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1940 Act File No. 811-7996
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 5 [X]
(check appropriate box or boxes)
SR&F BASE TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Registrant's Principal Offices)
(312) 368-5612
(Registrant's Telephone Number, Including Area Code)
Jilaine Hummel Bauer Cameron S. Avery
Executive Vice-President and Secretary Bell, Boyd & Lloyd
SR&F Base Trust Three First National Plaza
One South Wacker Drive 70 W. Madison Street,
Chicago, Illinois 60606 Suite 3300
Chicago, Illinois 60602
(Agents for Service)
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant
pursuant to Section 8(b) of the Investment Company Act of 1940.
However, beneficial interests in the Registrant are not being
registered under the Securities Act of 1933 (the "1933 Act")
because such interests will be issued solely in private placement
transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by investment companies, insurance
company separate accounts, common or commingled trust funds, or
similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell or the
solicitation of an offer to buy any beneficial interests in the
Registrant.
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PART A
Responses to Items 1 through 3 have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form
N-1A.
ITEM 4. GENERAL DESCRIPTION OF REGISTRANT.
INTRODUCTION
SR&F Base Trust ("Base Trust") is a no-load, diversified, open-end
management investment company which was organized as a trust under
the laws of the Commonwealth of Massachusetts on August 23, 1993.
Beneficial interests in Base Trust (the "Interest" or "Interests")
are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2)
of the Securities Act of 1933, as amended (the "1933 Act").
Investments in Base Trust may be made only by investment
companies, insurance company separate accounts, common or
commingled trust funds, or similar organizations or entities that
are "accredited investors" within the meaning of Regulation D
under the 1933 Act. This registration statement does not
constitute an offer to sell or the solicitation of an offer to buy
any "security" within the meaning of the 1933 Act. Base Trust has
authorized the nine series listed below. None of the series has
commenced operations except for SR&F Municipal Money Market
Portfolio.
SERIES
SR&F Municipal Money Market Portfolio
SR&F High Yield Portfolio
SR&F Balanced Portfolio
SR&F Growth & Income Portfolio
SR&F Growth Stock Portfolio
SR&F Growth Investor Portfolio
SR&F Special Portfolio
SR&F Special Venture Portfolio
SR&F International Portfolio
The series of Base Trust are referred to collectively as the
"Portfolios." Balanced Portfolio, Growth & Income Portfolio,
Growth Stock Portfolio, Growth Investor Portfolio, Special
Portfolio, Special Venture Portfolio, and International Portfolio
are also referred to collectively as the "Equity Portfolios."
OBJECTIVE AND BASIC INVESTMENT STRATEGY
The investment objectives and basic investment strategy of each
Portfolio follow. Each Portfolio may also employ the indicated
strategies and techniques listed under OTHER INVESTMENT
STRATEGIES.
SR&F MUNICIPAL MONEY MARKET PORTFOLIO ("MUNICIPAL MONEY
PORTFOLIO")
Municipal Money Portfolio seeks maximum current income exempt from
federal income tax by investing principally in a diversified
portfolio of "short-term" Municipal Securities.
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In pursuing its objective, the Municipal Money Portfolio attempts
to maintain relative stability of principal and liquidity.
Municipal Money Portfolio invests principally in a diversified
portfolio of short-term Municipal Securities (as defined below).
"Short-term" means a remaining maturity of no more than thirteen
months (or comparable period) as defined in the Glossary.
It is a fundamental policy that normally at least 80% of Municipal
Money Portfolio's investments will produce income that is exempt
from federal income tax, except for periods in which Stein Roe &
Farnham Incorporated (the "Adviser") believes require a defensive
position for the protection of shareholders.
As a fundamental policy, Municipal Money Portfolio invests in
Municipal Securities that, at the time of purchase, are: (1)
variable rate demand securities (as defined in the Glossary) whose
demand feature is rated within the two highest ratings assigned by
Moody's Investors Service, Inc. ("Moody's"), VMIG 1 or VMIG 2 /1/;
(2) notes rated within the two highest short-term municipal
ratings assigned by Moody's, MIG 1 or MIG 2, or within the highest
rating assigned by Standard & Poor's Corporation ("S&P"), /2/ SP-
l+; (3) municipal commercial paper (short-term promissory notes)
rated Prime-1 by Moody's, or A-l by S&P; (4) municipal bonds,
including industrial development bonds, rated within the two
highest ratings assigned to municipal bonds by S&P, AAA or AA, or
by Moody's, Aaa or Aa; (5) securities not rated as described in
(1) through (4) but determined by the Board of Trustees to be at
least equal in quality to one or more of the foregoing ratings,
although other types of obligations of the same issuer might not
be within the foregoing ratings; (vi) securities backed by the
full faith and credit of the U.S. Government; or (vii) securities
as to which the payment of principal and interest is
collateralized by securities issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities ["U.S.
Government Securities"] deposited in an escrow for the benefit of
holders of the securities. In accordance with SEC Rule 2a-7 under
the Investment Company Act, each security in which Municipal Money
Portfolio invests will be U.S. dollar denominated and (a) rated
(or be issued by an issuer that is rated with respect to its
short-term debt) within the two highest rating categories for
short-term debt by at least two nationally recognized statistical
rating organizations ("NRSRO") or, if rated by only one NRSRO,
rated within the two highest rating categories by that NRSRO, or,
if unrated, determined by or under the direction of the Board of
Trustees to be of comparable quality, and (b) determined by or
under the direction of the Board of Trustees to present minimal
credit risks.
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/1/ The Board of Trustees of the Trust has determined that the
demand feature of a variable rate demand security rated SP-1+, A-
1+ or A-1 by S&P or MIG 1, MIG 2 or Prime 1 by Moody's is at least
equal in quality to the demand feature of a variable rate demand
security rated VMIG 2 by Moody's. As a non-fundamental policy,
the Portfolio will not invest in a variable rate security whose
demand feature is conditional unless the Board of Trustees
determines that the security is at least the economic equivalent
of a variable rate security with an unconditional demand feature
or (a) the demand feature is rated within the two highest ratings
assigned by Moody's or within the equivalent ratings assigned by
S&P and (b) the underlying security is rated within the two
highest ratings assigned by Moody's or S&P. The Board of Trustees
has determined that a variable rate security where the demand
feature is suspended only after a default followed by an
acceleration of maturity is the economic equivalent of a variable
rate security with an unconditional demand feature.
/2/ For a description of Moody's and S&P quality ratings, see the
Appendix. All references to ratings apply to ratings adopted in
the future by Moody's or S&P that are determined by the Board of
Trustees to be equivalent to current ratings.
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MUNICIPAL SECURITIES. Municipal Securities are debt obligations
issued by or on behalf of the governments of states, territories
or possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the
interest on which is generally exempt from the regular federal
income tax.
The two principal classifications of Municipal Securities are
"general obligation" and "revenue" bonds. "General obligation"
bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. "Revenue"
bonds are usually payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from
the proceeds of a special excise tax or other specific revenue
source. Industrial development bonds are usually revenue bonds,
the credit quality of which is normally directly related to the
credit standing of the industrial user involved. Municipal
Securities may bear either fixed or variable rates of interest.
Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize
fluctuation in values of the instruments.
Within the principal classifications of Municipal Securities,
there are various types of instruments, including municipal bonds,
municipal notes, municipal leases, custodial receipts, and
participation certificates. Municipal notes include tax, revenue,
and bond anticipation notes of short maturity, generally less than
three years, which are issued to obtain temporary funds for
various public purposes. Municipal lease securities, and
participation certificates therein, evidence certain types of
interests in lease or installment purchases contract obligations
of a municipal authority or other entity. Custodial receipts
represent ownership in future interest or principal payments (or
both) on certain Municipal Securities and are underwritten by
securities dealers or banks. Some Municipal Securities may not be
backed by the faith, credit, and taxing power of the issuer and
may involve "non-appropriation" clauses which provide that the
municipal authority is not obligated to make lease or other
contractual payments, unless specific annual appropriations are
made by the municipality. Municipal Money Portfolio may invest
more than 5% of its net assets in municipal bonds and notes, but
does not expect to invest more than 5% of its net assets in the
other Municipal Securities described in this paragraph. The Board
is responsible for determining the credit quality of unrated
municipal leases on an ongoing basis, including an assessment of
the likelihood that such leases will not be cancelled.
Municipal Money Portfolio may also purchase Municipal Securities
that are insured as to the timely payment of interest and
principal. Such insured Municipal Securities may already be
insured when purchased by the Portfolio, or the Portfolio may
purchase insurance in order to turn an uninsured Municipal
Security into an insured Municipal Security.
Some Municipal Securities are backed by (1) the full faith and
credit of the U.S. Government, (2) agencies or instrumentalities
of the U.S. Government, or (3) U.S. Government Securities.
Except with respect to Municipal Securities with a demand feature
acquired by Municipal Money Portfolio (see the definition of
"short-term" in the Glossary to Part B), if, after purchase by the
Portfolio, an issue of Municipal Securities ceases to meet the
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required rating standards, if any, the Portfolio is not required
to sell such security, but the Adviser would consider such an
event in deciding whether the Portfolio should retain the security
in its portfolio. In the case of Municipal Securities with a
demand feature acquired by Municipal Money Portfolio, if the
quality of such a security falls below the minimum level
applicable at the time of acquisition, the Portfolio must dispose
of the security, unless the Board of Trustees determines that it
is in the best interests of the Portfolio and its shareholders to
retain the security.
SR&F HIGH YIELD PORTFOLIO ("HIGH YIELD PORTFOLIO")
High Yield Portfolio seeks total return by investing for a high
level of current income and capital growth. High Yield Portfolio
invests principally in high-yield, high-risk medium- and lower-
quality debt securities. The medium- and lower-quality debt
securities in which High Yield Portfolio will invest normally
offer a current yield or yield to maturity that is significantly
higher than the yield from securities rated in the three highest
categories assigned by rating services such as S&P or Moody's.
Under normal circumstances, at least 65% of High Yield Portfolio's
assets will be invested in high-yield, high-risk medium- and
lower-quality debt securities rated lower than Baa by Moody's or
lower than BBB by S&P, or equivalent ratings as determined by
other rating agencies or unrated securities that the Adviser
determines to be of comparable quality. Medium-quality debt
securities, although considered investment grade, have some
speculative characteristics. Lower-quality debt securities are
obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the
possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." Some issuers of debt securities
choose not to have their securities rated by a rating service, and
High Yield Portfolio may invest in unrated securities that the
Adviser believes are suitable for investment. High Yield
Portfolio may invest in debt obligations that are in default, but
such obligations are not expected to exceed 10% of High Yield
Portfolio's assts.
High Yield Portfolio may invest up to 35% of its total assets in
other securities including, but not limited to, pay-in-kind bonds,
securities issued in private placements, bank loans, zero coupon
bonds, foreign securities, convertible securities, futures, and
options. High Yield Portfolio may also invest in higher-quality
debt securities. Under normal market conditions, however, High
Yield Portfolio is unlikely to emphasize higher-quality debt
securities since generally they offer lower yields than medium-
and lower-quality debt securities with similar maturities. High
Yield Portfolio may also invest in common stocks and securities
that are convertible into common stocks, such as warrants.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. High Yield Portfolio will diversify its
holdings among a number of issuers to help minimize this risk. An
economic downturn could severely disrupt this market and adversely
affect the value of outstanding bonds and the ability of the
issuers to repay principal and interest. In addition, lower-
quality bonds are less sensitive to interest rate changes than
higher-quality instruments and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a
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period of rising interest rates, issuers of such bonds may
experience difficulty in servicing their principal and interest
payment obligations.
Achievement of the investment objective will be more dependent on
the Adviser's credit analysis than would be the case if High Yield
Portfolio were investing in higher-quality debt securities. Since
the ratings of rating services (which evaluate the safety of
principal and interest payments, not market risks) are used only
as preliminary indicators of investment quality, the Adviser
employs its own credit research and analysis, from which it has
developed a proprietary credit rating system based upon
comparative credit analyses of issuers within the same industry.
These analyses may take into consideration such quantitative
factors as an issuer's present and potential liquidity,
profitability, internal capability to generate funds, debt/equity
ratio and debt servicing capabilities, and such qualitative
factors as an assessment of management, industry characteristics,
accounting methodology, and foreign business exposure.
Lower-quality debt securities are obligations of issuers that are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the
terms of the obligation and, therefore, carry greater investment
risk, including the possibility of issuer default and bankruptcy,
and are commonly referred to as "junk bonds." The lowest rating
assigned by Moody's is for bonds that can be regarded as having
extremely poor prospects of ever attaining any real investment
standing.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and High Yield Fund or High Yield Portfolio may
have greater difficulty selling its portfolio securities. The
market value of these securities and their liquidity may be
affected by adverse publicity and investor perceptions.
SR&F BALANCED PORTFOLIO ("BALANCED PORTFOLIO")
The investment objective of Balanced Portfolio is to seek long-
term growth of capital and current income, consistent with
reasonable investment risk. Balanced Portfolio's assets are
allocated among equities, debt securities and cash. The portfolio
manager determines those allocations using the Adviser's
investment strategists' views regarding economic, market and other
factors relative to investment opportunities. The equity portion
of the portfolio of Balanced Portfolio is invested primarily in
well-established companies having market capitalizations in excess
of $1 billion. Fixed-income senior securities will make up at
least 25% of Balanced Portfolio's total assets. Investments in
debt securities are limited to those that are within the four
highest grades (generally referred to as "investment grade")
assigned by a nationally recognized statistical rating
organization or, if unrated, determined by the Adviser to be of
comparable quality.
SR&F GROWTH & INCOME PORTFOLIO ("GROWTH & INCOME PORTFOLIO")
The investment objective of Growth & Income Portfolio is to
provide both growth of capital and current income. It is designed
for investors seeking a diversified portfolio of securities that
offers the opportunity for long-term growth of capital while also
providing a steady stream of income. In seeking to meet this
objective, Growth & Income
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Portfolio invests primarily in well-established companies whose
common stocks are believed to have both the potential to
appreciate in value and to pay dividends to shareholders.
Although it may invest in a broad range of securities (including
common stocks, preferred stocks, securities convertible into or
exchangeable for common stocks, and warrants or rights to purchase
common stocks), normally Growth & Income Portfolio will emphasize
investments in equity securities of companies having market
capitalizations in excess of $1 billion. Securities of these
well-established companies are believed to be generally less
volatile than those of companies with smaller capitalizations
because companies with larger capitalizations tend to have
experienced management; broad, highly diversified product lines;
deep resources; and easy access to credit.
SR&F GROWTH STOCK PORTFOLIO ("GROWTH STOCK PORTFOLIO")
The investment objective of Growth Stock Portfolio is long-term
capital appreciation. Growth Stock Portfolio attempts to achieve
this objective by normally investing at least 65% of its total
assets in common stocks and other equity-type securities (such as
preferred stocks, securities convertible into or exchangeable for
common stocks, and warrants or rights to purchase common stocks)
that, in the opinion of the Adviser, have long-term appreciation
possibilities.
