customer acceptance; (4)
liquidity; (5) amount and quality of long-term debt; (6) trend of earnings over
a period of 10 years; (7) financial strength of a parent company and the
relationships which exist with the
5
<PAGE>
issuer; and (8) recognition by the management of obligations which may be
present or may arise as a result of public interest questions and preparation to
meet such obligations.
Government Securities
Government securities may be either direct obligations of the U.S. Treasury
or may be the obligations of an agency or instrumentality of the United States.
Treasury Obligations. The U.S. Treasury issues a variety of marketable
securities that are direct obligations of the U.S. Government. These securities
fall into three categories - bills, notes, and bonds distinguished primarily by
their maturity at time of issuance. Treasury bills have maturities of one year
or less at the time of issuance, while Treasury notes currently have maturities
of 1 to 10 years. Treasury bonds can be issued with any maturity of more than 10
years.
Obligations of Agencies and Instrumentalities. Agencies and
instrumentalities of the U.S. Government are created to fill specific
governmental roles. Their activities are primarily financed through securities
whose issuance has been authorized by Congress. Agencies and instrumentalities
include Export Import Bank, Federal Housing Administration, Government National
Mortgage Association, Tennessee Valley Authority, Banks for Cooperatives,
Farmers Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Land Banks, Federal National Mortgage Association, Federal
Home Loan Mortgage Corp., U.S. Postal System, and Federal Finance Bank. Although
obligations of "agencies" and "instrumentalities" are not direct obligations of
the U.S. Treasury, payment of the interest or principal on these obligations is
generally backed directly or indirectly by the U.S. Government. This support can
range from backing by the full faith and credit of the United States or U.S.
Treasury guarantees to the backing solely of the issuing instrumentality itself.
Mortgage-Backed Securities and Mortgage Pass-Through Securities
The Fund may also invest in mortgage-backed securities, which are interests
in pools of mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. Pools of mortgage
loans are assembled as securities for sale to investors by various governmental,
government-related and private organizations as further described below. The
Fund may also invest in debt securities which are secured with collateral
consisting of mortgage-backed securities (see "Collateralized Mortgage
Obligations"), and in other types of mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages and expose the Fund to a lower rate of return upon
reinvestment. To the extent that mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the value of the mortgage-backed securities held
by the Fund may not appreciate as rapidly as the price of non-callable debt
securities. When interest rates rise, mortgage prepayment rates tend to decline,
thus lengthening the life of mortgage-related securities and increasing their
price volatility, affecting the price volatility of the Fund's shares.
6
<PAGE>
Interests in pools of mortgage-backed securities differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal payments at maturity or specified call dates.
Instead, these securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a "pass-through"
of the monthly payments made by the individual borrowers on their mortgage
loans, net of any fees paid to the issuer or guarantor of such securities.
Additional payments are caused by repayments of principal resulting from the
sale of the underlying property, refinancing or foreclosure, net of fees or
costs which may be incurred. Because principal may be prepaid at any time,
mortgage-backed securities may involve significantly greater price and yield
volatility than traditional debt securities. Because principal may be prepaid at
any time, mortgage-backed securities involve significantly greater price and
yield volatility than traditional debt securities. Some mortgage-related
securities (such as securities issued by the Government National Mortgage
Association) are described as "modified pass-through." These securities entitle
the holder to receive all interest and principal payments owed on the mortgage
pool, net of certain fees, at the scheduled payment dates regardless of whether
or not the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, the timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks, and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market value or yield
of mortgage-backed securities or to the value of the Fund's shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and
credit of the U.S. Government) include the Federal National Mortgage Association
("FNMA") and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to regulation by the Secretary of Housing and Urban Development. FNMA
purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA, but are not backed by the full faith and credit of the U.S. Government.
FHLMC is a corporate instrumentality of the U.S. Government and was created
by Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by the twelve Federal Home
Loan Banks. FHLMC issues Participation Certificates ("PCs") which represent
interests in conventional mortgages from FHLMC's national portfolio. FHLMC
guarantees the timely payment of interest and ultimate collection of principal,
but PCs are not backed by the full faith and credit of the U.S. Government.
7
<PAGE>
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers, and other secondary market issuers also create
pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers, and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There is no assurance that the private insurers or guarantors
can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees if, through an examination of the loan experience and practices of
the originators/services and poolers, the Adviser determines that the securities
meet the Fund's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable.
Collateralized Mortgage Obligations ("CMOs")
The Fund may invest in CMOs, which are hybrids between mortgage-backed
bonds and mortgage pass-through securities. Similar to a bond, interest and
prepaid principal are paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially protected against a sooner than desired return
of principal by the sequential payments. The prices of certain CMOs, depending
on their structure and the rate of prepayments, can be volatile. Some CMOs may
also not be as liquid as other securities.
In a typical CMO transaction, a corporation issues multiple series, (e.g.,
A, B, C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to
purchase mortgages or mortgage pass-through certificates ("Collateral"). The
Collateral is pledged to a third party trustee as security for the Bonds.
Principal and interest payments from the Collateral are used to pay principal on
the Bonds in the order A, B, C, Z. The Series A, B, and C bonds all bear current
interest. Interest on the Series Z Bond is accrued and added to principal and a
like amount is paid as principal on the Series A, B, or C Bond currently being
paid off. When the Series A, B, and C Bonds are paid in full, interest and
principal on the Series Z Bond begins to
8
<PAGE>
be paid currently. With some CMOs, the issuer serves as a conduit to allow loan
originators (primarily builders or savings and loan associations) to borrow
against their loan portfolios.
The Fund will invest only in those CMOs whose characteristics and terms are
consistent with the average maturity and market risk profile of the other fixed
income securities held by the Fund.
Other Mortgage-Backed Securities
The Adviser expects that governmental, government-related or private
entities may create mortgage loan pools and other mortgage-related securities
offering mortgage pass-through and mortgage-collateralized investment in
addition to those described above. The mortgages underlying these securities may
include alternative mortgage instruments, that is, mortgage instruments whose
principal or interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Adviser will, consistent
with the Fund's investment objective, policies and quality standards, consider
making investments in such new types of mortgage-related securities.
Other Asset-Backed Securities
The securitization techniques used to develop mortgage-backed securities
are being applied to a broad range of assets. Through the use of trusts and
special purpose corporations, various types of assets, including automobile
loans, computer leases and credit card and other types of receivables, are being
securitized in pass-through structures similar to mortgage pass-through
structures described above or in a structure similar to the CMO structure.
Consistent with the Fund's investment objectives and policies, the Fund may
invest in these and other types of asset-backed securities that may be developed
in the future. In general, the collateral supporting these securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest rate fluctuations.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of state and
federal consumer credit laws, many of which give debtors the right to set off
certain amounts owed on the credit cards, thereby reducing the balance due.
There is the possibility that recoveries on repossessed collateral may not, in
some cases, be available to support payments on these securities.
Asset-backed securities are often backed by a pool of assets representing
the obligations of a number of direct parties. To reduce the effect of failures
by obligors on underlying assets to make payments, the securities may contain
elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor or the underlying assets. Liquidity protection refers to the
making of advances, generally by the entity administering the pool of assets, to
ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantee policies
9
<PAGE>
or letters of credit obtained by the issuer or sponsor from third parties,
through various means of structuring the transaction or through a combination of
such approaches. The Fund will not pay any additional or separate fees for
credit support. The degree of credit support provided for each issue is
generally based on historical information respecting the level of credit risk
associated with the underlying assets. Delinquency or loss in excess of that
anticipated or failure of the credit support could adversely affect the return
on an investment in such a security.
Floating or Variable Rate Securities
Floating or variable rate securities have interest rates that periodically
change according to the rise and fall of a specified interest rate index or a
specific fixed-income security that is used as a benchmark. The interest rate
typically changes every six months, but for some securities the rate may
fluctuate weekly, monthly, or quarterly. The index used is often the rate for 90
or 180-day Treasury Bills. Variable-rate and floating-rate securities may have
interest rate ceilings or caps that fix the interest rate on such a security if,
for example, a specified index exceeds a predetermined interest rate. If an
interest rate on a security held by the Fund becomes fixed as a result of a
ceiling or cap provision, the interest income received by the Fund will be
limited by the rate of the ceiling or cap. In addition, the principal values of
these types of securities will be adversely affected if market interest rates
continue to exceed the ceiling or cap rate.
Loan Transactions
Loan transactions involve the lending of securities to a broker-dealer or
institutional investor for its use in connection with short sales, arbitrage, or
other securities transactions. Loans of portfolio securities of the Fund will be
made (if at all) in conformity with applicable federal and state rules and
regulations. The purpose of a qualified loan transaction is to afford the Fund
the opportunity to continue to earn income on the securities loaned and at the
same time to earn income on the collateral held by it.
Management of the Fund understands that it is the view of the Staff of the
SEC that the Fund is permitted to engage in loan transactions only if the
following conditions are met: (1) the Fund must receive at least 100 percent
collateral in the form of cash, cash equivalents, e.g., U.S. Treasury bills or
notes, or an irrevocable letter of credit; (2) the borrower must increase the
collateral whenever the market value of the securities loaned (determined on a
daily basis) rises above the level of the collateral; (3) the Fund must be able
to terminate the loan, after notice, at any time; (4) the Fund must receive
reasonable interest on the loan or a flat fee from the borrower, as well as
amounts equivalent to any dividends, interest, or other distributions on the
securities loaned and any increase in market value; (5) the Fund may pay only
reasonable custodian fees in connection with the loan; (6) voting rights on the
securities loaned may pass to the borrower; however, if a material event
affecting the investment occurs, the Trustees must be able to terminate the loan
and vote proxies or enter into an alternative arrangement with the borrower to
enable the Trustees to vote proxies. Excluding items (1) and (2), these
practices may be amended from time to time as regulatory provisions permit.
While there may be delays in recovery of loaned securities or even a loss
of rights in collateral supplied if the borrower fails financially, loans will
be made only to firms deemed by
10
<PAGE>
the Adviser to be of good standing and will not be made unless, in the judgment
of the Adviser, the consideration to be earned from such loans would justify the
risk.
Foreign Securities
The Fund may invest up to 10% of its total assets in fixed income
securities of foreign issuers, including securities issued by foreign
governments, denominated in U.S. dollars. Foreign securities may be subject to
foreign taxes that would reduce their effective yield. Certain foreign
governments levy withholding taxes against dividend and interest income.
Although in some countries a portion of these taxes is recoverable, the
unrecovered portion of any foreign withholding taxes would reduce the income the
Fund receives from its foreign investments. Foreign investments involve certain
other risks, including possible political or economic instability, the
possibility of currency exchange controls, reduced availability of public
information about a foreign company, and the lack of uniform accounting,
auditing, and financial reporting standards comparable to those applicable to
domestic companies. In addition, with respect to certain foreign countries,
there is a possibility of expropriation, nationalization, confiscatory taxation,
or diplomatic developments that could affect investments in those countries.
Finally, in the event of default on a foreign debt obligation, it may be more
difficult for the Fund to obtain or enforce a judgment against the issuers of
the obligation.
Repurchase Agreements
The Fund may invest in repurchase agreements, which are agreements by which
the Fund purchases a security and simultaneously commits to resell that security
to the seller (a commercial bank or recognized securities dealer) at a stated
price within a number of days (usually not more than seven) from the date of
purchase. The resale price reflects the purchase price plus a rate of interest
which is unrelated to the coupon rate or maturity of the purchased security.
Repurchase agreements may be considered loans by the Fund collateralized by the
underlying security. The obligation of the seller to pay the stated price is in
effect secured by the underlying security. The seller will be required to
maintain the value of the collateral underlying any repurchase agreement at a
level at least equal to the price of the repurchase agreement. In the case of
default by the seller, the Fund could incur a loss. In the event of a bankruptcy
proceeding commenced against the seller, the Fund may incur costs and delays in
realizing upon the collateral. The Fund will enter into repurchase agreements
only with those banks or securities dealers who are deemed creditworthy pursuant
to criteria adopted by the Trustees of the Trust. There is no limit on the
portion of the Fund's assets that may be invested in repurchase agreements with
maturities of seven days or less.
Illiquid Securities
No illiquid securities will be acquired by the Fund if upon the purchase
more than 10 percent of the value of the Fund's net assets would consist of
these securities. "Illiquid securities" are securities that may not be sold or
disposed of in the ordinary course of business within seven days at
approximately the price used to determine the Fund's net asset value. Under
current interpretations of the Staff of the SEC, the following instruments in
which the Fund may invest will be considered illiquid: (1) repurchase agreements
maturing in more than seven days; (2) restricted securities (securities whose
public resale is subject to legal
11
<PAGE>
restrictions); (3) options, with respect to specific securities, not traded on a
national securities exchange that are not readily marketable; and (4) any other
securities in which the Fund may invest that are not readily marketable.
The Fund may purchase without limit, however, certain restricted securities
that can be resold to qualifying institutions pursuant to a regulatory exemption
under Rule 144A ("Rule 144A securities"). If a dealer or institutional trading
market exists for Rule 144A securities, such securities are deemed to be liquid
and thus not subject to the Fund's 10 percent limitation on the investment in
restricted or other illiquid securities. Under the supervision of the Trustees
of the Trust, the Fund's adviser determines the liquidity of Rule 144A
securities and, through reports from the adviser, the Trustees monitor trading
activity in these securities. In reaching liquidity decisions, the adviser will
consider, among other things, the following factors: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or
sell the security and the number of other potential purchasers; (3) dealer
undertakings to make a market in the security; and (4) the nature of the
security and the marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers, and the procedures for the transfer).
Because institutional trading in Rule 144A securities is relatively new, it is
difficult to predict accurately how these markets will develop. If institutional
trading in Rule 144A securities declines, the Fund's liquidity could be
adversely affected to the extent it is invested in such securities.
Dollar Roll Transactions
The Fund may enter into "dollar roll" transactions, which consist of the
sale by the Fund to a bank or broker-dealer (the "counterparty") of GNMA
certificates or other mortgage-backed securities together with a commitment to
purchase from the counterparty similar, but not identical, securities at a
future date and at the same price. The counterparty receives all principal and
interest payments, including prepayments, made on the security while it is the
holder. The Fund receives a fee from the counterparty as consideration for
entering into the commitment to purchase. Dollar rolls may be renewed over a
period of several months with a new purchase and repurchase price fixed and a
cash settlement made at each renewal without physical delivery of securities.
The Fund will not use such transactions for leveraging purposes and,
accordingly, will segregate cash, U.S. Government securities or other high grade
debt obligations in an amount sufficient to meet their purchase obligations
under the transactions. The Funds will also maintain asset coverage of at least
300% for all outstanding firm commitments, dollar rolls and other borrowings.
Dollar rolls may be treated for purposes of the Investment Company Act of
1940, as amended (the "1940 Act"), as borrowings of the Fund because they
involve the sale of a security coupled with an agreement to repurchase. Like all
borrowings, a dollar roll involves costs to the Fund. For example, while the
Fund receives a fee as consideration for agreeing to repurchase the security,
the Fund forgoes the right to receive all principal and interest payments while
the counterparty holds the security. These payments to the counterparty may
exceed the fee received by the Fund, thereby effectively charging the Fund
interest on its borrowing. Further, although the Fund can estimate the amount of
12
<PAGE>
expected principal prepayment over the term of the dollar roll, a variation in
the actual amount of prepayment could increase or decrease the cost of the
Fund's borrowing.