SR&F GROWTH INVESTOR PORTFOLIO ("GROWTH INVESTOR PORTFOLIO")
The investment objective of Growth Investor Portfolio is long-term
capital appreciation. Growth Investor Portfolio invests primarily
in common stocks and other equity-type securities that, in the
opinion of the Adviser, have long-term appreciation potential.
Under normal circumstances, at least 65% of the total assets of
Growth Investor Portfolio will be invested in securities of
companies that, in the opinion of the Adviser, directly or through
one or more subsidiaries, affect the lives of young people. Such
companies may include companies that produce products or services
that young people use, are aware of, or could potentially have an
interest in. Although Growth Investor Portfolio invest primarily
in common stocks and other equity-type securities (such as
preferred stocks, securities convertible into or exchangeable for
common stocks, and warrants or rights to purchase common stocks),
it may invest up to 35% of its total assets in debt securities.
SR&F SPECIAL PORTFOLIO ("SPECIAL PORTFOLIO")
The investment objective of Special Portfolio is to invest in
securities selected for possible capital appreciation. Particular
emphasis is placed on securities that are considered to have
limited downside risk relative to their potential for above-
average growth, including securities of undervalued, underfollowed
or out-of-favor companies, and companies that are low-cost
producers of goods or services, financially strong or run by well-
respected managers. Special Portfolio may invest more than 5% of
its net assets in securities of seasoned, established companies
that appear to have appreciation potential, as well as securities
of relatively small, new companies. In addition, it may invest in
securities with limited marketability, new issues of securities,
securities of companies that, in the Adviser's opinion, will
benefit from management change, new technology, new product or
service development or change in demand, and other securities that
the Adviser believes have capital appreciation possibilities;
however, Special Portfolio does not currently intend to invest
more than 5% of its net assets in any of these types of
securities. Securities of smaller, newer companies may be subject
to greater price volatility than securities of larger more well-
established companies. In addition, many smaller
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companies are less well known to the investing public and may not
be as widely followed by the investment community. Although
Special Portfolio will invest primarily in common stocks, it may
also invest in other equity-type securities, including preferred
stocks and securities convertible into equity securities.
SR&F SPECIAL VENTURE PORTFOLIO ("SPECIAL VENTURE PORTFOLIO")
The investment objective of Special Venture Portfolio is to seek
long-term capital appreciation. Special Venture Portfolio invests
primarily in a diversified portfolio of common stocks and other
equity-type securities (such as preferred stocks, securities
convertible or exchangeable for common stocks, and warrants or
rights to purchase common stocks) of entrepreneurially managed
companies that the Adviser believes represent special
opportunities. Special Venture Portfolio emphasizes investments
in financially strong small and medium-sized companies based
principally on management appraisal and stock valuation. The
Adviser considers "small" and "medium-sized" companies to be those
with market capitalizations of less than $1 billion and $1 to $3
billion, respectively. In both its initial and ongoing appraisals
of a company's management, the Adviser seeks to know both the
principal owners and senior management and to assess their
business judgment and strategies through personal visits. The
Adviser favors companies whose management has an owner/operator,
risk-averse orientation and a demonstrated ability to create
wealth for investors. Attractive company characteristics include
unit growth, favorable cost structures or competitive positions,
and financial strength that enables management to execute business
strategies under difficult conditions. A company is attractively
valued when its stock can be purchased at a meaningful discount to
the value of the underlying business.
SR&F INTERNATIONAL PORTFOLIO ("INTERNATIONAL PORTFOLIO")
The investment objective of International Portfolio is to seek
long-term growth of capital. International Portfolio seeks to
achieve this objective by investing primarily in a diversified
portfolio of foreign securities. Current income is not a primary
factor in the selection of portfolio securities. International
Portfolio invests primarily in common stocks and other equity-type
securities (such as preferred stocks, securities convertible or
exchangeable for common stocks, and warrants or rights to purchase
common stocks). International Portfolio may invest in securities
of smaller emerging companies as well as securities of well-
seasoned companies of any size. Smaller companies, however,
involve higher risks in that they typically have limited product
lines, markets, and financial or management resources. In
addition, the securities of smaller companies may trade less
frequently and have greater price fluctuation than larger
companies, particularly those operating in countries with
developing markets.
International Portfolio diversifies its investments among several
countries and does not concentrate investments in any particular
industry. In pursuing its objective, International Portfolio
varies the geographic allocation and types of securities in which
it invests based on the Adviser's continuing evaluation of
economic, market, and political trends throughout the world.
While International Portfolio has not established limits on
geographic asset distribution, it ordinarily invests in the
securities markets of at least three countries outside the United
States, including but not limited to Western European countries
(such as Belgium, France, Germany, Ireland, Italy, The
Netherlands, the countries of Scandinavia, Spain, Switzerland, and
the United Kingdom); countries in the Pacific Basin (such as
Australia, Hong Kong, Japan, Malaysia, the Philippines,
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Singapore, and Thailand); and countries in the Americas (such as
Argentina, Brazil, Chile, and Mexico).
Under normal market conditions, International Portfolio will
invest at least 65% of its total assets (taken at market value) in
foreign securities. If, however, investments in foreign
securities appear to be relatively unattractive in the judgment of
the Adviser because of current or anticipated adverse political or
economic conditions, International Portfolio may hold cash or
invest any portion of its assets in securities of the U.S.
Government and equity and debt securities of U.S. companies, as a
temporary defensive strategy. To meet liquidity needs,
International Portfolio may also hold cash in domestic and foreign
currencies and invest in domestic and foreign money market
securities (including repurchase agreements and "synthetic"
foreign money market positions).
In the past, the U.S. Government has from time to time imposed
restrictions, through taxation and otherwise, on foreign
investments by U.S. investors such as International Portfolio. If
such restrictions should be reinstated, it might become necessary
for International Portfolio to invest all or substantially all of
its assets in U.S. securities. In such an event, International
Portfolio would review its investment objective and policies to
determine whether changes are appropriate.
OTHER INVESTMENT PRACTICES
Each Portfolio may also engage to a limited extent in the
following investment practices, as indicated, each of which may
involve certain special risks.
When-Issued and Delayed-Delivery Securities. Each Portfolio's
assets may include securities purchased on a when-issued or
delayed-delivery basis. Although the payment and interest terms
of these securities are established at the time the purchaser
enters into the commitment, the securities may be delivered and
paid for a month or more after the date of purchase, when their
value may have changed. A Portfolio makes such commitments only
with the intention of actually acquiring the securities, but may
sell the securities before settlement date if the Adviser deems it
advisable for investment reasons. Securities purchased in this
manner involve a risk of loss if the value of the security
purchased declines before settlement date.
In the case of High Yield Portfolio, when-issued or delayed-
delivery securities may sometimes be purchased on a "dollar roll"
basis, meaning that the Portfolio will sell securities with a
commitment to purchase similar, but not identical, securities at a
future date. Generally, the securities are repurchased at a price
lower than the sales price. Dollar roll transactions involve the
risk of restrictions on the Portfolio's ability to repurchase the
security if the counterparty becomes insolvent; an adverse change
in the price of the security during the period of the roll or that
the value the security repurchased will be less than the security
sold; and transaction costs exceeding the return earned by the
Portfolio on the sales proceeds of the dollar roll.
Standby Commitments. To facilitate portfolio liquidity, Municipal
Money Portfolio may obtain standby commitments when it purchases
Municipal Securities. A standby commitment gives the holder the
right to sell the underlying security to the seller at an agreed-
upon price on certain dates or within a specified period. High
Yield Portfolio may also invest in securities purchased on a
standby commitment basis.
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Participation Interests. Municipal Money Portfolio may also
purchase participation interests or certificates of participation
in all or part of specific holdings of Municipal Securities,
including municipal obligations. Some participation interests,
certificates of participation, and municipal lease obligations are
illiquid and, as such, will be subject to the Portfolio's 10%
limit on investments in illiquid securities.
Debt securities. In pursuing its investment objective, High Yield
Portfolio invests in debt securities and each Equity Portfolio may
invest in debt securities. A debt security is an obligation of a
borrower to make payments of principal and interest to the holder
of the security. To the extent a Portfolio invests in debt
securities, such holdings will be subject to interest rate risk
and credit risk. Interest rate risk is the risk that the value of
a portfolio will fluctuate in response to changes in interest
rates. Generally, the debt component of a portfolio will tend to
decrease in value when interest rates rise and increase in value
when interest rates fall. Credit risk is the risk that an issuer
will be unable to make principal and interest payments when due.
Investments in debt securities by Growth & Income Portfolio,
Balanced Portfolio, Growth Stock Portfolio, and International
Portfolio are limited to those that are within the four highest
grades (generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization or, if
unrated, deemed to be of comparable quality by the Adviser. Each
of Special Venture Portfolio, Growth Investor Portfolio, and
Special Portfolio may invest up to 35% of its net assets in debt
securities, but do not expect to invest more than 5% of net assets
in debt securities that are rated below investment grade.
Securities rated within the fourth highest grade may possess
speculative characteristics. If the rating of a security held by
a Portfolio is lost or reduced below investment grade, the
Portfolio is not required to dispose of the security--the Adviser
will, however, consider that fact in determining whether the
Portfolio should continue to hold the security. When the Adviser
considers a temporary defensive position advisable, a Portfolio
may invest without limitation in high-quality fixed income
securities, or hold assets in cash or cash equivalents.
Convertible Securities. By investing in convertible securities,
High Yield Portfolio and an Equity Portfolio obtains the right to
benefit from the capital appreciation potential in the underlying
stock upon exercise of the conversion right, while earning higher
current income than would be available if the stock were purchased
directly. In determining whether to purchase a convertible, the
Adviser will consider substantially the same criteria that would
be considered in purchasing the underlying stock. Although
convertible securities purchased by a Fund are frequently rated
investment grade, an Equity Portfolio also may purchase unrated
securities or securities rated below investment grade if the
securities meet the Adviser's other investment criteria.
Convertible securities rated below investment grade:
- - Tend to be more sensitive to interest rate and economic changes;
- - May be obligations of issuers who are less creditworthy than
issuers of higher quality convertible securities;
- - May be more thinly traded due to the fact that such securities
are less well known to investors than either common stock or
conventional debt securities.
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As a result, the Adviser's own investment research and analysis
tends to be more important than other factors in the purchase of
such securities.
Short Sales against the Box. High Yield Portfolio and each Equity
Portfolio may sell short securities it owns or has the right to
acquire without further consideration, a technique called selling
short "against the box." Short sales against the box may protect
a Portfolio against the risk of losses in the value of its
portfolio securities because any unrealized losses with respect to
such securities should be wholly or partly offset by a
corresponding gain in the short position. However, any potential
gains in such securities should be wholly or partially offset by a
corresponding loss in the short position. Short sales against the
box may be used to lock in a profit on a security when, for tax
reasons or otherwise, the Adviser does not want to sell the
security. For a more complete explanation, please refer to Part
B, the Statement of Additional Information.
Tender Option Bonds. Municipal Money Portfolio may purchase
tender option bonds. A tender option bond is a Municipal Security
(generally held pursuant to a custodial arrangement) having a
relatively long maturity and bearing interest at a fixed rate
substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as
a bank, broker-dealer or other financial institution, pursuant to
which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for
providing the option, the financial institution receives periodic
fees equal to the difference between the Municipal Security's
fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a
demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser will consider on an ongoing basis
the creditworthiness of the issuer of the underlying Municipal
Securities, of any custodian, and of the third-party provider of
the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a
default in payment of principal or interest on the underlying
Municipal Securities and for other reasons. Municipal Money
Portfolio does not intend to invest more than 10% of net assets in
tender option bonds.
Foreign Securities. International Portfolio invests primarily in
foreign securities and High Yield Portfolio and each other Equity
Portfolio may invest up to 25% of its total assets in foreign
securities excluding American Depositary Receipts (ADRs), foreign
debt securities denominated in U.S. dollars, and securities
guaranteed by a U.S. person. A Portfolio may invest in sponsored
or unsponsored ADRs. In addition to, or in lieu of, such direct
investment, a Portfolio may construct a synthetic foreign position
by (a) purchasing a debt instrument denominated in one currency,
generally U.S. dollars; and (b) concurrently entering into a
forward contract to deliver a corresponding amount of that
currency in exchange for a different currency on a future date and
at a specified rate of exchange. Because of the availability of a
variety of highly liquid U.S. dollar debt instruments, a synthetic
foreign position utilizing such U.S. dollar instruments may offer
greater liquidity than direct investment in foreign currency debt
instruments. In connection with the purchase of foreign
securities, a Portfolio may contract to purchase an amount of
foreign currency sufficient to pay the purchase price of the
securities at
<PAGE> 13
the settlement date. Such a contract involves the risk that the
value of the foreign currency may decline relative to the value of
the dollar prior to the settlement date--this risk is in addition
to the risk that the value of the foreign security purchased may
decline. A Portfolio also may enter into foreign currency
contracts as a hedging technique to limit or reduce its exposure
to currency fluctuations. In addition, a Portfolio may use
options and futures contracts, as described below, to limit or
reduce exposure to currency fluctuations.
Settlement Transactions. When International Portfolio enters
into a contract for the purchase or sale of a foreign portfolio
security, it usually is required to settle the purchase
transaction in the relevant foreign currency or receive the
proceeds of the sale in that currency. In either event,
International Portfolio is obliged to acquire or dispose of an
appropriate amount of foreign currency by selling or buying an
equivalent amount of U.S. dollars. At or near the time of the
purchase or sale of the foreign portfolio security, International
Portfolio may wish to lock in the U.S. dollar value of a
transaction at the exchange rate or rates then prevailing between
the U.S. dollar and the currency in which the security is
denominated. Known as "transaction hedging," this may be
accomplished by purchasing or selling such foreign securities on a
"spot," or cash, basis. Transaction hedging also may be
accomplished on a forward basis, whereby International Portfolio
purchases or sells a specific amount of foreign currency, at a
price set at the time of the contract, for receipt or delivery at
either a specified date or at any time within a specified time
period. In so doing, International Portfolio will attempt to
insulate itself against possible losses and gains resulting from a
change in the relationship between the U.S. dollar and the foreign
currency during the period between the date the security is
purchased or sold and the date on which payment is made or
received. Similar transactions may be entered into by using other
currencies if International Portfolio seeks to move investments
denominated in one currency to investments denominated in another.