The entry into dollar rolls involves potential risks of loss which are
different from those related to the securities underlying the transactions. For
example, if the counterparty becomes insolvent, the Fund's right to purchase
from the counterparty might be restricted. Additionally, the Fund may be
required to purchase securities in connection with a dollar roll at a higher
price than may otherwise be available on the open market. Since, as noted above,
the counterparty is required to deliver a similar, but not identical security to
the Fund, the security which the Fund is required to buy under the dollar roll
may be worth less than an identical security.
INVESTMENT RESTRICTIONS
The following is a list of investment restrictions applicable to the Fund.
If a percentage limitation is adhered to at the time of the investment, a later
increase or decrease in percentage resulting from any change in value or net
assets will not result in a violation of such restriction. The Trust may not
change these restrictions without a majority vote of the outstanding securities
of the Fund.
The Fund may not:
1. Buy or sell commodities or commodity futures contracts.
2. Concentrate investments in any industry. However, it may (a) invest up
to 25 percent of the value of its total assets in any one industry, (b) invest
up to 100 percent of the value of its total assets in securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities, and (c)
invest for defensive purposes up to 80% of the value of its total assets in
certificates of deposit (C/D's) and banker's acceptances with maturities not
greater than one year. C/D's and banker's acceptances will be limited to
domestic banks which have total assets in excess of $1 billion and are subject
to regulatory supervision by the U.S. Government or state governments.
Commitments to purchase securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities on a "when-issued" basis may not exceed 20
percent of the total assets of the Fund. Emphasis on investments in securities
of a particular industry will be shifted whenever the adviser determines that
such action is desirable for investment reasons. The Trustees will periodically
review these decisions of the adviser.
3. Buy or sell real estate. However, the Fund may purchase or hold
securities issued by companies, such as real estate investment trusts, that deal
in real estate or interests therein, and participation interests in pools of
real estate mortgage loans.
4. Make loans to other persons (except by purchase of short-term commercial
paper, bonds, debentures, repurchase agreements or other debt securities
constituting part of an issue). The Fund may lend portfolio securities to
broker-dealers or other institutional investors if, as a result thereof, the
aggregate value of all securities loaned does not exceed 33 1/3 percent of its
total assets.
13
<PAGE>
5. Purchase illiquid securities, if upon the purchase more than 10% of the
value of the Fund's net assets would consist of such illiquid securities. See
"DESCRIPTION OF THE FUND, INVESTMENTS IN THE FUND" for a complete discussion of
illiquid securities.
6. Purchase the securities of any issuer if the purchase, at the time
thereof, would cause more than 10 percent of the outstanding voting securities
of that issuer to be held in the Fund.
7. Purchase the securities of any issuer if the purchase, at the time
thereof, would cause more than 5 percent of the value of its total assets at
market value to be invested in the securities of that issuer (other than
obligations of the U.S. Government and its instrumentalities), with reference to
75 percent of the assets of the Fund.
8. Purchase or retain securities of an issuer, any of whose officers or
directors or security holders is an officer or director of the Fund or of its
adviser if, or so long as, the officers and directors of he Fund and of its
adviser together own beneficially more than 5 percent of any class of securities
of the issuer.
9. Purchase securities of other open-end investment companies, except as
permitted by Section 12(d)(1)(A) of the 1940 Act.
10. Issue senior securities, bonds, or debentures.
11. Underwrite securities of other issuers, except the Fund may acquire
portfolio securities in circumstances where, if the securities are later
publicly offered or sold by the Fund, it might be deemed to be an underwriter
for purposes of the Securities Act of 1933, as amended (the "1933 Act").
12. Borrow money except as a temporary measure for extraordinary or
emergency purposes. Its borrowings may not exceed 5 percent of the gross assets
of the Fund valued at the lesser of cost or market value, nor may it pledge,
mortgage, or hypothecate assets valued at market to an extent greater than 10
percent of the gross assets taken at cost of the Fund.
13. Invest in the securities of any company if the purchase, at the time
thereof, would cause more than 5 percent of the value of the Fund's total assets
to be invested in companies which, including predecessors and parents, have a
record of less than three years of continuous operation.
14. Invest in companies to exercise control or management.
15. Buy any securities or other property on margin or purchase or sell puts
or calls, or confirmations thereof.
16. Engage in short sales of securities except to the extent that it owns
other securities convertible into an equivalent amount of such securities. These
short sales may only be made to protect a profit in or to attempt to minimize a
loss with respect to convertible
14
<PAGE>
securities. In any event no more than 10 percent of the Fund's net assets valued
at market may, at any time, be held as collateral for such sales.
- --------------------------------------------------------------------------------
MANAGEMENT
- --------------------------------------------------------------------------------
The Fund is managed under the general supervision of the Trustees of the
Trust. The trustees and officers of the Trust are listed below, together with
their principal business occupations. All principal business positions have been
held for more than five years, except as follows: Columbia Small Cap Fund, Inc.
since August 1996; Columbia Real Estate Equity Fund, Inc. since April 1994; and
except as otherwise indicated. The term "Columbia Funds" refers to Columbia High
Yield Fund, Inc., Columbia Balanced Fund, Inc., Columbia Common Stock Fund,
Inc., Columbia International Stock Fund, Inc., Columbia Municipal Bond Fund,
Inc., Columbia Real Estate Equity Fund, Inc., Columbia U.S. Government
Securities Fund, Inc., Columbia Special Fund, Inc., Columbia Growth Fund, Inc.,
Columbia Daily Income Company, Columbia Small Cap Fund, Inc., and Columbia Fixed
Income Securities Fund, Inc.
J. JERRY INSKEEP, JR.,* Chairman, President, and Trustee of the Trust; Chairman,
President, and Director of each of the Columbia Funds; Consultant with Fleet
Financial Group, Inc. (since December 1997); formerly Chairman and a Director of
Columbia Management Co. (the "Adviser"), the investment adviser of the Fund,
Columbia Funds Management Company ("CFMC"), Columbia Trust Company (the "Trust
Company"), the Fund's transfer agent; and formerly a Director of Columbia
Financial Center Incorporated ("Columbia Financial"). Mr. Inskeep's business
address is 1300 S.W. Sixth Avenue, P.O. Box 1350, Portland, Oregon 97207.
JAMES C. GEORGE, Trustee of the Trust (since December 1997) and Director of each
of the Columbia Funds (since June 1994). Mr. George, former investment manager
of the Oregon State Treasury (1962-1992), is an investment consultant. Mr.
George's business address is 1001 S.W. Fifth Avenue, Portland, Oregon 97204.
THOMAS R. MACKENZIE, Trustee of the Trust (since December 1997); Director of
each of the Columbia Funds; and Chairman of the Board of Directors of Group
Mackenzie (architecture, planning, interior design, engineering). Mr.
Mackenzie's address is 0690 S.W. Bancroft Street, Portland, Oregon 97201.
ROBERT J. MOORMAN, * Secretary of the Columbia Funds and the Trust (since
January 1998); attorney with Stoel Rives LLP. Mr. Moorman's business address is
900 S.W. Fifth Avenue, Suite 2600, Portland, Oregon 97204-1268.
RICHARD L. WOOLWORTH, Trustee of the Trust; Director of each of the Columbia
Funds; Chairman and Chief Executive Officer of Blue Cross and Blue Shield of
Oregon; and Chairman and Chief Executive Officer of the Regence Group, health
insurers. Mr. Woolworth's address is 100 S. W. Market Street, Portland, Oregon
97201.
15
<PAGE>
*Mr. Inskeep and Mr. Moorman are each an "interested person" as defined by
the Investment Company Act of 1940 (the "1940 Act") and receive no trustee fees
or salaries from the Trust or the Fund.
The following table sets forth the compensation received by the
disinterested trustees of the Trust for the fiscal year ended October 31, 1998.