Currency Hedging. Most of International Portfolio's assets will
be invested in foreign securities. As a result, in addition to
the risk of change in the market value of portfolio securities,
the value of the portfolio in U.S. dollars is subject to
fluctuations in the exchange rate between the foreign currencies
and the U.S. dollar. When, in the opinion of the Adviser, it is
desirable to limit or reduce exposure in a foreign currency to
moderate potential changes in the U.S. dollar value of the
portfolio, International Portfolio may enter into a forward
currency exchange contract to sell or buy such foreign currency
(or another foreign currency that acts as a proxy for that
currency)--through the contract, the U.S. dollar value of certain
underlying foreign portfolio securities can be approximately
matched by an equivalent U.S. dollar liability. This technique is
known as "currency hedging." By locking in a rate of exchange,
currency hedging is intended to moderate or reduce the risk of
change in the U.S. dollar value of International Portfolio's
portfolio only during the period of the forward contract. Forward
contracts usually are entered into with banks and broker-dealers;
are not exchange traded; and while they are usually less than one
year, may be renewed. A default on the contract would deprive
International Portfolio of unrealized profits or force
International Portfolio to cover its commitments for purchase or
sale of currency, if any, at the current market price.
<PAGE> 14
Neither type of foreign currency transaction will eliminate
fluctuations in the prices of International Portfolio's portfolio
securities or prevent loss if the price of such securities should
decline. In addition, such forward currency exchange contracts
will diminish the benefit of the appreciation in the U.S. dollar
value of that foreign currency. (For further information on
forward foreign currency exchange transactions, see the Statement
of Additional Information.)
International Portfolio may utilize spot and forward foreign
exchange transactions to reduce the risk caused by exchange rate
fluctuations between one currency and another when securities are
purchased or sold on a when-issued basis. It may also invest in
synthetic money market instruments. International Portfolio may
invest in repurchase agreements, provided that it will not invest
more than 15% of its net assets in repurchase agreements maturing
in more than seven days and any other illiquid securities. (See
the Statement of Additional Information.)
Lending portfolio securities. Subject to certain restrictions,
High Yield Portfolio and each Equity Portfolio may lend portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Portfolio. The
Portfolio would continue to receive the equivalent of the interest
or dividends paid by the issuer on the securities loaned, and
would also receive an additional return that may be in the form of
a fixed fee or a percentage of the collateral. The Portfolio
would have the right to call the loan and obtain the securities
loaned at any time on notice of not more than five business days.
In the event of bankruptcy or other default of the borrower, the
Portfolio could experience both delays in liquidating the loan
collateral or recovering the loaned securities and losses
including (a) possible decline in the value of the collateral or
in the value of the securities loaned during the period while the
Portfolio seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
Derivatives. Consistent with its objective, High Yield Portfolio
and each Equity Portfolio may invest in a broad array of financial
instruments and securities, including conventional, exchange-
traded and non-exchange-traded options, futures contracts, futures
options, forward contracts, securities collateralized by
underlying pools of mortgages or other receivables, floating rate
instruments, and other instruments that securitize assets of
various types ("Derivatives"). In each case, the value of the
instrument or security is "derived" from the performance of an
underlying asset or a "benchmark" such as a security index, or an
interest rate. The Portfolio does not expect to invest more than
5% of its net assets in any type of Derivative except for options,
futures contracts, futures options and, in the case of
International Portfolio, forward contracts.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because they are more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or
<PAGE> 15
benchmark. In addition, correlations in the performance of an
underlying asset to a Derivative may not be well established.
Finally, privately negotiated and over-the-counter Derivatives may
not be as well regulated and may be less marketable than exchange-
traded Derivatives. For additional information on Derivatives,
please refer to Part B.
Options and Futures. In seeking to achieve its desired investment
objective, provide additional revenue, or to hedge against changes
in security prices, interest rates or currency fluctuations, High
Yield Portfolio and each Equity Portfolio may: (1) purchase and
write both call options and put options on securities, indexes and
foreign currencies; (2) enter into interest rate, index and
foreign currency futures contracts; (3) write options on such
futures contracts; and (4) purchase other types of forward or
investment contracts linked to individual securities, indexes, or
other benchmarks. The Portfolio may write a call or put option
only if the option is covered. As the writer of a covered call
option, the Portfolio foregoes, during the option's life, the
opportunity to profit from increases in market value of the
security covering the call option above the sum of the premium and
the exercise price of the call. There can be no assurance that a
liquid market will exist when the Portfolio seeks to close out a
position. In addition, because futures positions may require low
margin deposits, the use of futures contracts involves a high
degree of leverage and may result in losses in excess of the
amount of the margin deposit.
Mortgage and Other Asset-Backed Debt Securities. High Yield
Portfolio may invest in securities secured by mortgages or other
assets such as automobile or home improvement loans and credit
card receivables. These instruments may be issued or guaranteed
by the U.S. Government or by its agencies or instrumentalities or
by private entities such as commercial, mortgage and investment
banks and financial companies or financial subsidiaries of
industrial companies. Securities issued by GNMA represent an
interest in a pool of mortgages insured by the Federal Housing
Administration or the Farmers Home Administration, or guaranteed
by the Veterans Administration. Securities issued by FNMA and
FHLMC, U.S. Government-sponsored corporations, also represent an
interest in a pool of mortgages. The timely payment of principal
and interest on GNMA securities is guaranteed by GNMA and backed
by the full faith and credit of the U.S. Treasury. FNMA
guarantees full and timely payment of interest and principal on
FNMA securities. FHLMC guarantees timely payment of interest and
ultimate collection of principal on FHLMC securities. FNMA and
FHLMC securities are not backed by the full faith and credit of
the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining
interest rates, there is increased likelihood that mortgages will
be prepaid, with a resulting loss of the full-term benefit of any
premium paid by High Yield Portfolio on purchase of such
securities; in addition, the proceeds of prepayment would likely
be invested at lower interest rates. Mortgage-backed securities
provide either a pro rata interest in underlying mortgages or an
interest in collateralized mortgage obligations ("CMOs"), which
represent a right to interest and/or principal payments from an
underlying mortgage pool. CMOs are not guaranteed by either the
U.S. Government or by its agencies or instrumentalities and are
usually issued in multiple classes, each of
<PAGE> 16
which has different payment rights, pre-payment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
pre-payment of the underlying mortgages at a faster or slower rate
than the established schedule. Pre-payments generally increase
with falling interest rates and decrease with rising rates, but
they also are influenced by economic, social, and market factors.
If mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit of
any premium paid by High Yield Portfolio on purchase of the CMO,
and the proceeds of pre-payment would likely be invested at lower
interest rates. High Yield Portfolio tends to invest in CMOs of
classes known as planned amortization classes ("PACs") which have
pre-payment protection features tending to make them less
susceptible to price volatility.
Non-mortgage asset-backed securities usually have less pre-payment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any. Asset-
backed securities tend to experience greater price volatility than
straight debt securities.
Floating Rate Instruments. High Yield Portfolio may also invest
in floating rate instruments which provide for periodic
adjustments in coupon interest rates that are automatically reset
based on changes in amount and direction of specified market
interest rates. In addition, the adjusted duration of some of
these instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to
lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%. High
Yield Portfolio does not intend to invest more than 5% of its net
assets in floating rate instruments.
PIK and Zero Coupon Bonds. High Yield Portfolio may invest up to
20% of its total assets in zero coupon bonds and bonds the
interest on which is payable in kind ("PIK bonds"). A zero coupon
bond is a bond that does not pay interest for its entire life. A
PIK bond pays interest in the form of additional securities. The
market prices of both zero coupon and PIK bonds are affected to a
greater extent by changes in prevailing levels of interest rates
and thereby tend to be more volatile in price than securities that
pay interest periodically and in cash. In addition, because High
Yield Portfolio accrues income with respect to these securities
prior to the receipt of such interest in cash, it may have to
dispose of portfolio securities under disadvantageous
circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax
consequences.
PORTFOLIO TURNOVER
In seeking to attain its objective, Municipal Money Portfolio may
sell portfolio securities without regard to the period of time
they have been held. In attempting to attain its objective, High
Yield Portfolio may sell portfolio securities without regard to
the period of time they have been held. Further, the Adviser may
purchase and sell securities for
<PAGE> 17
the investment portfolio with a view to maximizing current return,
even if portfolio changes would cause the realization of capital
gains. Although the average stated maturity of High Yield
Portfolio will be from five to ten years, the Adviser may adjust
the average effective maturity of High Yield Portfolio's portfolio
from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its
expectations of future changes in interest rates.
Although an Equity Portfolio does not purchase securities with a
view to rapid turnover, there are no limitations on the length of
time portfolio securities must be held. Flexibility of investment
and emphasis on capital appreciation may involve greater portfolio
turnover than that of mutual funds that have the objectives of
income or maintenance of a balanced investment position.
As a result, the turnover rate may vary from year to year. It may
exceed 100%, but is not expected to exceed 200% under normal
market conditions. A high rate of portfolio turnover may result
in increased transaction expenses and the realization of capital
gains (which may be taxable) or losses.
RISK FACTORS
Municipal Money Portfolio and High Yield Portfolio. These
Portfolios seek to reduce risk by investing in a diversified
portfolio, this does not eliminate all risk. The risks inherent
in each depend primarily upon the maturity and quality of the
obligations in which it invests, as well as on market conditions.
A decline in prevailing levels of interest rates generally
increases the value of securities in which the Portfolio invests,
while an increase in rates usually reduces the value of those
securities. There can be no assurance that it will achieve its
objective, nor can it assure that payments of interest and
principal on portfolio obligations will be made when due.
Generally, high-quality short-term obligations offer lower yields
and less fluctuation in value than long-term low-quality
obligations. Consequently, Municipal Money Portfolio is designed
for investors who seek little or no fluctuation in portfolio
value. Although Municipal Money Portfolio currently limits its
investments in Municipal Securities to those the interest on which
is exempt from the regular federal income tax, it may invest up to
100% of its total assets in Municipal Securities the interest on
which is subject to the federal alternative minimum tax.
Municipal Money Portfolio may invest 25% or more of its assets in
Municipal Securities that are related in such a way that an
economic, business, or political development affecting one such
security could also affect the other securities. For example,
Municipal Securities the interest upon which is paid from revenues
of similar-type projects, such as hospitals, utilities, or
housing, would be so related. Municipal Money Portfolio may
invest 25% or more of its assets in industrial development bonds
(subject to the concentration restrictions described in this Part
A under Investment Restrictions and in Part B). Assets of
Municipal Money Portfolio that are not invested in Municipal
Securities may be held in cash or invested in short-term taxable
investments. /3/
High Yield Fund is designed for investors who can accept the
heightened level of risk and principal fluctuation which might
result from a portfolio that invests at least 65% of its assets in
medium- and lower-quality debt securities. As a result, interest
rate fluctuations will affect net asset value. In addition, if
the bonds in the investment portfolio
- -------------------
/3/ The policy expressed in this sentence is a fundamental policy
of Municipal Money Portfolio.
- -------------------
<PAGE> 18
contain call, prepayment or redemption provisions, during a period
of declining interest rates, these securities are likely to be
redeemed, and High Yield Portfolio will probably be unable to
replace them with securities having as great a yield.
Equity Portfolios. While an Equity Portfolio seeks to reduce risk
by investing in a diversified portfolio, diversification does not
eliminate all risk. An Equity Portfolio will not, however, invest
more than 25% of the total value of its assets (at the time of
investment) in the securities of companies in any one industry.
Balanced Portfolio is designed for long-term investors who can
accept the fluctuations in portfolio value and other risks
associated with seeking long-term capital appreciation through
investments in securities. Growth & Income Portfolio is designed
for long-term investors who desire to participate in the stock
market with moderate investment risk while seeking to limit market
volatility. Growth Stock Portfolio and Special Portfolio are
designed for long-term investors who desire to participate in the
stock market with more investment risk and volatility than the
stock market in general, but with less investment risk and
volatility than aggressive capital appreciation Portfolios.
Growth Investor Portfolio is designed for long-term investors who
desire to participate in the stock market and places an emphasis
on companies that appeal to young investors. These investors can
accept more investment risk and volatility than the stock market
in general but want less investment risk and volatility than
aggressive capital appreciation funds; by investing in companies
whose products or services appeal to young investors, the
Portfolio emphasize various consumer goods sectors. Special
Venture Portfolio is designed for long-term investors who want
greater return potential than is available from the stock market
in general, and who are willing to tolerate the greater investment
risk and market volatility associated with investments in small
and medium-sized companies. International Portfolio is intended
for long-term investors who can accept the risks entailed in
investing in foreign securities. Of course, there can be no
guarantee that a Portfolio will achieve its objective.
Debt securities rated in the fourth highest grade may have some
speculative characteristics, and changes in economic conditions or
other circumstances may lead to a weakened capacity of the issuers
of such securities to make principal and interest payments.
Securities rated below investment grade may possess speculative
characteristics, and changes in economic conditions are more
likely to affect the issuer's capacity to pay interest or repay
principal.
Foreign Investing. Non-U.S. investments may be attractive because
they increase diversification, as compared to a portfolio
comprised solely of U.S. investments. In addition, many foreign
economies have, from time to time, grown faster than the U.S.
economy, and the returns on investments in these countries have
exceeded those of similar U.S. investments--there can be no
assurance, however, that these conditions will continue.
International diversification allows International Portfolio and
an investor to achieve greater diversification and to take
advantage of changes in foreign economies and market conditions.
Investors should understand and consider carefully the greater
risks involved in foreign investing. Investing in foreign
securities--positions which are generally denominated in foreign
currencies--and utilization of forward foreign currency exchange
contracts
<PAGE> 19
involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in
exchange rates of foreign currencies; possible imposition of
exchange control regulations or currency restrictions that would
prevent cash from being brought back to the United States; less
public information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in the securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements. These risks are greater for emerging market
countries.
Although a Portfolio will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of
foreign government restrictions, and other adverse political,
social or diplomatic developments that could affect investment in
these nations. The price of securities of small, rapidly growing
companies is expected to fluctuate more widely than the general
market due to the difficulty in assessing financial prospects of
companies developing new products or operating in countries with
developing markets.
The strategy for selecting investments will be based on various
criteria. A company proposed for investment should have a good
market position in a fast-growing segment of the economy, strong
management, preferably a leading position in its business,
prospects of superior financial returns, ability to self-finance,
and securities available for purchase at a reasonable market
valuation. Because of the foreign domicile of such companies,
however, information on some of the above factors may be
difficult, if not impossible, to obtain.
To the extent portfolio securities are issued by foreign issuers
or denominated in foreign currencies, investment performance is
affected by the strength or weakness of the U.S. dollar against
these currencies. If the dollar falls relative to the Japanese
yen, for example, the dollar value of a yen-denominated stock held
in the portfolio will rise even though the price of the stock
remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock
will fall.
INVESTMENT RESTRICTIONS
Municipal Money Portfolio may not with respect to 75% of its
assets, invest more than 5% of its total assets in the securities
of any one issuer, except for obligations issued or guaranteed by
the U.S. Government or by its agencies or instrumentalities or
repurchase agreements for such securities (guarantees or letters
of credit of a single guarantor may exceed this limit). High
Yield Portfolio and each Equity Portfolio may not invest more than
5% of its assets in the securities of any one issuer (this
restriction applies only to 75% of its portfolio, but does not
apply to securities of the U.S. Government or repurchase
agreements for such securities).
<PAGE> 20
No Portfolio may (1) invest 25% or more of its total assets in the
securities of non-governmental issuers whose principal business
activities are in the same industry; (2) acquire more than 10% of
the outstanding voting securities of any one issuer; or (3) make
loans, except that it may (a) purchase money market instruments
and enter into repurchase agreements /4/; (b) acquire publicly-
distributed or privately-placed debt securities; (c) participate
in an interfund lending program with other Stein Roe Funds; and
(d) in the case of High Yield Portfolio and each Equity Portfolio,
lend its portfolio securities under certain conditions. No
Portfolio may borrow money, except for non-leveraging, temporary,
or emergency purposes or in connection with participation in the
interfund lending program. Neither a Portfolio's aggregate
borrowings (including reverse repurchase agreements) nor its
aggregate loans at any one time may exceed 33 1/3% of the value of
its total assets. Additional securities may not be purchased when
borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
The policies summarized in this section are fundamental policies
of each Portfolio and, as such, can be changed only with the
approval of a "majority of the outstanding voting securities" as
defined in the Investment Company Act of 1940. Each Portfolio's
objective is non-fundamental and, as such, may be changed by the
Board of Trustees without shareholder approval. All of the
investment restrictions are set forth in the Statement of
Additional Information.
Nothing in the investment restrictions outlined here shall be
deemed to prohibit International Portfolio from purchasing the
securities of any issuer pursuant to the exercise of subscription
rights distributed to International Portfolio by the issuer. No
such purchase may be made if, as a result, International Portfolio
will no longer be a diversified investment company as defined in
the Investment Company Act of 1940 or if International Portfolio
will fail to meet the diversification requirements of the Internal
Revenue Code of 1986, as amended (the "Code").
OTHER INFORMATION
Each Portfolio's policies include additional investment
restrictions which are described in Part B. Each Portfolio's
investment objective is non-fundamental and may be changed by the
Board of Trustees without investor approval. Investors will be
notified of any material change in such policies. Fundamental
policies may be changed only with investor approval.
ITEM 5. MANAGEMENT OF BASE TRUST.
TRUSTEES
The Board of Trustees of Base Trust has overall management
responsibility for the Trust and each Portfolio. See Part B for
the names of and other information about the trustees and
officers.
- ---------------
/4/ A repurchase agreement involves a sale of securities to the
Portfolio in which the seller agrees to repurchase the securities
at a higher price, which includes an amount representing interest
on the purchase price, within a specified time. In the event of
bankruptcy of the seller, the Portfolio could experience both
losses and delays in liquidating its collateral.
- --------------
<PAGE> 21
ADVISER
Base Trust has retained the services of Stein Roe & Farnham
Incorporated (the "Adviser"), One South Wacker Drive, Chicago,
Illinois 60606, as investment adviser and administrator of each
Portfolio. The Adviser is responsible for the investment
management and administration of each Portfolio, subject to the
direction of the Board. The Adviser is registered as an
investment adviser under the Investment Advisers Act of 1940. The
Adviser was organized in 1986 to succeed to the business of Stein
Roe & Farnham, a partnership that had advised and managed mutual
funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
INVESTOR SERVICES
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned indirect subsidiary of Liberty
Mutual, pursuant to a separate service agreement, also provides
certain investor accounting and recordkeeping services for each
Portfolio.
PORTFOLIO MANAGERS
Veronica M. Wallace has been portfolio manager of Municipal Money
Portfolio since September 1995. Ms. Wallace was formerly a trader
in taxable money market instruments for the Adviser.
Erik P. Gustafson, David P. Brady and Arthur J. McQueen. Mr.
Gustafson have been portfolio manager of Growth Investor
Portfolio since its inception. Messrs. Gustafson and McQueen are
senior vice presidents of the Adviser and Mr. Brady is a vice
president of the Adviser. Before joining the Adviser, Mr.
Gustafson was an attorney with Fowler, White, Burnett, Hurley,
Banick & Strickroot from 1989 to 1992. Mr. Brady, who joined
Stein Roe in 1993, was an equity investment analyst with State
Farm Mutual Automobile Insurance Company from 1986 to 1993. Mr.
McQueen has been employed by the Adviser as an equity analyst
since 1987.
Daniel K. Cantor has been portfolio manager of Growth & Income
Portfolio since its inception. He is a senior vice president of
the Adviser, which he joined in 1985. Jeffrey C. Kinzel is
associate manager of Growth & Income Portfolio. Mr. Kinzel is a
vice president and intermediate research analyst with the Adviser.
Before joining the Adviser in 1991 as an equity research analyst,
Mr. Kinzel was employed by Butler and Binion; Miller, Canfield,
Paddock and Stone; and 1838 Investment Advisers.
Harvey B. Hirschhorn has been portfolio manager of Balanced
Portfolio since its inception. He is executive vice president and
director of research services of the Adviser, which he joined in
1973. William Garrison and Sandra Knight are associate portfolio
managers of Balanced Portfolio. Mr. Garrison joined the Adviser
in 1989. Ms. Knight is a vice president and senior quantitative
research analyst with the Adviser, which she joined in 1991.
Growth Stock Portfolio has been managed by Erik P. Gustafson since
its inception. Mr. Gustafson is a senior vice president and
senior portfolio manager with the Adviser, which he joined in
1992. From 1989 to 1992 he was an attorney with Fowler, White,
Burnett, Hurley, Banick & Strickroot. David P. Brady is
associate portfolio manager of
<PAGE> 22
Growth Stock Portfolio. A vice president of the Adviser, Mr.
Brady joined the Adviser in 1993, and was an equity investment
analyst with State Farm Mutual Automobile Insurance Company from
1986 to 1993.
E. Bruce Dunn and Richard B. Peterson have been co-portfolio
managers of Special Portfolio and Special Venture Fund since their
inception. Each is a senior vice president of the Adviser. Mr.
Dunn has been associated with the Adviser since 1964. Mr.
Peterson, who began his investment career at Stein Roe & Farnham
in 1965 rejoined the Adviser in 1991 after 15 years of equity
research and portfolio management experience with State Farm
Investment Management Corporation.
Bruno Bertocci and David P. Harris have been co-portfolio managers
of International Portfolio since its inception. They joined the
Adviser in 1995 as senior vice president and vice president,
respectively. Messrs. Bertocci and Harris are also employed by
Colonial Management Associates, Inc., a subsidiary of Liberty
Financial, as vice presidents, effective January, 1996. Prior to
joining the Adviser, Messrs. Bertocci and Harris were senior
global equity portfolio manager and portfolio manager,
respectively, with Rockefeller & Co. ("Rockefeller").
FEES AND EXPENSES
In return for its services, the Adviser receives a monthly fee
from each Portfolio, computed and accrued daily. The annualized
rates of fees are as follows:
Annual Management Fee (as a
Portfolio percentage of average net assets)
- -------------------------------- ---------------------------------
Municipal Money Market Portfolio..0.25%
High Yield Portfolio ............ 0.50% of the first $500 million,
0.475% thereafter
Balanced Portfolio............... 0.55% up to $500 million,
0.50% next $500 million,
0.45% thereafter
Growth & Income Portfolio.........0.60% up to $500 million,
0.55% next $500 million,
0.50% thereafter
Growth Stock Portfolio............0.60% up to $500 million,
0.55% next $500 million,
0.50% thereafter
Growth Investor Portfolio.........0.60% of the first $500 million,
0.55% of the next $500 million,
0.50% thereafter
Special Portfolio.................0.75% up to $500 million,
0.70% next $500 million,
0.65% next $500 million,
0.60% thereafter
Special Venture Portfolio ........0.75%
International Portfolio...........0.85%
Under a separate agreement with Base Trust, the Adviser provides
certain accounting and bookkeeping services to each Portfolio,
including computation of the Portfolio's net
<PAGE> 23
asset value and calculation of its net income and capital gains
and losses on disposition of its assets.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
portfolio securities and any options and futures transactions. In
doing so, the Adviser seeks to obtain the best combination of
price and execution, which involves a number of judgmental
factors.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for each
Portfolio.
ITEM 5A. MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE.
A response to Item 5A has been omitted pursuant to paragraph 4 of
Instruction F of the General Instructions to Form N-1A.
ITEM 6. CAPITAL STOCK AND OTHER SECURITIES.
Investments in Base Trust have no preemptive or conversion rights
and are fully paid and non-assessable, except as set forth below.
Base Trust is not required to hold annual meetings of investors,
and has no current intention to do so, but Base Trust will hold
special meetings of investors when, in the judgment of the
trustees, it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted
to investors for approval. An investors' meeting will be held
upon the written, specific request to the trustees of investors
holding in the aggregate not less than 10% of the Interests in a
series. Investors have under certain circumstances (e.g., upon
application and submission of certain specified documents to the
trustees by a specified number of shareholders) the right to
communicate with other investors in connection with requesting a
meeting of investors for the purpose of removing one or more
trustees. Investors also have the right to remove one or more
trustees without a meeting by a declaration in writing by a
specified number of investors. Upon liquidation of Base Trust or
a series thereof, investors would be entitled to share pro rata in
the net assets available for distribution to investors (unless
another sharing method is required for federal income tax reasons,
in accordance with the sharing method adopted by the trustees).
Base Trust reserves the right to create and issue a number of
series, in which case investors in each series would participate
solely in the earnings, dividends, and assets of the particular
series. Interests in any series of Base Trust may be divided into
two or more classes of Interests having such preferences or
special or relative rights or privileges as the trustees of Base
Trust may determine. Currently, Base Trust has nine series, each
with only one class.
Base Trust is organized as a trust under the laws of the
Commonwealth of Massachusetts. Under the Declaration of Trust,
the trustees are authorized to issue Interests in Base Trust.
Each investor in a series is entitled to vote in proportion to the
amount of its investment in the series. Investments in Base Trust
may not be transferred, but an investor may withdraw all or a
portion of his investment at any time at net asset value.
<PAGE> 24
Investors in any series of Base Trust (e.g., investment companies,
insurance company separate accounts, and common and commingled
trust funds or similar organizations or entities that are
"accredited investors" within the meaning of Regulation D under
the 1933 Act) may be held personally, jointly and severally liable
for all obligations of that series of Base Trust. However, the
risk of an investor in a series incurring financial loss on
account of such liability is limited to circumstances in which
both inadequate insurance exists and Base Trust itself is unable
to meet its obligations.
It is intended that the assets, income, and distributions will be
managed in such a way that an investor in a series will be able to
satisfy the requirements of Subchapter M of the Code for
qualification as a regulated investment company, assuming that the
investor invested all of its assets in the series.
The net income of a series of Base Trust shall consist of (1) all
income accrued less the amortization of any premium, on the assets
of the series, less (2) all actual and any accrued expenses of the
series determined in accordance with generally accepted accounting
principles. Income includes discount earned (including both
original issue and, by election, market discount) on discount
paper accrued ratably to the date of maturity and any net realized
gains or losses on the assets of the series. All of the net
income of a series is allocated among the investors in the series
in accordance with their Interests (unless another sharing method
is required for federal income tax reasons, in accordance with the
sharing method adopted by the trustees).
Under the anticipated method of operation of Base Trust, the Trust
will not be subject to any federal income tax. However, each
investor in a series of Base Trust will be taxed on its share (as
determined in accordance with the governing instruments of Base
Trust) of the series' ordinary income and capital gain in
determining its income tax liability. The determination of such
share will be made in accordance with an allocation method
designed to satisfy the Code and regulations promulgated
thereunder. Distributions of net income and capital gain are to
be made pro rata to investors in accordance with their investment
in a Portfolio. For federal income tax purposes, however, income,
gain, or loss may be allocated in a manner other than pro rata, if
necessary to reflect gains or losses properly allocable to fewer
than all investors as a result of contributions of securities to a
series or redemptions of portions of an investor's unrealized gain
or loss in series assets.
ITEM 7. PURCHASE OF SECURITIES.
Interests in a Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the
meaning if Section 4(2) of the 1933 Act. Investments in a
Portfolio may be made only by investment companies, insurance
company separate accounts, common or commingled trust funds, or
similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell or the
solicitation of any offer to buy any "security" within the meaning
of the 1933 Act.
An investment in a Portfolio may be made without a sales load.
All investments are made at net asset value next determined if an
order is received by SteinRoe Services Inc., the Portfolios'
investor accounting and recordkeeping agent, by the designated
<PAGE> 25
cutoff time. The net asset value of each Portfolio is determined
as of the close of trading on the New York Stock Exchange ("NYSE")
(currently 3:00 p.m., central time) every day the NYSE is open for
trading ("business day") by dividing the difference between the
values of the Portfolio's assets and liabilities by the number of
shares outstanding. Net asset value will not be determined on
days when the NYSE is closed unless, in the judgment of the Board
of Trustees, the net asset value should be determined on any such
day, in which case the determination will be made at 3:00 p.m.,
central time.
The valuation of Municipal Money Portfolio's portfolio securities
is based on their amortized cost, which does not take into account
unrealized gains or losses, in an attempt to maintain its net
asset value at $1.00 per share. The extent of any deviation
between the Portfolio's net asset value based upon market
quotations or equivalents and $1.00 per share based on amortized
cost will be examined by the Board of Trustees. If such deviation
were to exceed 1/2 of 1%, the Board would consider what action, if
any, should be taken, including selling portfolio instruments,
increasing, reducing or suspending distributions, or redeeming
shares in kind. Other assets and securities of the Portfolio for
which this valuation method does not produce a fair value are
valued at a fair value determined by the Board.
For High Yield Portfolio, securities for which market quotations
are readily available at the time of valuation are valued on that
basis. Long-term straight-debt securities for which market
quotations are not readily available are valued at a fair value
based on valuations provided by pricing services approved by the
Board, which may employ electronic data processing techniques,
including a matrix system, to determine valuations. Short-term
debt securities with remaining maturities of 60 days or less are
valued at their amortized cost, which does not take into account
unrealized gains or losses. The Board believes that the amortized
cost represents a fair value for such securities. Short-term debt
securities with remaining maturities of more than 60 days for
which market quotations are not readily available are valued by
use of a matrix prepared by the Adviser based on quotations for
comparable securities. Other assets and securities held by High
Yield Portfolio for which these valuation methods do not produce a
fair value are valued by a method that the Board believes will
determine a fair value.
For each Equity Portfolio other than International Portfolio, each
security traded on a national stock exchange is valued at its last
sale price on that exchange on the day of valuation or, if there
are no sales that day, at the latest bid quotation. Each over-
the-counter security for which the last sale price on the day of
valuation is available from Nasdaq is valued at that price. All
other over-the-counter securities for which reliable quotations
are available are valued at the latest bid quotation.