<TABLE>
<CAPTION>
Total Compensation from the
Trustee Compensation From Trust* Trust and Columbia Funds
- ------- ------------------------ ---------------------------
<S> <C> <C>
Richard L. Woolworth $ $
Thomas R. Mackenzie $ $
James C. George $ $
*Mr. Mackenzie and Mr. George became Trustees of the Trust on December 10, 1997.
Therefore, their compensation is for a partial year.
</TABLE>
At September 30, 1998, to the knowledge of the Trust, the following persons
owned of record or beneficially more than 5 percent of the outstanding shares of
the Fund:
Shares Beneficially Owned
Name and Address at September 30, 1998
- ---------------- -------------------------
Legacy Fixed Income Investment Fund 2,415,770 (68.78%)
Corporate Financial Admin. Services
1919 N.W. Lovejoy
Portland, OR 97209
CMC S/T Bond A/C #ST0502 434,139 (17.97%)
Lawrence S. Viehl
2424 S.W. Sherwood Drive
Portland, OR 97201-1614
- --------------------------------------------------------------------------------
INVESTMENT ADVISORY AND OTHER FEES PAID TO AFFILIATES
- --------------------------------------------------------------------------------
The investment adviser to the Fund is Columbia Management Co. (the
"Adviser"). The Adviser has entered into an investment contract with the Fund.
Pursuant to the investment contract the Adviser provides research, advice, and
supervision with respect to investment matters and determines what securities to
purchase or sell and what portion of the Fund's assets to invest.
The Adviser and the Trust Company are indirect wholly owned subsidiaries of
Fleet Financial Group, Inc. ("Fleet"). Fleet and its affiliates provide a wide
range of banking, financial, and investment products and services to individuals
and businesses. Their principal activities include customer and commercial
banking, mortgage lending and servicing, trust administration, investment
management, retirement plan services, brokerage and clearing
16
<PAGE>
services, securities underwriting, private and corporate financing and advisory
activities, and insurance services.
The Adviser provides office space and pays all executive salaries and
executive expenses of the Fund. The Fund assumes its costs relating to trust
matters, cost of services to shareholders, transfer and dividend paying agent
fees, custodian fees, legal and auditing expenses, disinterested trustees fees,
taxes and governmental fees, interest, broker's commissions, transaction
expenses, cost of stock certificates and any other expenses (including clerical
expenses) of issue, sale, repurchase, or redemption of its shares, expenses of
registering or qualifying its shares for sale, transfer taxes, and all other
expenses of preparing its registration statement, prospectuses, and reports.
For its services provided to the Fund, the Adviser charges an advisory fee,
which is accrued daily and paid monthly. The advisory fee for the Fund equals
the annual rate of .25 of 1 percent of its daily net assets. For the fiscal
period ended October 31, 1998 relating to the first 9 months of the Fund's
operations, advisory fees paid by the Fund to the Adviser were _________. The
Adviser has agreed to reimburse the Fund to the extent Total Fund Operating
Expenses exceed .25%. If the Adviser had not agreed to reimburse the Fund for
such expenses, Total Fund Operating Expenses for the Fund would have been ___%.
In addition to the investment advisory fee payable by the Fund to the
Adviser, each shareholder enters into an Administrative Services Agreement (the
"Agreement") with the Adviser. Pursuant to this Agreement, the Adviser agrees to
provide certain administrative services to each shareholder and charges each
shareholder a fee for those services based on the level of shareholder assets
invested in the Fund. The fees range from .05% to .20%.
The Trust Company acts as transfer agent and dividend crediting agent for
the Fund. Its address is 1301 SW Fifth Avenue, P.O. Box 1350, Portland, Oregon
97207. It issues certificates for shares of the Fund, if requested, and records
and disburses dividends for the Fund. The Trust pays the Trust Company a per
account fee of $1 per month for each shareholder account with the Fund existing
at any time during the month, with a minimum aggregate fee of $1,500 per month.
In addition, the Trust pays the Trust Company for extra administrative services
performed at cost in accordance with a schedule set forth in the agreement
between the Trust Company and the Trust and reimburses the Trust Company for
certain out-of-pocket expenses incurred in carrying out its duties under that
agreement. The Trust paid $18,000 to the Trust Company for services performed
for fiscal 1998 under the transfer agent agreement relating to the Fund.
- --------------------------------------------------------------------------------
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
The Fund will not generally invest in securities for short-term capital
appreciation but, when business and economic conditions, market prices, or the
Fund's investment policy warrant, individual security positions may be sold
without regard to the length of time they have been held.
17
<PAGE>
There is generally no stated commission in the case of fixed income
securities, which are traded in the over-the-counter markets, but the price paid
by the Fund usually includes an undisclosed dealer commission or mark-up. In
underwritten offerings, the price paid by the Fund includes a disclosed, fixed
commission or discount retained by the underwriter or dealer. Transactions on
U.S. stock exchanges and other agency transactions involve the payment by the
Fund of negotiated brokerage commissions. Such brokerage commissions vary among
different brokers, and a particular broker may charge different commissions
according to such factors as the difficulty and size of the transaction.
Prompt execution of orders at the most favorable price will be the primary
consideration of the Fund in transactions where fees or commissions are
involved. Additional factors considered in the process of selecting a
broker-dealer to execute a transaction include: (i) professional capability of
the executing broker-dealer and the value and quality of the services provided
by the broker-dealer; (ii) size and type of the transaction; (iii) timing of the
transaction in the context of market prices and trends; (iv) nature and
character of markets for the security purchased or sold; (v) the broker-dealer's
execution efficiency and settlement capability; (vi) the executing
broker-dealer's stability and the execution services it renders to the Adviser
on a continuing basis; and (vii) reasonableness of commission. Research,
statistical, and other services also may be taken into consideration in
selecting broker-dealers. These services may include: advice concerning the
value of securities, the advisability of investing in, purchasing, or selling
securities, and the availability of securities or the purchasers or sellers of
securities; and furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategies, and performance
of accounts.
Allocation of transactions to obtain research services for the Adviser
enables the Adviser to supplement its own research and analysis with the
statistics, information, and views of others. While it is not possible to place
a dollar value on these services, it is the opinion of the Adviser that the
receipt of such services will not reduce the overall expenses for its research
or those of its affiliated companies. The fees paid to the Adviser by the Fund
would not be reduced as a result of the receipt of such information and services
by the Fund. The receipt of research services from brokers or dealers might be
useful to the Adviser and its affiliates in rendering investment management
services to the Fund or other clients; and, conversely, information provided by
brokers or dealers who have executed orders on behalf of other clients might be
useful to the Adviser in carrying out its obligations to the Fund. As permitted
by Section 28(e) of the Securities and Exchange Act of 1934, the Adviser may
cause the Fund to pay a broker-dealer which provides "brokerage and research
services" (as defined in the Act) to the Adviser an amount of undisclosed
commission for effecting a securities transaction for the Trust in excess of the
commission which another broker-dealer would have charged for effecting that
transaction.
The Adviser may use research services provided by, and place agency
transactions with, affiliated broker-dealers if the commissions are fair and
reasonable and comparable to commissions charged by non-affiliated qualified
brokerage firms.
Investment decisions for the Fund are made independently from those of the
other portfolios of the Trust or accounts managed by the Adviser or its
affiliate, Columbia Funds Management Company. The same security is sometimes
held in the portfolio of more than one fund or account. Simultaneous
transactions are inevitable when several funds or accounts
18
<PAGE>
are managed by the same investment adviser, particularly when the same security
is suitable for the investment objective of more than one fund or account. In
the event of simultaneous transactions, allocations among the Fund, other
portfolios of the Trust and other accounts will be made on an equitable basis.