In computing the net asset value of International Portfolio, the
values of portfolio securities are generally based upon market
quotations. Depending upon local convention or regulation, these
market quotations may be the last sale price, last bid or asked
price, or the mean between the last bid and asked prices as of, in
each case, the close of the appropriate exchange or other
designated time. Trading in securities on European and Far
Eastern securities exchanges and over-the-counter markets is
normally completed at various times before the close of business
on each day on which the NYSE is open. Trading of these
securities may not take place on every NYSE business day. In
addition, trading may take place in various foreign markets on
Saturdays or on other days when
<PAGE> 26
the NYSE is not open and on which International Portfolio's net
asset value is not calculated. Therefore, such calculation does
not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such
calculation and the value of International Portfolio's portfolio
may be significantly affected on days when shares of International
Portfolio may not be purchased or redeemed.
Each investor in a Portfolio may add to or reduce its investment
in the Portfolio on each business day. The investor's percentage
of the aggregate Interests in the Portfolio will be computed as
the percentage equal to the fraction (1) the numerator of which is
the beginning of the day value of such investor's investment in
the Portfolio, on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (2) the
denominator of which is the aggregate beginning of the day net
asset value of the Portfolio on such day plus or minus, as the
case may be, the amount of the net additions to or withdrawals
from the aggregate investments in the Portfolio by all investors
in the Portfolio. The percentage so determined will then be
applied to determine the value of the investor's Interest in the
Portfolio as of the close of business.
There is no minimum initial or subsequent investment in a
Portfolio.
Each Portfolio and SteinRoe Services Inc. reserve the right to
cease accepting investments at any time or to reject any
investment order.
ITEM 8. REDEMPTION OR REPURCHASE.
An investor in a Portfolio may redeem all or any portion of its
investment at the next determined net asset value if a withdrawal
request in proper form is furnished by the investor to SteinRoe
Services Inc., the Portfolios' investor accounting agent, by the
designated cutoff time. The proceeds of a withdrawal will be paid
by the Portfolio in federal funds normally on the business day the
withdrawal is effected, but in any event within seven days.
Investments in a Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal
proceeds postponed during any period in which the NYSE is closed
(other than weekends or holidays) or trading on the NYSE is
restricted, or, to the extent otherwise permitted by the
Investment Company Act of 1940 if an emergency exists.
ITEM 9. PENDING LEGAL PROCEEDINGS.
Not applicable.
<PAGE> 27
PART B
ITEM 10. COVER PAGE.
SR&F BASE TRUST
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
800-338-2550
Statement of Additional Information Dated October 31, 1996
This Statement of Additional Information is not a prospectus but
provides additional information that should be read in conjunction
with the prospectus contained in Part A of this Registration
Statement, which may be obtained at no charge by telephoning 800-
338-2550.
ITEM 11. TABLE OF CONTENTS.
General Information and History.........................27
Investment Objective and Policies.......................27
Management of Base Trust................................54
Control Persons and Principal Holders of Securities.....56
Investment Management and Administrative Services.......56
Brokerage Allocation and Other Practices................58
Capital Stock and Other Securities......................60
Purchase, Redemption, and Pricing of Securities.........62
Tax Status..............................................64
Underwriter.............................................66
Calculation of Performance Data.........................67
Financial Statements....................................67
Glossary................................................67
Appendix................................................68
ITEM 12. GENERAL INFORMATION AND HISTORY.
Not applicable.
ITEM 13. INVESTMENT OBJECTIVES AND POLICIES.
The basic investment policies and strategies of each Portfolio are
described in Part A, Item 4. The following supplements the
information contained in Part A regarding certain miscellaneous
investment practices in which a Portfolio may engage and the risks
associated therewith.
AMT Securities. Although Municipal Money Portfolio currently
limits its investments in Municipal Securities to those the
interest on which is exempt from the regular federal income tax,
it may invest 100% of its total assets in Municipal Securities the
interest on which is subject to the federal alternative minimum
tax ("AMT").
<PAGE> 28
Convertible Securities. By investing in convertible securities,
High Yield Portfolio and each Equity Portfolio obtains the right
to benefit from the capital appreciation potential in the
underlying stock upon exercise of the conversion right, while
earning higher current income than would be available if the stock
were purchased directly. In determining whether to purchase a
convertible, the Adviser will consider substantially the same
criteria that would be considered in purchasing the underlying
stock. While convertible securities purchased by a Portfolio are
frequently rated investment grade, each Portfolio may purchase
unrated securities or securities rated below investment grade if
the securities meet the Adviser's other investment criteria.
Convertible securities rated below investment grade (a) tend to be
more sensitive to interest rate and economic changes, (b) may be
obligations of issuers who are less creditworthy than issuers of
higher quality convertible securities, and (c) may be more thinly
traded due to such securities being less well known to investors
than either common stock or conventional debt securities. As a
result, the Adviser's own investment research and analysis tends
to be more important in the purchase of such securities than other
factors.
Debt Securities. In pursuing its investment objective, High Yield
Portfolio does and each Equity Portfolio may invest in debt
securities of corporate and governmental issuers. The risks
inherent in debt securities depend primarily on the term and
quality of the obligations in the investment portfolio as well as
on market conditions. A decline in the prevailing levels of
interest rates generally increases the value of debt securities,
while an increase in rates usually reduces the value of those
securities.
Investments in debt securities by Growth & Income Portfolio,
Balanced Portfolio, Growth Stock Portfolio, and International
Portfolio are limited to those that are within the four highest
grades (generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization or, if
unrated, deemed to be of comparable quality by the Adviser. Each
of Special Venture Portfolio, Growth Investor Portfolio, and
Special Portfolio may invest up to 35% of its net assets in debt
securities, but do not expect to invest more than 5% of net assets
in debt securities that are rated below investment grade.
Securities in the fourth highest grade may possess speculative
characteristics, and changes in economic conditions are more
likely to affect the issuer's capacity to pay interest and repay
principal. If the rating of a security held by a Portfolio is
lost or reduced below investment grade, the Portfolio is not
required to dispose of the security, but the Adviser will consider
that fact in determining whether that Portfolio should continue to
hold the security.
Securities that are rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and therefore carry greater investment risk, including
the possibility of issuer default and bankruptcy.
Defensive Investments. When the Adviser considers a temporary
defensive position advisable, High Yield Portfolio and each Equity
Portfolio may invest, without limitation, in high-quality fixed
income securities or hold assets in cash or cash equivalents.
<PAGE> 29
Derivatives. Consistent with its objective, High Yield Portfolio
and each Equity Portfolio may invest in a broad array of financial
instruments and securities, including conventional exchange-traded
and non-exchange-traded options, futures contracts, futures
options, securities collateralized by underlying pools of
mortgages or other receivables, floating rate instruments, and
other instruments that securitize assets of various types
("Derivatives"). In each case, the value of the instrument or
security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, an interest rate, or a
currency.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment that cannot be
readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives.
High Yield Portfolio does not intend to invest more than 5% of its
assets in any type of Derivative. No Equity Portfolio currently
intends to invest more than 5% of its net assets in any type of
Derivative, except for options, futures contracts, futures
options, and, in the case of International Portfolio, forward
contracts. (See Options and Futures below.)
Some mortgage-backed debt securities are of the "modified pass-
through type," which means the interest and principal payments on
mortgages in the pool are "passed through" to investors. During
periods of declining interest rates, there is increased likelihood
that mortgages will be prepaid, with a resulting loss of the full-
term benefit of any premium paid by a Portfolio on purchase of
such securities; in addition, the proceeds of prepayment would
likely be invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs") that represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities, and are usually issued in multiple classes each
of which has different payment rights, prepayment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
prepayment on the underlying mortgages at a faster or slower rate
than the established schedule. Prepayments generally increase
with falling interest rates and decrease with rising rates but
they also are influenced by economic, social, and market factors.
If mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit of
any premium paid by a Portfolio on purchase of the CMO, and the
proceeds of prepayment would likely be invested at lower interest
rates.
<PAGE> 30
Non-mortgage asset-backed securities usually have less prepayment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans that finance payments on the securities
themselves.
Floating rate instruments provide for periodic adjustments in
coupon interest rates that are automatically reset based on
changes in amount and direction of specified market interest
rates. In addition, the adjusted duration of some of these
instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to
lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%.
Lending of Portfolio Securities. Subject to the restriction on
lending under Investment Restrictions in this Part B, High Yield
Portfolio and each Equity Portfolio may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by a Portfolio. Cash
collateral for securities loaned will be invested in liquid high-
grade debt securities. A Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the
securities loaned, and would also receive an additional return
that may be in the form of a fixed fee or a percentage of the
collateral. A Portfolio would have the right to call the loan and
obtain the securities loaned at any time on notice of not more
than five business days. A Portfolio would not have the right to
vote the securities during the existence of the loan but would
call the loan to permit voting of the securities if, in the
Adviser's judgment, a material event requiring a shareholder vote
would otherwise occur before the loan was repaid. In the event of
bankruptcy or other default of the borrower, a Portfolio could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses, including (a)
possible decline in the value of the collateral or in the value of
the securities loaned during the period while the Portfolio seeks
to enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period, and (c)
expenses of enforcing its rights.
Line of Credit. Subject to its restriction on borrowing under
Investment Restrictions, each Portfolio may establish and maintain
a line of credit with a major bank in order to permit borrowing on
a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to
liquidation of portfolio securities.
Participation Interests. Municipal Money Portfolio may purchase
participation interests or certificates of participation in all or
part of specific holdings of Municipal Securities, but does not
intend to do so unless the tax-exempt status of those
participation interests or certificates of participation is
confirmed to the satisfaction of the Board of Trustees, which may
include consideration of an opinion of counsel as to the tax-
exempt status. Each participation interest would meet the
prescribed quality standards of the Portfolio or be backed by an
irrevocable letter of credit or guarantee of a bank that meets the
<PAGE> 31
prescribed quality standards of the Portfolio. Some participation
interests are illiquid securities.
Municipal Money Portfolio may also purchase participations in
lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal
authorities or entities. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for,
appropriate, and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to
make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In
addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more
conventional bonds. Although "non-appropriation" lease
obligations are secured by leased property, disposition of the
property in the event of foreclosure might prove difficult. The
Portfolio will seek to minimize these risks by investing primarily
in those "non-appropriation" lease obligations where (1) the
nature of the leased equipment or property is such that its
ownership or use is essential to a governmental function of the
municipality, (2) the lease obligor has maintained good market
acceptability in the past, (3) the investment is of a size that
will be attractive to institutional investors, and (4) the
underlying leased equipment has elements of portability and/or use
that enhance its marketability in the event foreclosure on the
underlying equipment were ever required.
The Board of Trustees has delegated to the Adviser the
responsibility to determine the credit quality of participation
interests. The determinations concerning the liquidity and
appropriate valuation of a municipal lease obligation, as with any
other municipal security, are made based on all relevant factors.
These factors may include, among others: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers
willing to purchase or sell the security and the number of other
potential buyers; (3) the willingness of dealers to undertake to
make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of
transfer.
PIK and Zero Coupon Bonds. High Yield Portfolio may invest up to
20% of its assets in zero coupon bonds and bonds the interest on
which is payable in kind ("PIK bonds"). A zero coupon bond is a
bond that does not pay interest for its entire life. A PIK bond
pays interest in the form of additional securities. The market
prices of both zero coupon and PIK bonds are affected to a greater
extent by changes in prevailing levels of interest rates and
thereby tend to be more volatile in price than securities that pay
interest periodically and in cash. In addition, because High
Yield Portfolio accrues income with respect to these securities
prior to the receipt of such interest in cash, it may have to
dispose of portfolio securities under disadvantageous
circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax
consequences.
Rated Securities. For a description of the ratings applied by
rating services to Municipal Securities and other debt securities,
please refer to the Appendix. Except with respect to debt
securities with a demand feature (see the definition of "short-
term" in the Glossary)
<PAGE> 32
acquired by Municipal Money Portfolio, the fact that the rating of
a debt security held by Municipal Money Portfolio or High Yield
Portfolio may be lost or reduced below the minimum level
applicable to its original purchase by the Portfolio does not
require that obligation to be sold, but the Adviser will consider
such fact in determining whether the Portfolio should continue to
hold the obligation. In the case of Municipal Securities with a
demand feature acquired by Municipal Money Portfolio, if the
quality of such a security falls below the minimum level
applicable at the time of acquisition, the Portfolio must dispose
of the security within a reasonable period of time either by
exercising the demand feature or by selling the security in the
secondary market, unless the Board of Trustees determines that it
is in the best interests of the Portfolio and its shareholders to
retain the security.
To the extent that the ratings accorded by Moody's or S&P for debt
securities may change as a result of changes in such
organizations, or changes in their rating systems, Municipal Money
Portfolio or High Yield Portfolio will attempt to use comparable
ratings as standards for its investments in accordance with its
investment policies. The Board of Trustees is required to review
such ratings with respect to Municipal Money Portfolio.
Reverse Repurchase Agreements. Each Portfolio may enter into
reverse repurchase agreements with banks and securities dealers.
A reverse repurchase agreement is a repurchase agreement in which
a Portfolio is the seller of, rather than the investor in,
securities and agrees to repurchase them at an agreed-upon time
and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and transaction
costs.
At the time a Portfolio enters into a binding obligation to
purchase securities on a when-issued basis or enters into a
reverse repurchase agreement, liquid assets (cash, U.S. Government
securities or other "high-grade" debt obligations) of the
Portfolio having a value at least as great as the purchase price
of the securities to be purchased will be segregated on the books
of the Portfolio and held by the custodian throughout the period
of the obligation. The use of these investment strategies, as
well as borrowing under a line of credit as described below, may
increase net asset value fluctuation.
Rule 144A Securities. High Yield Portfolio and each Equity
Portfolio may purchase securities that have been privately placed
but that are eligible for purchase and sale under Rule 144A under
the 1933 Act. That Rule permits certain qualified institutional
buyers, such as the Portfolios, to trade in privately placed
securities that have not been registered for sale under the 1933
Act. The Adviser, under the supervision of the Board of Trustees,
will consider whether securities purchased under Rule 144A are
illiquid and thus subject to a Portfolio's restriction of
investing no more than 15% of its net assets in illiquid
securities. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this
determination, the Adviser will consider the trading markets for
the specific security, taking into account the unregistered nature
of a Rule 144A security. In addition, the Adviser could consider
the (1) frequency of trades and quotes, (2) number of dealers and
potential purchasers, (3) dealer undertakings to make a market,
and (4) nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of
soliciting offers, and the mechanics of transfer). The liquidity
of Rule 144A securities would be monitored and, if as a result of
changed
<PAGE> 33
conditions, it is determined that a Rule 144A security is no
longer liquid, the Portfolios' holdings of illiquid securities
would be reviewed to determine what, if any, steps are required to
assure that the Portfolio does not invest more than 5% of its
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of a Portfolio's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. The Portfolios
do not expect to invest as much as 5% of its total assets in Rule
144A securities that have not been deemed liquid by the Adviser.
(See Investment Restrictions.)
Short Sales "against the Box." Each Portfolio may sell securities
short against the box; that is, enter into short sales of
securities that it currently owns or has the right to acquire
through the conversion or exchange of other securities that it
owns at no additional cost. A Portfolio may make short sales of
securities only if at all times when a short position is open the
Portfolio owns at least an equal amount of such securities or
securities convertible into or exchangeable for securities of the
same issue as, and equal in amount to, the securities sold short,
at no additional cost.
In a short sale against the box, a Portfolio does not deliver from
its portfolio the securities sold. Instead, the Portfolio
borrows the securities sold short from a broker-dealer through
which the short sale is executed, and the broker-dealer delivers
such securities, on behalf of the Portfolio, to the purchaser of
such securities. The Portfolio is required to pay to the broker-
dealer the amount of any dividends paid on shares sold short.
Finally, to secure its obligation to deliver to such broker-dealer
the securities sold short, the Portfolio must deposit and
continuously maintain in a separate account with the Portfolio's
custodian an equivalent amount of the securities sold short or
securities convertible into or exchangeable for such securities at
no additional cost. A Portfolio is said to have a short position
in the securities sold until it delivers to the broker-dealer the
securities sold. A Portfolio may close out a short position by
purchasing on the open market and delivering to the broker-dealer
an equal amount of the securities sold short, rather than by
delivering portfolio securities.
Short sales may protect a Portfolio against the risk of losses in
the value of its portfolio securities because any unrealized
losses with respect to such portfolio securities should be wholly
or partially offset by a corresponding gain in the short position.
However, any potential gains in such portfolio securities should
be wholly or partially offset by a corresponding loss in the short
position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to
the amount the Portfolio owns, either directly or indirectly, and,
in the case where the Portfolio owns convertible securities,
changes in the conversion premium.
Short sale transactions involve certain risks. If the price of
the security sold short increases between the time of the short
sale and the time a Portfolio replaces the borrowed security, the
Portfolio will incur a loss and if the price declines during this
period, the Portfolio will realize a short-term capital gain. Any
realized short-term capital gain will be decreased, and any
incurred loss increased, by the amount of transaction costs and
any premium, dividend or interest which the Portfolio may have to
pay in connection with such short sale. Certain provisions of the
Code may limit the degree to which a Portfolio is able to enter
into short sales. There is no limitation on the amount of each
Portfolio's assets that, in the aggregate, may be deposited as
collateral for the obligation
<PAGE> 34
to replace securities borrowed to effect short sales and allocated
to segregated accounts in connection with short sales. Balanced
Portfolio may invest up to 20% of its total assets in short sales
against the box; no other Portfolio will invest more than 5% of
its total assets in short sales against the box.
Standby Commitments. Municipal Money Portfolio and High Yield
Portfolio may obtain standby commitments when purchasing
securities. A standby commitment gives the holder the right to
sell the underlying security to the seller at an agreed-upon price
on certain dates or within a specified period. Municipal Money
Portfolio will acquire standby commitments solely to facilitate
portfolio liquidity and not with a view to exercising them at a
time when the exercise price may exceed the current value of the
underlying securities. If the exercise price of a standby
commitment held by Municipal Money Portfolio should exceed the
current value of the underlying securities, Municipal Money
Portfolio may refrain from exercising the standby commitment in
order to avoid causing the issuer of the standby commitment to
sustain a loss and thereby jeopardizing the Portfolio's business
relationship with the issuer. Municipal Money Portfolio will
enter into standby commitments only with banks and securities
dealers that, in the opinion of the Adviser, present minimal
credit risks. However, if a securities dealer or bank is unable
to meet its obligation to repurchase the security when Municipal
Money Portfolio exercises a standby commitment, the Portfolio
might be unable to recover all or a portion of any loss sustained
from having to sell the security elsewhere. Standby commitments
will be valued at zero in determining Municipal Money Portfolio's
net asset value.
Standby commitment agreements create an additional risk for High
Yield Portfolio because the other party to the standby agreement
generally will not be obligated to deliver the security, but High
Yield Portfolio will be obligated to accept it if delivered.
Depending on market conditions, High Yield Portfolio may receive a
commitment fee for assuming this obligation. If prevailing market
interest rates increase during the period between the date of the
agreement and the settlement date, the other party can be expected
to deliver the security and, in effect, pass any decline in value
to High Yield Portfolio. If the value of the security increases
after the agreement is made, however, the other party is unlikely
to deliver the security. In other words, a decrease in the value
of the securities to be purchased under the terms of a standby
commitment agreement will likely result in the delivery of the
security, and, therefore, such decrease will be reflected in High
Yield Portfolio's net asset value. However, any increase in the
value of the securities to be purchased will likely result in the
non-delivery of the security and, therefore, such increase will
not affect the net asset value unless and until High Yield
Portfolio actually obtains the security.
Taxable Securities. Assets of Municipal Money Portfolio that are
not invested in Municipal Securities may be held in cash or
invested in short-term taxable investments /5/ such as: (1) U.S.
Government bills, notes and bonds; (2) obligations of agencies and
instrumentalities of the U.S. Government (including obligations
not backed by the full faith and credit of the U.S. Government);
(3) other money market instruments such as certificates of deposit
and bankers' acceptances of domestic banks having total assets in
excess of $1 billion, and corporate commercial paper rated Prime-1
by Moody's or A-1 by S&P
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/5/ The policies described in this paragraph are fundamental for
Municipal Money Portfolio.
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<PAGE> 35
at the time of purchase, or, if unrated, issued or guaranteed by
an issuer with outstanding debt rated Aa or better by Moody's or
AA or better by S&P; and (4) repurchase agreements with banks and
securities dealers. Municipal Money Portfolio limits repurchase
agreements to those that are short-term, subject to restriction 18
under Investment Restrictions (although the underlying securities
may not be short-term).
Tender Option Bonds. Municipal Money Portfolio may purchase
tender option bonds. A tender option bond is a Municipal Security
(generally held pursuant to a custodial arrangement) having a
relatively long maturity and bearing interest at a fixed rate
substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such as
a bank, broker-dealer or other financial institution, pursuant to
which such institution grants the security holders the option, at
periodic intervals, to tender their securities to the institution
and receive the face value thereof. As consideration for
providing the option, the financial institution receives periodic
fees equal to the difference between the Municipal Security's
fixed coupon rate and the rate, as determined by a remarketing or
similar agent at or near the commencement of such period, that
would cause the securities, coupled with the tender option, to
trade at par on the date of such determination. Thus, after
payment of this fee, the security holder effectively holds a
demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser will consider on an ongoing basis
the creditworthiness of the issuer of the underlying Municipal
Securities, of any custodian, and of the third-party provider of
the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a
default in payment of principal or interest on the underlying
Municipal Securities and for other reasons. Municipal Money
Portfolio does not intend to invest more than 10% of net assets in
tender option bonds.
When-Issued and Delayed-Delivery Securities. Each Portfolio may
purchase securities on a when-issued or delayed-delivery basis.
Although the payment and interest terms of these securities are
established at the time a Portfolio enters into the commitment,
the securities may be delivered and paid for a month or more after
the date of purchase, when their value may have changed. The
Portfolios make such commitments only with the intention of
actually acquiring the securities, but may sell the securities
before settlement date if the Adviser deems it advisable for
investment reasons. No Portfolio currently intends to make
commitments to purchase when-issued securities in excess of 5% of
its net assets. International Portfolio may utilize spot and
forward foreign currency exchange transactions to reduce the risk
inherent in fluctuations in the exchange rate between one currency
and another when securities are purchased or sold on a when-issued
or delayed-delivery basis.
Securities purchased by High Yield Portfolio on a when-issued or
delayed-delivery basis are sometimes done on a "dollar roll"
basis. Dollar roll transactions consist of the sale by the
Portfolio of securities with a commitment to purchase similar but
not identical securities, generally at a lower price at a future
date. A dollar roll may be renewed after cash settlement and
initially may involve only a firm commitment agreement by the
Portfolio to buy a security. A dollar roll transaction involves
the following risks: if the broker-dealer to whom the Portfolio
sells the security becomes insolvent, the Portfolio's right to
purchase or repurchase the security may be restricted; the value
of the security may change adversely over the term of the dollar
roll; the security which the
<PAGE> 36
Portfolio is required to repurchase may be worth less than a
security which the Portfolio originally held; and the return
earned by the Portfolio with the proceeds of a dollar roll may not
exceed transaction costs.
At the time Municipal Money Portfolio or High Yield Portfolio
enters into a binding obligation to purchase securities on a when-
issued basis, liquid assets (cash, U.S. Government or other "high
grade" debt obligations) of the Portfolio having a value of at
least as great as the purchase price of the securities to be
purchased will be segregated on the books of the Portfolio and
held by the custodian throughout the period of the obligation.
Foreign Securities. International Portfolio invests primarily in
foreign securities and High Yield Portfolio and each Equity
Portfolio may invest up to 25% of its total assets in foreign
securities, which may entail a greater degree of risk (including
risks relating to exchange rate fluctuations, tax provisions, or
expropriation of assets) than does investment in securities of
domestic issuers. For this purpose, foreign securities do not
include American Depositary Receipts (ADRs) or securities
guaranteed by a United States person. ADRs are receipts typically
issued by an American bank or trust company evidencing ownership
of the underlying securities. A Portfolio may invest in sponsored
or unsponsored ADRs. In the case of an unsponsored ADR, a
Portfolio is likely to bear its proportionate share of the
expenses of the depository and it may have greater difficulty in
receiving shareholder communications than it would have with a
sponsored ADR.
International Portfolio may also purchase foreign securities in
the form of European Depositary Receipts (EDRs) or other
securities representing underlying shares of foreign issuers.
Positions in these securities are not necessarily denominated in
the same currency as the common stocks into which they may be
converted. ADRs are receipts typically issued by an American bank
or trust company evidencing ownership of the underlying
securities. EDRs are European receipts evidencing a similar
arrangement. Generally, ADRs, in registered form, are designed
for the U.S. securities markets and EDRs, in bearer form, are
designed for use in European securities markets.
With respect to portfolio securities that are issued by foreign
issuers or denominated in foreign currencies, a Portfolio's
investment performance is affected by the strength or weakness of
the U.S. dollar against these currencies. For example, if the
dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in a Portfolio will rise
even though the price of the stock remains unchanged. Conversely,
if the dollar rises in value relative to the yen, the dollar value
of the yen-denominated stock will fall. (See discussion of
transaction hedging and portfolio hedging under Currency Exchange
Transactions.)
Investors should understand and consider carefully the risks
involved in foreign investing. Investing in foreign securities,
positions in which are generally denominated in foreign
currencies, and utilization of forward foreign currency exchange
contracts involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in
exchange rates of foreign currencies; possible imposition of
exchange control regulation or currency restrictions that would
prevent cash from being brought back to the United States; less
public information with respect to issuers of securities; less
governmental
<PAGE> 37
supervision of stock exchanges, securities brokers, and issuers of
securities; lack of uniform accounting, auditing, and financial
reporting standards; lack of uniform settlement periods and
trading practices; less liquidity and frequently greater price
volatility in foreign markets than in the United States; possible
imposition of foreign taxes; possible investment in securities of
companies in developing as well as developed countries; and
sometimes less advantageous legal, operational, and financial
protections applicable to foreign sub-custodial arrangements.
Although a Portfolio will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption of
foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment in
these nations.
Currency Exchange Transactions. Currency exchange transactions
may be conducted either on a spot (i.e., cash) basis at the spot
rate for purchasing or selling currency prevailing in the foreign
exchange market or through forward currency exchange contracts
("forward contracts"). Forward contracts are contractual
agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at
the time of the contract. Forward contracts are usually entered
into with banks and broker-dealers, are not exchange traded, and
are usually for less than one year, but may be renewed.
A Portfolio's foreign currency exchange transactions are limited
to transaction and portfolio hedging involving either specific
transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward contracts with respect to specific
receivables or payables of a Portfolio arising in connection with
the purchase and sale of its portfolio securities. Portfolio
hedging is the use of forward contracts with respect to portfolio
security positions denominated or quoted in a particular foreign
currency. Portfolio hedging allows a Portfolio to limit or reduce
its exposure in a foreign currency by entering into a forward
contract to sell such foreign currency (or another foreign
currency that acts as a proxy for that currency) at a future date
for a price payable in U.S. dollars so that the value of the
foreign-denominated portfolio securities can be approximately
matched by a foreign-denominated liability. A Portfolio may not
engage in portfolio hedging with respect to the currency of a
particular country to an extent greater than the aggregate market
value (at the time of making such sale) of the securities held in
its portfolio denominated or quoted in that particular currency,
except that a Portfolio may hedge all or part of its foreign
currency exposure through the use of a basket of currencies or a
proxy currency where such currencies or currency act as an
effective proxy for other currencies. In such a case, a Portfolio
may enter into a forward contract where the amount of the foreign
currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering into
separate forward contracts for each currency held in a Portfolio.
A Portfolio may not engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a particular
currency, a Portfolio may either sell a Portfolio security related
to such contract and make delivery of the
<PAGE> 38
currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual
obligation to deliver the currency by purchasing an offsetting
contract with the same currency trader obligating it to purchase
on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the market
value of portfolio securities at the expiration of a forward
contract. Accordingly, it may be necessary for a Portfolio to
purchase additional currency on the spot market (and bear the
expense of such purchase) if the market value of the security is
less than the amount of currency a Portfolio is obligated to
deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to sell
on the spot market some of the currency received upon the sale of
a Portfolio security if its market value exceeds the amount of
currency a Portfolio is obligated to deliver.
If a Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss
to the extent that there has been movement in forward contract
prices. If a Portfolio engages in an offsetting transaction, it
may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between
a Portfolio's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for
the purchase of the currency, the Portfolio will realize a gain to
the extent the price of the currency it has agreed to sell exceeds
the price of the currency it has agreed to purchase. Should
forward prices increase, a Portfolio will suffer a loss to the
extent the price of the currency it has agreed to purchase exceeds
the price of the currency it has agreed to sell. A default on the
contract would deprive a Portfolio of unrealized profits or force
the Portfolio to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value
of the hedged currency should rise. Moreover, it may not be
possible for a Portfolio to hedge against a devaluation that is so
generally anticipated that a Portfolio is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. The cost to a Portfolio of engaging in currency
exchange transactions varies with such factors as the currency
involved, the length of the contract period, and prevailing market
conditions. Since currency exchange transactions are usually
conducted on a principal basis, no fees or commissions are
involved.