Both the Trust and the Adviser have adopted a Code of Ethics (the "Code")
that sets forth general and specific standards relating to the securities
trading activities of all their employees. The purpose of the Code is to ensure
that all employees conduct their personal transactions in a manner that does not
interfere with the portfolio transactions of the Fund or the Adviser's other
clients, or take unfair advantage of their relationship with the Adviser. The
specific standards in the Code include, among others, a requirement that all
employee trades be pre-cleared; a prohibition on investing in initial public
offerings; required pre-approval of an investment in private placements; a
prohibition on portfolio managers trading in a security seven days before or
after a trade in the same security by an account over which the manager
exercises investment discretion; and a prohibition on realizing any profit on
the trading of a security held less than 60 days. Certain securities and
transactions, such as mutual fund shares or U. S. Treasuries and purchases of
options on securities indexes or securities under an automatic dividend
reinvestment plan, are exempt from the restrictions in the Code because they
present little or no potential for abuse. Certain transactions involving the
stocks of large capitalization companies are exempt from the seven day black-out
period and short-term trading prohibitions because such transactions are highly
unlikely to affect the price of these stocks. In addition to the trading
restrictions, the Code contains reporting obligations that are designed to
ensure compliance and allow the Adviser's Ethics Committee to monitor that
compliance.
The Trust and the Adviser have also adopted a Policy and Procedures
Designed to Detect and Prevent Insider Trading (the "Insider Trading Policy").
The Insider Trading Policy prohibits any employee from trading, either
personally or on behalf of others (including a client account), on the basis of
material nonpublic information. All employees are required to certify each year
that they have read and complied with the provisions of the Code and the Insider
Trading Policy.
- --------------------------------------------------------------------------------
CAPITAL STOCK AND OTHER SECURITIES
- --------------------------------------------------------------------------------
The Trust may establish separate series of investment portfolios under its
Restated Declaration of Trust. The Fund, CMC Small Cap Fund, CMC International
Stock Fund, and CMC High Yield Fund are the only series established under the
Trust. Shares of each series vote together, except as provided in the Trust's
Declaration of Trust and under applicable law. It is expected that shares of a
series would vote separately by series on any changes in fundamental investment
policies relating to that series. All shares of each series of the Trust,
including the Fund, have equal rights as to voting, redemption, dividends and
distributions. All issued and outstanding shares of the Fund are fully paid and
nonassessable. Shares have no preemptive or conversion rights. Fractional shares
have the same rights proportionately as full shares. The shares of the Fund do
not have cumulative voting rights, which means that the holders of more than 50
percent of the shares of the Fund and any other portfolio of the
19
<PAGE>
Trust, voting for the election of Trustees, can elect all the Trustees if they
choose to do so. In certain circumstances, Trustees may be removed by action of
the Trustees or the shareholders.
Any reference to the phrase "vote of a majority of the outstanding voting
securities of the Fund" means the vote at any meeting of shareholders of the
Fund of (i) 67 percent or more of the shares present or represented by proxy at
the meeting, if the holders of more than 50 percent of the outstanding shares
are present or represented by proxy, or (ii) more than 50 percent of the
outstanding shares, whichever is less.
- --------------------------------------------------------------------------------
PURCHASE, REDEMPTION AND PRICING OF SHARES
- --------------------------------------------------------------------------------
PURCHASES
Shareholders of the Fund are investment advisory clients of the Adviser.
Investments in the Fund are made directly by clients of the Adviser or by the
Adviser in its role as discretionary investment adviser for a portion of
shareholder's assets. However, with respect to assets of an investment advisory
client of the Adviser invested in the Fund, that client will pay no fee pursuant
to its separate management contract with the Adviser (for the period during
which the assets are invested in the Fund).
If the Adviser is deemed to be a fiduciary with respect to a prospective
shareholder of the Fund pursuant to the Employee Retirement Income Security Act
of 1974 ("ERISA"), certain conditions must be satisfied before assets may be
invested in the Fund by the Adviser on behalf of the shareholder. These
conditions are set forth by the U. S. Department of Labor in Prohibited
Transaction Class Exemption No. 77-4 (the "Exemption"). The Exemption permits
the Adviser to direct investments of ERISA-qualified plans to a mutual fund,
such as the Fund, for which the Adviser serves as an investment adviser if,
after review of the Prospectus and disclosure relating to fees of the Fund and
fees under the advisory contract, another fiduciary, as determined under ERISA,
with respect to that shareholder approves investments in the Fund. The second
fiduciary must be independent of and unrelated to the Adviser under standards
set forth by the U. S. Department of Labor in the Exemption.
The second, independent fiduciary that must approve investments in the Fund
by the Adviser must not be engaged as a second fiduciary only in contemplation
of a possible investment in the Fund. Rather, the second, independent fiduciary
is almost always a committee appointed by the employee benefit plan sponsor and
has oversight responsibility for appointment of CMC as an investment adviser
with respect to certain plan assets. This committee is almost always made up of
one or more employees of the plan sponsor, and, as such, these employees receive
compensation from the plan sponsor but are not compensated out of plan assets.
The transfer agent for the Fund may, at its discretion, permit investors to
purchase shares through the exchange of securities they hold. Any securities
exchanged must meet the investment objective, policies, and limitations of the
Fund, must have a readily ascertainable market value, must be liquid, and must
not be subject to restrictions on resale. The market
20
<PAGE>
value of any securities exchanged, plus any cash, must be at least $100,000.
Shares purchased in exchange for securities generally may not be redeemed or
exchanged until the transfer has settled - usually within 15 days following the
purchase by exchange. The basis of the exchange will depend upon the relative
net asset value of the shares purchased and securities exchanged. Securities
accepted by the Fund will be valued in the same manner as the Fund values its
assets. Any interest earned on securities following their delivery to the
transfer agent and prior to the exchange will be considered in valuing the
securities. All interest, dividends, subscription, or other rights attached to
the securities become the property of the Fund, along with the securities.
Before engaging in an exchange, investors should consult their tax advisers
concerning the tax consequences to them of the exchange.
REDEMPTIONS
Redemptions of all or any portion of a shareholder's investment can be made
at any time. Redemption of shares are at the net asset value next computed after
receipt of a redemption order on a day the New York Stock Exchange ("NYSE") is
open for business. Payment will be made within seven days of the date of
redemption, except as provided by the rules of the SEC. The Trust may suspend
the determination of net asset value of the Fund and the right of redemption for
any period (1) when the New York Stock Exchange is closed, other than customary
weekend and holiday closings, (2) when trading on the New York Stock Exchange is
restricted, (3) when an emergency exists as a result of which sale of securities
owned by the Fund is not reasonably practicable or it is not reasonably
practicable for the Trust to determine the value of the Fund's net assets, or
(4) as the Securities and Exchange Commission ("SEC") may by order permit for
the protection of security holders, provided the Trust complies with rules and
regulations of the SEC which govern as to whether the conditions prescribed in
(2) or (3) exist. The New York Stock Exchange observes the following holidays:
New Year's Day, Martin Luther King, Jr.'s Birthday, Washington's Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving, and Christmas.
In the case of suspension of the right to redeem, shareholders may withdraw
their redemption request or receive payment based upon the net asset value
computed upon the termination of the suspension.
The Fund reserves the right to redeem Fund shares in cash or in kind. The
Trust has elected, however, to be governed by Rule 18f-1 under the Investment
Company Act of 1940 (the "1940 Act"), pursuant to which the Fund is obligated to
redeem, during any 90-day period, shares of a shareholder solely (or cash up to
the lesser of $250,000 or 1 percent of the net asset value of the Fund). A
shareholder who is redeemed in kind may incur brokerage fees upon the sale of
any securities distributed upon redemption.
PRICING OF SHARES
The net asset value per share of the Fund is determined by the Adviser,
under procedures approved by the trustees of the Trust, as of the close of
regular trading (normally 4:00 p.m. New York time) on each day the NYSE is open
for business and at other times determined by the trustees. The net asset value
per share is computed by dividing the value of all assets of the Fund, less its
liabilities, by the number of shares outstanding.
21
<PAGE>
The Fund's portfolio securities and other assets for which market
quotations are readily available are stated at market value. Market value is
determined on the basis of last reported sales prices, or if no sales are
reported, as is the case for most securities traded over-the-counter, at the
average between representative bid and asked quotations obtained from a third
party pricing service or from established market makers. Fixed income
securities, including those to be purchased under firm commitment agreements
(other than obligations having a maturity of 60 days or less), are normally
valued on the basis of quotations obtained from brokers and dealers or pricing
services, which take into account appropriate factors such as
institutional-sized trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other market
data. Short-term investments having a maturity of 60 days or less are valued at
amortized cost, when the Board of Trustees determines that amortized cost is
their fair value.
Certain fixed income securities for which daily market quotations are not
readily available, or for which the Adviser believes accurate quotations have
not been received from the pricing service, may be valued by the Adviser,
pursuant to guidelines established by the Board of Trustees, with reference to
fixed income securities whose prices are more readily obtainable and whose
durations are comparable to the securities being valued. Subject to the
foregoing, other securities for which market quotations are not readily
available are valued at fair value as determined in good faith by the Board of
Trustees.
- --------------------------------------------------------------------------------
CUSTODIANS
- --------------------------------------------------------------------------------
United States National Bank of Oregon, 321 SW Sixth Avenue, Portland,
Oregon 97208, acts as general custodian of the Trust (a "Custodian"). Chase
Manhattan Bank ("Chase" or a "Custodian"), One Pierrepont Plaza, Brooklyn, New
York 11201, has entered into a custodian agreement with the Trust in respect of
the purchase of foreign securities by the Fund. The Custodians hold all
securities and cash of the Fund, receive and pay for securities purchased,
deliver against payment securities sold, receive and collect income from
investments, make all payments covering expenses of the Fund, and perform other
administrative duties, all as directed by authorized officers of the Trust. The
Custodians do not exercise any supervisory function in the purchase and sale of
portfolio securities or payment of dividends.
The Fund is authorized to invest up to 10% of its total assets in fixed
income securities of foreign issuers, denominated in U.S. dollars. Portfolio
securities purchased outside the United States by the Fund are maintained in the
custody of foreign banks, trust companies, or depositories that have
sub-custodian arrangements with Chase (the "foreign sub-custodians"). Each of
the domestic and foreign custodial institutions that may hold portfolio
securities of the Fund has been approved by the Trustees of the Trust or a
delegate of the Trustees in accordance with regulations under the 1940 Act.
22
<PAGE>
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
- --------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 1300 S.W. Fifth Avenue, Suite 3100, Portland,
Oregon 97201, serves as the Trust's independent accountants and, in addition to
examining the annual financial statements of the Trust, assists in the
preparation of the tax returns of the Trust and in certain other matters.
- --------------------------------------------------------------------------------
TAXES
- --------------------------------------------------------------------------------
Federal Income Taxes
The Fund intends and expects to meet continuously the tests for
qualification as a regulated investment company under Part I of Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"). The Fund believes it
satisfies the tests to qualify as a regulated investment company.
To qualify as a regulated investment company for any taxable year, the Fund
must, among other things:
(a) derive at least 90 percent of its gross income from dividends,
interest, payments with respect to securities loans, gains from the sale or
other disposition of stock, securities, or foreign currencies, or other income
(including but not limited to gains from options, futures, or forward contracts)
derived with respect to its business of investing in such stock, securities, or
currencies (the "90 Percent Test"); and
(b) diversify its holdings so that at the end of each quarter (i) 50
percent or more of the value of the assets of the Fund is represented by cash,
government securities, and other securities limited, in respect of any one
issuer of such other securities, to an amount not greater than 5 percent of the
value of the assets of the Fund and 10 percent of the outstanding voting
securities of such issuer, and (ii) not more than 25 percent of the value of the
assets of the Fund is invested in the securities (other than government
securities) of any one issuer or of two or more issuers that the Fund "controls"
within the meaning of Section 851 of the Code and that meet certain
requirements. In addition, the Fund must file, or have filed, a proper election
with the Internal Revenue Service.
Part I of Subchapter M of the Code will apply to the Fund during a taxable
year only if it meets certain additional requirements. Among other things, the
Fund must: (a) have a deduction for dividends paid (without regard to capital
gain dividends) at least equal to the sum of 90 percent of its investment
company taxable income (computed without any deduction for dividends paid) and
90 percent of its tax-exempt interest in excess of certain disallowed deductions
(unless the Internal Revenue Service waives this requirement) and (b) either (i)
have been subject to Part I of Subchapter M for all taxable years ending after
November 8, 1983 or (ii) as of the close of the taxable year have no earnings
and profits accumulated in any taxable year to which Part I of Subchapter M did
not apply.
23
<PAGE>
The Trust currently has four portfolios, including the Fund. The Trust may
establish additional funds in the future. Federal income tax laws generally will
treat each fund as a separate corporation (provided that each fund consists of a
segregated portfolio of assets the beneficial interests in which are owned by
the holders of a class or series of stock that is preferred over all other
classes or series in respect of that portfolio of assets).
A regulated investment company that meets the requirements described above
is taxed only on its "investment company taxable income," which generally equals
the undistributed portion of its ordinary net income and any excess of net
short-term capital gain over net long-term capital loss. In addition, any excess
of net long-term capital gain over net short-term capital loss that is not
distributed is taxed to the Fund at corporate capital gain tax rates. The policy
of the Fund is to apply capital loss carry-forwards as a deduction against
future capital gains before making a capital gain distribution to shareholders.
If any net long-term capital gains in excess of net short-term capital
losses are retained by the Fund, requiring federal income taxes to be paid
thereon by the Fund, the Fund may elect to treat such capital gains as having
been distributed to shareholders. In the case of such an election, shareholders
will be taxed on such amounts as long-term capital gains, will be able to claim
their proportional share of the federal income taxes paid by the Fund on such
gains as a credit against their own federal income tax liabilities, and
generally will be entitled to increase the adjusted tax basis of their shares in
the Fund by the differences between their pro rata shares of such gains and
their tax credits.
Shareholders of the Fund are taxed on distributions of net investment
income, or of any excess of net short-term capital gain over net long-term
capital loss, as ordinary income. Income distributions from the Fund are
unlikely to qualify for the dividends-received deduction for corporate
shareholders because the income of the Fund consists largely or entirely of
interest rather than dividends. Distributions of any excess of net long-term
capital gain over net short-term capital loss from the Fund are ineligible for
the dividends-received deduction.
The Fund may invest up to 10 percent of its total assets in the securities
of foreign corporations and issuers. Foreign countries may impose income taxes,
generally collected by withholding, on foreign-source dividends and interest
paid to the Fund. These foreign taxes will reduce the Fund's distributed income.
The Fund generally expects to incur, however, no foreign income taxes on gains
from the sale of foreign securities. The United States has entered into income
tax treaties with many foreign countries to reduce or eliminate the foreign
taxes on certain dividends and interest received from corporations in those
countries. The Fund intends to take advantage of such treaties where possible.
It is impossible to predict with certainty in advance the effective rate of
foreign taxes that will be paid by the Fund since the amount invested in
particular countries will fluctuate and the amounts of dividends and interest
relative to total income will fluctuate.
Distributions properly designated by the Fund as representing the excess of
net long-term capital gain over net short-term capital loss are taxable to
shareholders as long-term capital gain, regardless of the length of time the
shares of the Fund have been held by shareholders. For noncorporate taxpayers,
the highest rate that applies to long-term capital gains is lower than the
highest rate that applies to ordinary income. Any loss that is realized
24
<PAGE>
and allowed on redemption of shares of the Fund less than six months from the
date of purchase of the shares and following the receipt of a capital gain
dividend will be treated as a long-term capital loss to the extent of the
capital gain dividend. For this purpose, Section 852(b)(4) of the Code contains
special rules on the computation of a shareholder's holding period.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether paid in shares or in cash.