Synthetic Foreign Money Market Positions. High Yield Portfolio
and International Portfolio may invest in money market instruments
denominated in foreign currencies. In addition to, or in lieu of,
such direct investment, International Portfolio may construct a
synthetic foreign money market position by (a) purchasing a money
market instrument denominated in one currency, generally U.S.
dollars, and (b) concurrently entering into a forward contract to
deliver a corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of
exchange. For example, a synthetic money market position in
Japanese yen could be constructed by purchasing a U.S. dollar
money market instrument, and entering concurrently into a forward
contract to deliver a corresponding amount of U.S. dollars in
exchange for Japanese yen on a
<PAGE> 39
specified date and at a specified rate of exchange. Because of
the availability of a variety of highly liquid short-term U.S.
dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity
than direct investment in foreign currency money market
instruments. The result of a direct investment in a foreign
currency and a concurrent construction of a synthetic position in
such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be
similar, but would not be identical because the components of the
alternative investments would not be identical. Except to the
extent a synthetic foreign money market position consists of a
money market instrument denominated in a foreign currency, the
synthetic foreign money market position shall not be deemed a
"foreign security" for purposes of the policy that, under normal
conditions, International Portfolio will invest at least 65% of
its total assets in foreign securities.
High Yield Portfolio may also construct a synthetic foreign
position by entering into a swap arrangement. A swap is a
contractual agreement between two parties to exchange cash flows--
at the time of the swap agreement and again at maturity, and, with
some swaps, at various intervals through the period of the
agreement. The use of swaps to construct a synthetic foreign
position would generally entail the swap of interest rates and
currencies. A currency swap is a contractual arrangement between
two parties to exchange principal amounts in different currencies
at a predetermined foreign exchange rate. An interest rate swap
is a contractual agreement between two parties to exchange
interest payments on identical principal amounts. An interest
rate swap may be between a floating and a fixed rate instrument, a
domestic and a foreign instrument, or any other type of cash flow
exchange. A currency swap generally has the same risk
characteristics as a forward currency contract, and all types of
swaps have counter-party risk. Depending on the facts and
circumstances, swaps may be considered illiquid. Illiquid
securities usually have greater investment risk and are subject to
greater price volatility. The net amount of the excess, if any,
of High Yield Portfolio's obligations over which it is entitled to
receive with respect to an interest rate or currency swap will be
accrued daily and liquid assets (cash, U.S. Government securities,
or other "high grade" debt obligations) of High Yield Portfolio
having a value at least equal to such accrued excess will be
segregated on the books of High Yield Portfolio and held by the
Custodian for the duration of the swap. High Yield Portfolio may
also construct a synthetic foreign position by purchasing an
instrument whose return is tied to the return of the desired
foreign position. An investment in these "principal exchange rate
linked securities" (often called PERLS) can produce a similar
return to a direct investment in a foreign security.
Options on Securities and Indexes. High Yield Portfolio and each
Equity Portfolio may purchase and sell put options and call
options on securities, indexes or foreign currencies in
standardized contracts traded on recognized securities exchanges,
boards of trade, or similar entities, or quoted on Nasdaq. A
Portfolio may purchase agreements, sometimes called cash puts,
that may accompany the purchase of a new issue of bonds from a
dealer.
An option on a security (or index) is a contract that gives the
purchaser (holder) of the option, in return for a premium, the
right to buy from (call) or sell to (put) the seller (writer) of
the option the security underlying the option (or the cash value
of the index)
<PAGE> 40
at a specified exercise price at any time during the term of the
option (normally not exceeding nine months). The writer of an
option on an individual security or on a foreign currency has the
obligation upon exercise of the option to deliver the underlying
security or foreign currency upon payment of the exercise price or
to pay the exercise price upon delivery of the underlying security
or foreign currency. Upon exercise, the writer of an option on an
index is obligated to pay the difference between the cash value of
the index and the exercise price multiplied by the specified
multiplier for the index option. (An index is designed to reflect
specified facets of a particular financial or securities market, a
specific group of financial instruments or securities, or certain
economic indicators.)
A Portfolio will write call options and put options only if they
are "covered." For example, in the case of a call option on a
security, the option is "covered" if a Portfolio owns the security
underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or,
if additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by its
custodian) upon conversion or exchange of other securities held in
its portfolio.
If an option written by a Portfolio expires, the Portfolio
realizes a capital gain equal to the premium received at the time
the option was written. If an option purchased by a Portfolio
expires, the Portfolio realizes a capital loss equal to the
premium paid.
Prior to the earlier of exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the
same series (type, exchange, underlying security or index,
exercise price, and expiration). There can be no assurance,
however, that a closing purchase or sale transaction can be
effected when a Portfolio desires.
A Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the
Portfolio will realize a capital loss. If the premium received
from a closing sale transaction is more than the premium paid to
purchase the option, the Portfolio will realize a capital gain or,
if it is less, the Portfolio will realize a capital loss. The
principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current
market price of the underlying security or index in relation to
the exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by a Portfolio is an asset of the
Portfolio, valued initially at the premium paid for the option.
The premium received for an option written by a Portfolio is
recorded as a deferred credit. The value of an option purchased
or written is marked-to-market daily and is valued at the closing
price on the exchange on which it is traded or, if not traded on
an exchange or no closing price is available, at the mean between
the last bid and asked prices.
Risks Associated with Options. There are several risks associated
with transactions in options. For example, there are significant
differences between the securities markets, the currency markets,
and the options markets that could result in an imperfect
correlation between these markets, causing a given transaction not
to achieve its objectives. A decision as to whether, when and how
to use options involves the exercise of skill and
<PAGE> 41
judgment, and even a well-conceived transaction may be
unsuccessful to some degree because of market behavior or
unexpected events.
There can be no assurance that a liquid market will exist when a
Portfolio seeks to close out an option position. If a Portfolio
were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to realize
any profit or the option would expire and become worthless. If a
Portfolio were unable to close out a covered call option that it
had written on a security, it would not be able to sell the
underlying security until the option expired. As the writer of a
covered call option on a security, a Portfolio foregoes, during
the option's life, the opportunity to profit from increases in the
market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased or written by a
Portfolio, the Portfolio would not be able to close out the
option. If restrictions on exercise were imposed, the Portfolio
might be unable to exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts. High Yield
Portfolio and each Equity Portfolio may use interest rate futures
contracts, index futures contracts, and foreign currency futures
contracts. An interest rate, index or foreign currency futures
contract provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument or
the cash value of an index /6/ at a specified price and time. A
public market exists in futures contracts covering a number of
indexes (including, but not limited to: the Standard & Poor's 500
Index; the Value Line Composite Index; and the New York Stock
Exchange Composite Index) as well as financial instruments
(including, but not limited to: U.S. Treasury bonds; U.S. Treasury
notes; Eurodollar certificates of deposit; and foreign
currencies). Other index and financial instrument futures
contracts are available and it is expected that additional futures
contracts will be developed and traded.
A Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as
options on securities, indexes and foreign currencies (discussed
above). A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise price
at any time during the period of the option. Upon exercise of a
call option, the holder acquires a long position in the futures
contract and the writer is assigned the opposite short position.
In the case of a put option, the opposite is true. A Portfolio
might, for example, use futures contracts to hedge against or gain
exposure to fluctuations in the general level of stock prices,
anticipated changes in interest rates or currency fluctuations
that might adversely affect either the value of a Portfolio's
securities or the price of the securities that the Portfolio
intends to purchase. Although other techniques could be used to
reduce or increase a Portfolio's exposure to stock price, interest
rate, and currency fluctuations, the Portfolio may be able to
achieve its
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/6/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at
which the index contract was originally written. Although the
value of a securities index is a function of the value of certain
specified securities no physical delivery of those securities is
made.
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<PAGE> 42
exposure more effectively and perhaps at a lower cost by using
futures contracts and futures options.
A Portfolio will only enter into futures contracts and futures
options that are standardized and traded on an exchange, board of
trade, or similar entity, or quoted on an automated quotation
system.
The success of any futures transaction depends on the Adviser
correctly predicting changes in the level and direction of stock
prices, interest rates, currency exchange rates and other factors.
Should those predictions be incorrect, a Portfolio's return might
have been better had the transaction not been attempted; however,
in the absence of the ability to use futures contracts, the
Adviser might have taken portfolio actions in anticipation of the
same market movements with similar investment results but,
presumably, at greater transaction costs.
When a purchase or sale of a futures contract is made by a
Portfolio, the Portfolio is required to deposit with its custodian
(or broker, if legally permitted) a specified amount of cash or
U.S. Government securities or other securities acceptable to the
broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith
deposit on the futures contract, which is returned to a Portfolio
upon termination of the contract, assuming all contractual
obligations have been satisfied. A Portfolio expects to earn
interest income on its initial margin deposits. A futures
contract held by a Portfolio is valued daily at the official
settlement price of the exchange on which it is traded. Each day
a Portfolio pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract. This
process is known as "marking-to-market." Variation margin paid or
received by a Portfolio does not represent a borrowing or loan by
the Portfolio but is instead settlement between the Portfolio and
the broker of the amount one would owe the other if the futures
contract had expired at the close of the previous day. In
computing daily net asset value, a Portfolio will mark-to-market
its open futures positions.
A Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by
it. Such margin deposits will vary depending on the nature of the
underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by a Portfolio.
Although some futures contracts call for making or taking delivery
of the underlying securities, usually these obligations are closed
out prior to delivery by offsetting purchases or sales of matching
futures contracts (same exchange, underlying security or index,
and delivery month). If an offsetting purchase price is less than
the original sale price, a Portfolio realizes a capital gain, or
if it is more, the Portfolio realizes a capital loss. Conversely,
if an offsetting sale price is more than the original purchase
price, a Portfolio realizes a capital gain, or if it is less, the
Portfolio realizes a capital loss. The transaction costs must
also be included in these calculations.
<PAGE> 43
Risks Associated with Futures. There are several risks associated
with the use of futures contracts and futures options. A purchase
or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee that
there will be a correlation between price movements in the futures
contract and in a Portfolio exposure sought. In addition, there
are significant differences between the securities and futures
markets that could result in an imperfect correlation between the
markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for
futures, futures options and the related securities, including
technical influences in futures and futures options trading and
differences between the securities market and the securities
underlying the standard contracts available for trading. For
example, in the case of index futures contracts, the composition
of the index, including the issuers and the weighting of each
issue, may differ from the composition of a Portfolio's portfolio,
and, in the case of interest rate futures contracts, the interest
rate levels, maturities, and creditworthiness of the issues
underlying the futures contract may differ from the financial
instruments held in the Portfolio's portfolio. A decision as to
whether, when and how to use futures contracts involves the
exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market
behavior or unexpected stock price or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The
daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous
day's settlement price at the end of the current trading session.
Once the daily limit has been reached in a futures contract
subject to the limit, no more trades may be made on that day at a
price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not
limit potential losses because the limit may work to prevent the
liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures
contracts to substantial losses. Stock index futures contracts
are not normally subject to such daily price change limitations.
There can be no assurance that a liquid market will exist at a
time when a Portfolio seeks to close out a futures or futures
option position. A Portfolio would be exposed to possible loss on
the position during the interval of inability to close, and would
continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts discussed
above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active
secondary market will develop or continue to exist.
Limitations on Options and Futures. If other options, futures
contracts, or futures options of types other than those described
herein are traded in the future, High Yield Portfolio and each
Equity Portfolio may also use those investment vehicles, provided
the Board of Trustees determines that their use is consistent with
the Portfolio's investment objective.
<PAGE> 44
A Portfolio will not enter into a futures contract or purchase an
option thereon if, immediately thereafter, the initial margin
deposits for futures contracts held by the Portfolio plus premiums
paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," /7/ would exceed 5%
of a Portfolio's total assets.
When purchasing a futures contract or writing a put option on a
futures contract, a Portfolio must maintain with its custodian (or
broker, if legally permitted) cash or cash equivalents (including
any margin) equal to the market value of such contract. When
writing a call option on a futures contract, a Portfolio similarly
will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is
in-the-money until the option expires or is closed out by the
Portfolio.
A Portfolio may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between a Portfolio and the
positions. For this purpose, to the extent a Portfolio has
written call options on specific securities in its portfolio, the
value of those securities will be deducted from the current market
value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being deemed a "commodity pool
operator," a Portfolio will use commodity futures or commodity
options contracts solely for bona fide hedging purposes within the
meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts
that do not come within the meaning and intent of 1.3(z), the
aggregate initial margin and premiums required to establish such
positions will not exceed 5% of the fair market value of the
assets of a Portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts it has entered
into [in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount (as defined in Section 190.01(x)
of the Commission Regulations) may be excluded in computing such
5%].
As long as an investor in a Portfolio continues to sell its shares
in certain states, the Portfolio's options and futures
transactions will also be subject to certain non-fundamental
investment restrictions set forth under Investment Restrictions in
this Part B.
Taxation of Options and Futures. If a Portfolio exercises a call
or put option that it holds, the premium paid for the option is
added to the cost basis of the security purchased (call) or
deducted from the proceeds of the security sold (put). For cash
settlement options and futures options exercised by a Portfolio,
the difference between the cash received at exercise and the
premium paid is a capital gain or loss.
- -----------------
/7/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
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<PAGE> 45
If a call or put option written by a Portfolio is exercised, the
premium is included in the proceeds of the sale of the underlying
security (call) or reduces the cost basis of the security
purchased (put). For cash settlement options and futures options
written by a Portfolio, the difference between the cash paid at
exercise and the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital
gain or loss. If an option written by a Portfolio was in-the-
money at the time it was written and the security covering the
option was held for more than the long-term holding period prior
to the writing of the option, any loss realized as a result of a
closing purchase transaction will be long-term. The holding
period of the securities covering an in-the-money option will not
include the period of time the option is outstanding.
If a Portfolio writes an equity call option /8/ other than a
"qualified covered call option," as defined in the Code, any loss
on such option transaction, to the extent it does not exceed the
unrealized gains on the securities covering the option, may be
subject to deferral until the securities covering the option have
been sold.
A futures contract held until delivery results in capital gain or
loss equal to the difference between the price at which the
futures contract was entered into and the settlement price on the
earlier of delivery notice date or expiration date. If a
Portfolio delivers securities under a futures contract, the
Portfolio also realizes a capital gain or loss on those
securities.
For federal income tax purposes, a Portfolio generally is required
to recognize as income for each taxable year its net unrealized
gains and losses as of the end of the year on futures, futures
options and non-equity options positions ("year-end mark-to-
market"). Generally, any gain or loss recognized with respect to
such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and
40% short-term, without regard to the holding periods of the
contracts. However, in the case of positions classified as part
of a "mixed straddle," the recognition of losses on certain
positions (including options, futures and futures options
positions, the related securities and certain successor positions
thereto) may be deferred to a later taxable year. Sale of futures
contracts or writing of call options (or futures call options) or
buying put options (or futures put options) that are intended to
hedge against a change in the value of securities held by a
Portfolio: (1) will affect the holding period of the hedged
securities; and (2) may cause unrealized gain or loss on such
securities to be recognized upon entry into the hedge.