Each distribution is accompanied by a brief explanation of the form and
character of the distribution. Within 60 days after the close of each taxable
year (October 31), the Fund issues to each shareholder a statement of the
federal income tax status of all distributions, including a statement of the
prior taxable year's distributions which the Fund has designated to be treated
as long-term capital gain.
A distribution may be taxable to a shareholder even if the distribution
reduces the net asset value of the shares held below their cost (and is in an
economic sense a return of the shareholder's capital). This tax result is most
likely when shares are purchased shortly before an annual distribution of
capital gains or other earnings.
If the Fund declares a dividend in October, November, or December payable
to shareholders of record on a certain date in such a month and pays the
dividend during January of the following year, the shareholders will be taxed as
if they had received the dividend on December 31 of the year in which the
dividend was declared. Thus, a shareholder may be taxed on the dividend in a
taxable year prior to the year of actual receipt.
A special tax may apply to the Fund if it fails to make sufficient
distributions during the calendar year. The required distributions for each
calendar year generally equal the sum of (a) 98 percent of the ordinary income
for the calendar year plus (b) 98 percent of the capital gain net income for the
one-year period that ends on October 31 during the calendar year, plus (c) an
adjustment relating to any shortfall for the prior taxable year. If the actual
distributions are less than the required distributions, a tax of 4 percent
applies to the shortfall.
The Code allows the deduction by certain individuals, trusts, and estates
of "miscellaneous itemized deductions" only to the extent that such deductions
exceed 2 percent of adjusted gross income. The limit on miscellaneous itemized
deductions will not apply, however, with respect to the expenses incurred by any
"publicly offered regulated investment company." The Fund believes that it is a
publicly offered regulated investment company because its shares are
continuously offered pursuant to a public offering (within the meaning of
section 4 of the 1933 Act. Therefore, the limit on miscellaneous itemized
deductions should not apply to expenses incurred by the Fund.
State Income Taxes
The state tax consequences of investments in the Fund are beyond the scope
of the tax discussions in the Prospectus and this Statement of Additional
Information.
25
<PAGE>
Additional Information
The foregoing summary and the summary included in the Prospectus under
"Taxes" of tax consequences of an investment in the Fund are necessarily general
and abbreviated. No attempt has been made to present a complete or detailed
explanation of tax matters. Furthermore, the provisions of the statutes and
regulations on which they are based are subject to change by legislative or
administrative action. State and local taxes are beyond the scope of this
discussion. Prospective investors in the Fund are urged to consult their own tax
advisers regarding specific questions as to federal, state, or local taxes.
- --------------------------------------------------------------------------------
YIELD AND PERFORMANCE
- --------------------------------------------------------------------------------
The Trust may from time to time advertise or quote current yield and total
return performance for the Fund. These figures represent historical data and are
calculated according to SEC rules standardizing such computations. The
investment return on and the value of shares of the Fund will fluctuate so that
the shares when redeemed may be worth more or less than their original cost.
Current yield of the Fund is calculated by dividing the net investment
income per share earned during an identified 30-day period by the maximum
offering price per share on the last day of the same period, according to the
following formula:
Yield = 2 [(a-b + 1)6 -1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period.
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the maximum offering price per share on the last day of
the period.
The Fund uses generally accepted accounting principles in determining its
income paid, and these principles differ in some instances from SEC rules for
computing income for the above yield calculations. Therefore, the quoted yields
as calculated above may differ from the actual dividends paid. The current yield
of the Fund for the 30 day period ended October 31, 1998 was ___%.
The Trust may publish average annual total return quotations for recent 1,
5, and 10-year periods (or a fractional portion thereof) computed by finding the
average annual compounded rates of return over the 1, 5, and 10-year periods
that would equate the initial amount invested to the ending redeemable value,
according to the following formula:
26
<PAGE>
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical
$1000 payment made at the beginning of the 1,
5, and 10-year periods (or a fraction portion
thereof)
Total return figures may also be published for recent 1, 5, and 10-year
periods (or a fractional portion thereof) where the total return figures
represent the percentage return for the 1, 5, and 10-year periods that would
equate the initial amount invested to the ending redeemable value. If the
Trust's registration statement under the 1940 Act with respect to the Fund has
been in effect less than 1, 5 or 10 years, the time period during which the
registration statement with respect to that Fund has been in effect will be
substituted for the periods stated. For the period ended October 31, 1998, the
average annual return for the Fund since inception (February 2, 1998) was ___%.
The Fund may compare its performance to other mutual funds with similar
investment objectives and to the mutual fund industry as a whole, as quoted by
ranking services and publications of general interest. Examples of these
services or publications include Lipper Analytical Services, Inc., Barron's
Business Week, The Financial Times, Financial World, Forbes, Investor's Business
Daily, Money, Morningstar Mutual Funds, Personal Investor, The Economist, The
Wall Street Journal and USA Today. (Lipper Analytical Services, Inc. is an
independent rating service that ranks over 1000 mutual funds based on total
return performance. These ranking services and publications may rank the
performance of the Fund against all other funds over specified categories.
The Fund may also compare its performance to that of a recognized unmanaged
index of investment results, including the S&P 500, Dow Jones Industrial
Average, Russell 2000, and NASDAQ stock indices and the Lehman Brothers and
Lipper Analytical bond indices. The comparative material found in
advertisements, sales literature, or in reports to shareholders may contain past
or present performance ratings. This is not to be considered representative or
indicative of future results or future performance.
The Fund may also compare its performance to other income producing
securities such as (i) money market funds; (ii) various bank products (based on
average rates of banks and thrift institution certificates of deposit, money
market deposit accounts, and NOW accounts as reported by the Bank Rate Monitor
and other financial reporting services, including newspapers); and (iii) U.S.
treasury bills or notes. There are differences between these income-producing
alternatives and the Fund other than their yields, some of which are summarized
below.
27
<PAGE>
The yield of the Fund is not fixed and will fluctuate. The principal value
of your investment is not insured and its yield is not guaranteed. Although the
yields of bank money market deposit accounts and NOW accounts will fluctuate,
principal will not fluctuate and is insured by the Federal Deposit Insurance
Corporation up to $100,000. Bank passbook savings accounts normally offer a
fixed rate of interest and their principal and interest are also guaranteed and
insured. Bank certificates of deposit offer fixed or variable rates for a set
term. Principal and fixed rates are guaranteed and insured. There is no
fluctuation in principal value. Withdrawal of these deposits prior to maturity
will normally be subject to a penalty.
- --------------------------------------------------------------------------------
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The financial statements listed below are included in the Fund's 1998
Annual Report to Shareholders for the year ended October 31, 1998 (filed
electronically on _________, accession number _________) and are included in and
incorporated by reference into this Statement of Additional Information. [To be
filed by post-effective amendment]
28
<PAGE>
CMC FUND TRUST
PART C
OTHER INFORMATION
Item 23. Financial Statements and Exhibits
(a) Index to Financial Statements.
CMC Small Cap Fund - To be filed by Post-Effective Amendment.
CMC International Stock Fund -- To be filed by Post-Effective
Amendment.
CMC High Yield Fund -- To be filed by Post-Effective Amendment.
CMC Short Term Bond Fund -- To be filed by Post-Effective Amendment.
(b) Exhibits:
(1A) Restated Declaration of Trust.(1)
(1B) Amendment to Restated Declaration of Trust.(1)
(1C) Amendment No. 2 to Restated Declaration of Trust.(2)
(2) Bylaws.(1)
(3A) Specimen Stock Certificate for CMC Small Cap Fund.(1)
(3B) Specimen Stock Certificate for CMC International Stock
Fund.(1)
(3C) Specimen Stock Certificate for CMC High Yield Fund.(1)
(3D) Specimen Stock Certificate for CMC Short Term Bond Fund.(2)
(4A) Investment Advisory Contract for CMC Small Cap Fund.(3)
(4B) Investment Advisory Contract for CMC International Stock
Fund.(3)
(4C) Investment Advisory Contract for CMC High Yield Fund.(3)
(4D) Investment Advisory Contract for CMC Short Term Bond Fund.(2)
(5) Underwriting Contracts - Not Applicable.
C-1
<PAGE>
(6) Not Applicable.
(7A) Custodian Contract between United States National Bank of
Oregon and CMC Fund Trust.(1)
(7B) Custodian Contract between CMC Fund Trust and Morgan Stanley
Trust Company.(1)
(8A) Transfer Agent Agreement for CMC Small Cap Fund.(3)
(8B) Transfer Agent Agreement for CMC International Stock Fund.(3)
(8C) Transfer Agent Agreement for CMC High Yield Fund.(3)
(8D) Transfer Agent Agreement for CMC Short Term Bond Fund.(2)
(8E) Form of Administrative Services Agreement.(3)
(9) Opinion of Counsel - Not Applicable for this filing.
(10) Consent of Accountants - Not Applicable for this filing.
(11) Omitted Financial Statements - Not Applicable.
(12) Not Applicable.
(13) 12b-1 Plan - Not Applicable.
(14A) Financial Data Schedule for CMC Small Cap Fund - To be filed
by Post-Effective Amendment.
(14B) Financial Data Schedule for CMC International Stock Fund - To
be filed by Post-Effective Amendment.
(14C) Financial Data Schedule for CMC High Yield Fund - To be filed
by Post-Effective Amendment.
(14D) Financial Data Schedule for CMC Short Term Bond Fund - To be
filed by Post-Effective Amendment.
(15) Plan Adopting Multiple Classes by Shares - Not Applicable.
(16) Powers of Attorney for Messrs. George and Mackenzie.(3) Powers
of Attorney for Messrs. Inskeep and Woolworth.(1)
C-2
<PAGE>
(1) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File No. 33-30394, filed
December 16, 1996.
(2) Incorporated herein by Reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File No. 33-30394, filed
September 2, 1997.
(3) Incorporated herein by Reference to Post-Effective Amendment No. 13 to
Registrant's Registration Statement on Form N-1A, File No. 33-30394, filed
December 24, 1997.
Item 24. Persons Controlled by or Under Common Control with Registrant
The Registrant has an investment advisory contract with Columbia Management
Co., an Oregon corporation (the "Adviser"). Columbia Daily Income Company,
Columbia Growth Fund, Inc., Columbia Special Fund, Inc., Columbia Fixed Income
Securities Fund, Inc., Columbia Municipal Bond Fund, Inc., Columbia Real Estate
Equity Fund, Inc., Columbia U.S. Government Securities Fund, Inc., Columbia
Balanced Fund, Inc., Columbia Common Stock Fund, Inc., Columbia International
Stock Fund, Inc., Columbia Small Cap Fund, Inc. and Columbia High Yield Fund,
Inc., each an Oregon corporation, have investment advisory contracts with
Columbia Funds Management Company, an Oregon corporation ("CFMC"). Fleet
Financial Group, Inc. ("Fleet") is a publicly owned multibank holding company
registered under the Bank Holding Company Act of 1956. CFMC, the Adviser,
Columbia Trust Company and Columbia Financial Center Incorporated are indirect
wholly owned subsidiaries of Fleet. See "Management" and "Investment Advisory
and Other Fees paid to Affiliates" in the Statement of Additional Information.
Item 25. Indemnification
Under the Declaration of Trust and Bylaws of the Registrant, any trustee or
officer of the Registrant may be indemnified by the Registrant against all
expenses incurred by the trustee or officer in connection with any claim,
action, suit or proceeding, civil or criminal, by reason of his or her being a
trustee or officer of the Registrant, to the fullest extent not prohibited by
law and the Investment Company Act of 1940 (the "1940 Act") and related
regulations and interpretations of the Securities and Exchange Commission
("SEC").
Insofar as reimbursement or indemnification for expenses incurred by a
director or officer in legal proceedings arising under the Securities Act of
1933 (the "1933 Act") may be permitted by the above provisions or otherwise, the
Registrant has been advised that in the opinion of the SEC such reimbursement or
indemnification is against public policy as expressed in the Act and therefore
unenforceable. In the event that any claim for indemnification under the above
provisions is asserted by an officer or trustee in connection with the
securities being registered, the Registrant, unless in the opinion of its
counsel the matter has already been settled by controlling precedent, will
(except insofar as such claim seeks reimbursement of expenses paid or incurred
by an officer or trustee in the successful defense of any such action, suit or
proceeding or claim, issue, or matter therein) submit to a court of
C-3
<PAGE>
appropriate jurisdiction the question whether indemnification by it is against
public policy as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
The Registrant's trustees and officers are named insureds under an
insurance policy issued by ICI Mutual Insurance Company.
Item 26. Business and Other Connections of Investment Adviser
Information regarding the businesses of Columbia Management Co. and its
officers and directors is set forth under in the Prospectus and under
"Management" and "Investment Advisory and Other Fees Paid to Affiliates" in the
Statement of Additional Information and is incorporated herein by reference.
Columbia Trust Company also acts as trustee and/or agent for the investment of
the assets of pension and profit sharing plans in pooled accounts.
Item 27. Principal Underwriters
Not applicable.
Item 28. Location of Accounts and Records
The records required to be maintained under Section 31(a) of the 1940 Act
and Rules 31a-1 to 31a-3 thereunder are maintained by CMC Fund Trust, Columbia
Management Co., and Columbia Trust Company at 1300 S.W. Sixth Avenue, Portland,
Oregon 97201. Records relating to the Registrant's portfolio securities are also
maintained by United States National Bank of Oregon, 321 S.W. Sixth Avenue,
Portland, Oregon 97208 and Chase Manhattan Bank, One Pierrepont Plaza, Brooklyn,
New York 11201.
Item 29. Management Services
Not applicable.
Item 30. Undertakings
The Registrant hereby undertakes to promptly call a meeting of the
shareholders of the Registrant for the purpose of voting in the removal of any
trustee of the Registrant when requested in writing by shareholders of at least
10 percent of the outstanding shares of the Registrant. The Registrant
undertakes to assist its shareholders in communicating with other shareholders
of the Registrant to the extent required by Section 16 of the 1940 Act or any
regulations promulgated thereunder.
The Registrant hereby undertakes, upon request and without charge, to
furnish a copy of the Registrant's annual report to shareholders to each person
to whom a prospectus is delivered.
C-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Portland
and State of Oregon on the 10th day of October, 1998.
CMC FUND TRUST
By: J. JERRY INSKEEP, JR.
-------------------------------------
J. Jerry Inskeep, Jr.
President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below on
the 10th day of October, 1998 by the following persons in the capacities
indicated.
(i) Principal executive officer:
* J. JERRY INSKEEP, JR. President, Chairman, and Trustee
- ----------------------------------
J. Jerry Inskeep, Jr.
(ii) Principal accounting and financial officer:
J. JERRY INSKEEP, JR. President, Chairman, and Trustee
- ----------------------------------
J. Jerry Inskeep, Jr.
(iii) Trustees:
* RICHARD L. WOOLWORTH Trustee
- ----------------------------------
Richard L. Woolworth
C-5
<PAGE>
* JAMES C. GEORGE Trustee
- ----------------------------------
James C. George
* THOMAS R. MACKENZIE Trustee
- ----------------------------------
Thomas R. Mackenzie
*By: J. JERRY INSKEEP, JR.
----------------------------------
J. Jerry Inskeep, Jr.
Attorney-In-Fact
C-6