If a Portfolio were to enter into a short index future, short
index futures option or short index option position and a
Portfolio's portfolio were deemed to "mimic" the performance of
the index underlying such contract, the option or futures contract
position and
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/8/ An equity option is defined to mean any option to buy or sell
stock, and any other option the value of which is determined by
reference to an index of stocks of the type that is ineligible to
be traded on a commodity futures exchange (e.g., an option
contract on a sub-index based on the price of nine hotel-casino
stocks). The definition of equity option excludes options on
broad-based stock indexes (such as the Standard & Poor's 500
index).
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<PAGE> 46
the Portfolio's stock positions would be deemed to be positions in
a mixed straddle, subject to the above-mentioned loss deferral
rules.
In order for a Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of
its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived from
loans of securities, and gains from the sale of securities or
foreign currencies, or other income (including but not limited to
gains from options, futures, or forward contracts). In addition,
gains realized on the sale or other disposition of securities held
for less than three months must be limited to less than 30% of its
annual gross income. Any net gain realized from futures (or
futures options) contracts will be considered gain from the sale
of securities and therefore be qualifying income for purposes of
the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, a Portfolio may be
required to defer the closing out of certain positions beyond the
time when it would otherwise be advantageous to do so.
Each Portfolio distributes to investors annually any net capital
gains that have been recognized for federal income tax purposes
(including year-end mark-to-market gains) on options and futures
transactions. Such distributions are combined with distributions
of capital gains realized on other investments, and investors are
advised of the nature of the payments.
INVESTMENT RISKS--MUNICIPAL MONEY PORTFOLIO
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States
provide that, in certain circumstances, such subdivisions or
authorities may be authorized to initiate bankruptcy proceedings
without prior notice to or consent of creditors, which proceedings
could result in material and adverse changes in the rights of
holders of their obligations.
Lawsuits challenging the validity under state constitutions of
present systems of financing public education have been initiated
or adjudicated in a number of states, and legislation has been
introduced to effect changes in public school financing in some
states. In other instances there have been lawsuits challenging
the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which could ultimately
affect the validity of those Municipal Securities or the tax-free
nature of the interest thereon. In addition, from time to time
proposals have been introduced in Congress to restrict or
eliminate the federal income tax exemption for interest on
Municipal Securities, and similar proposals may be introduced in
the future. Some of the past proposals would have applied to
interest on Municipal Securities issued before the date of
enactment, which would have adversely affected their value to a
material degree. If such proposals are enacted, the availability
of Municipal Securities for investment by Municipal Money
Portfolio and the value of its portfolio would be affected and, in
such an event, the Portfolio would reevaluate its investment
objectives and policies.
Because Municipal Money Portfolio may invest in industrial
development bonds, its shares may not be an appropriate investment
for "substantial users" of facilities financed by industrial
development bonds or for "related persons of substantial users."
<PAGE> 47
In addition, Municipal Money Portfolio may invest in Municipal
Securities issued after the effective date of the Tax Reform Act
of 1986 (the "1986 Act"), which may be subject to retroactive
taxation if they fail to continue to comply after issuance with
certain requirements imposed by the 1986 Act.
Although the banks and securities dealers from which Municipal
Money Portfolio may acquire repurchase agreements and standby
commitments, and the entities from which it may purchase
participation interests in Municipal Securities, will be those
that the Adviser believes to be financially sound, there can be no
assurance that they will be able to honor their obligations to the
Portfolio.
INVESTMENT RESTRICTIONS
Fundamental policies may be changed only with the approval of a
"majority of its outstanding voting securities" as defined in the
Investment Company Act of 1940. Non-fundamental investment
restrictions, which may be required by various laws and
administrative positions, may be changed by the Board of Trustees
without a vote of shareholders.
The following investment restrictions (other than material within
brackets) are fundamental policies of Municipal Money Portfolio.
Municipal Money Portfolio may not:
(1) invest in a security if, with respect to 75% of its assets, as
a result of such investment, more than 5% of its total assets
(taken at market value at the time of investment) would be
invested in the securities of any one issuer (for this
purpose, the issuer(s) of a security being deemed to be only
the entity or entities whose assets or revenues are subject to
the principal and interest obligations of the security), other
than obligations issued or guaranteed by the U.S. Government
or by its agencies or instrumentalities or repurchase
agreements for such securities [however, in the case of a
guarantor of securities (including an issuer of a letter of
credit), the value of the guarantee (or letter of credit) may
be excluded from this computation if the aggregate value of
securities owned by the Portfolio and guaranteed by such
guarantor (plus any other investments of the Portfolio in
securities issued by the guarantor) does not exceed 10% of the
Portfolio's total assets]; /9/ /10/
(2) purchase any securities on margin, except for use of short-
term credit necessary for clearance of purchases and sales of
portfolio securities (this restriction does not apply to
securities purchased on a when-issued or delayed-delivery
basis or to reverse repurchase agreements);
(3) make loans, although it may (a) participate in an interfund
lending program with other Stein Roe Funds provided that no
such loan may be made if, as a result, the aggregate of such
loans would exceed 33 1/3% of the value of its total assets;
(b)
- ------------------
/9/ In the case of a security that is insured as to payment of
principal and interest, the related insurance policy is not deemed
a security, nor is it subject to this investment restriction.
/10/ Notwithstanding the foregoing, and in accordance with Rule
2a-7 of the Investment Company Act of 1940 (the "Rule"), Municipal
Money Portfolio will not, immediately after the acquisition of any
security (other than a Government Security or certain other
securities as permitted under the Rule), invest more than 5% of
its total assets in the securities of any one issuer; provided,
however, that it may invest up to 25% of its total assets in First
Tier Securities (as that term is defined in the Rule) of a single
issuer for a period of up to three business days after the
purchase thereof.
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<PAGE> 48
purchase money market instruments and enter into repurchase
agreements; and (c) acquire publicly-distributed or privately-
placed debt securities;
(4) borrow except that it may (a) borrow for non-leveraging,
temporary or emergency purposes and (b) engage in reverse
repurchase agreements and make other borrowings, provided that
the combination of (a) and (b) shall not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law; it may borrow from banks, other Stein Roe
Funds, and other persons to the extent permitted by applicable
law;
(5) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Portfolio except as may be necessary in connection with
borrowings mentioned in (4) above;
(6) invest more than 25% of its total assets (taken at market
value at the time of each investment) in securities of non-
governmental issuers whose principal business activities are
in the same industry;
(7) purchase portfolio securities for the Portfolio from, or sell
portfolio securities to, any of the officers, directors, or
trustees of the Trust or of its investment adviser;
(8) purchase or sell commodities or commodities contracts or oil,
gas, or mineral programs;
(9) purchase any securities other than those described in Part A
under Objectives and Basic Investment Strategy and Other
Investment Practices;
(10) issue any senior security except to the extent permitted
under the Investment Company Act of 1940;
Following are the non-fundamental investment restrictions of
Municipal Money Portfolio. Municipal Money Portfolio may not:
(a) own more than 10% of the outstanding voting securities of an
issuer;
(b) invest in companies for the purpose of exercising control or
management;
(c) make investments in the securities of other investment
companies, except in connection with a merger, consolidation,
or reorganization;
(d) purchase or sell real estate (other than Municipal Securities
or money market securities secured by real estate or interests
therein or such securities issued by companies which invest in
real estate or interests therein);
(e) act as an underwriter of securities, except that it may
participate as part of a group in bidding, or bid alone, for
the purchase of Municipal Securities directly from an issuer
for the its own portfolio;
(f) purchase or retain securities of an issuer if 5% of the
securities of such issuer are owned by those trustees and
officers of the Trust who own individually more than 1/2 of 1%
of such securities;
(g) sell securities short unless (1) the Portfolio owns or has the
right to obtain securities equivalent in kind and amount to
those sold short at no added cost or (2) the securities sold
are "when issued" or "when distributed" securities which the
Portfolio expects to receive in a recapitalization,
reorganization, or other exchange for securities the Portfolio
contemporaneously owns or has the right to obtain and provided
that it may purchase standby commitments and securities
subject to a demand feature entitling the Portfolio to require
sellers of securities to the Portfolio to repurchase them upon
demand by the Portfolio;
<PAGE> 49
(h) invest more than 5% of its total assets (taken at market value
at the time of a particular investment) in securities of
issuers (other than issuers of federal agency obligations or
securities issued or guaranteed by any foreign country or
asset-backed securities) that, together with any predecessors
or unconditional guarantors, have been in continuous operation
for less than three years ("unseasoned issuers");
(i) invest more than 15% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities and securities of unseasoned issuers;
(j) invest more than 10% of its net assets (taken at market value
at the time of a particular investment) in illiquid
securities, including repurchase agreements maturing in more
than seven days.
(k) purchase shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization; or
(l) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants that are not listed on the New York or American stock
exchange.
Following are the fundamental investment restrictions of High
Yield Portfolio. High Yield Portfolio may not:
(1) invest in a security if, as a result of such investment, more
than 25% of its total assets (taken at market value at the
time of such investment) would be invested in the securities
of issuers in any particular industry, except that this
restriction does not apply to U.S. Government Securities;
(2) invest in a security if, with respect to 75% of its assets, as
a result of such investment, more than 5% of its total assets
(taken at market value at the time of such investment) would
be invested in the securities of any one issuer, except that
this restriction does not apply to U.S. Government Securities
or repurchase agreements for such securities;
(3) invest in a security if, as a result of such investment, it
would hold more than 10% (taken at the time of such
investment) of the outstanding voting securities of any one
issuer;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein);
(5) purchase or sell commodities or commodities contracts or oil,
gas or mineral programs, except that it may enter into (a)
futures and options on futures and (b) forward contracts;
(6) purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of
portfolio securities, but it may make margin deposits in
connection with transactions in options, futures, and options
on futures;
(7) make loans, although it may (a) lend portfolio securities and
participate in an interfund lending program with other Stein
Roe Funds provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed 33 1/3% of
the value of its total assets (taken at market value at the
time of such loans); (b) purchase money market instruments and
enter into repurchase agreements; and (c) acquire publicly-
distributed or privately-placed debt securities;
<PAGE> 50
(8) borrow except that it may (a) borrow for non-leveraging,
temporary or emergency purposes, (b) engage in reverse
repurchase agreements and make other borrowings, provided that
the combination of (a) and (b) shall not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds,
and other persons to the extent permitted by applicable law;
(9) act as an underwriter of securities, except insofar as it may
be deemed to be an "underwriter" for purposes of the
Securities Act of 1933 on disposition of securities acquired
subject to legal or contractual restrictions on resale;
(10) issue any senior security except to the extent permitted
under the Investment Company Act of 1940.
Following are the non-fundamental investment restrictions of High
Yield Portfolio. High Yield Portfolio may not:
(a) invest for the purpose of exercising control or management;
(b) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal
to more than 5% of its total assets (valued at time of
purchase) in the case of any one other investment company and
10% of such assets (valued at time of purchase) in the case of
all other investment companies in the aggregate; any such
purchases are to be made in the open market where no profit to
a sponsor or dealer results from the purchase, other than the
customary broker's commission, except for securities acquired
as part of a merger, consolidation or acquisition of assets;
/11/
(c) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by it,
except as may be necessary in connection with (1) borrowings
permitted in (8) above and (2) options, futures, and options
on futures;
(d) purchase or retain securities of any issuer if 5% of the
securities of such issuer are owned by those officers and
trustees or directors of the Trust or of its investment
adviser who each own beneficially more than l/2 of 1% of its
securities;
(e) purchase portfolio securities from, or sell portfolio
securities to, any of the officers and directors or trustees
of the Trust or of its investment adviser;
(f) purchase shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization;
(g) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants which are not listed on the New York or American
Stock Exchange;
(h) purchase a put or call option if the aggregate premiums paid
for all put and call options exceed 20% of its net assets
(less the amount by which any such positions are in-the-
money), excluding put and call options purchased as closing
transactions;
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/11/ Stein Roe Funds have been informed that the staff of the
Securities and Exchange Commission takes the position that the
issuers of certain CMOs and certain other collateralized assets
are investment companies and that subsidiaries of foreign banks
may be investment companies for purposes of Section 12(d)(1) of
the Investment Company Act of 1940, which limits the ability of
one investment company to invest in another investment company.
Accordingly, High Yield Portfolio intends to operate within the
applicable limitations under Section 12(d)(1)(A) of that Act.
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<PAGE> 51
(i) write an option on a security unless the option is issued by
the Options Clearing Corporation, an exchange, or similar
entity;
(j) buy or sell an option on a security, a futures contract, or an
option on a futures contract unless the option, the futures
contract, or the option on the futures contract is offered
through the facilities of a national securities association or
listed on a national exchange or similar entity;
(k) invest in limited partnerships in real estate unless they are
readily marketable;
(l) sell securities short unless (1) it owns or has the right to
obtain securities equivalent in kind and amount to those sold
short at no added cost or (2) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other
exchange for securities it contemporaneously owns or has the
right to obtain and provided that transactions in options,
futures, and options on futures are not treated as short
sales;
(m) invest more than 5% of its total assets (taken at market value
at the time of a particular investment) in securities of
issuers (other than issuers of federal agency obligations or
securities issued or guaranteed by any foreign country or
asset-backed securities) that, together with any predecessors
or unconditional guarantors, have been in continuous operation
for less than three years ("unseasoned issuers");
(n) invest more than 15% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities, other than securities eligible for resale pursuant
to Rule 144A under the Securities Act of 1933;
(o) invest more than 15% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities and securities of unseasoned issuers; or
(p) invest more than 10% of its net assets (taken at market value
at the time of a particular investment) in illiquid securities
/12/, including repurchase agreements maturing in more than
seven days.
Following are the fundamental investment restrictions of each
Equity Portfolio (except that (1) and (2) are non-fundamental
restrictions for Special Portfolio). An Equity Portfolio may not:
(1) with respect to 75% of its total assets, invest more than 5%
of its total assets, taken at market value at the time of a
particular purchase, in the securities of a single issuer,
except for securities issued or guaranteed by the Government
of the U.S. or any of its agencies or instrumentalities or
repurchase agreements for such securities;
(2) acquire more than 10%, taken at the time of a particular
purchase, of the outstanding voting securities of any one
issuer;
(3) act as an underwriter of securities, except insofar as it may
be deemed an underwriter for purposes of the Securities Act of
1933 on disposition of securities acquired subject to legal or
contractual restrictions on resale;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real
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/12/ In the judgment of the Adviser, Private Placement Notes,
which are issued pursuant to Section 4(2) of the Securities Act of
1933, generally are readily marketable even though they are
subject to certain legal restrictions on resale. As such, they
are not treated as being subject to the limitation on illiquid
securities.
- -------------
<PAGE> 52
estate or interests therein), commodities, or commodity contracts,
except that it may enter into (a) futures and options on
futures and (b) forward contracts;
(5) make loans, although it may (a) lend portfolio securities and
participate in an interfund lending program with other Stein
Roe Funds provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed 33 1/3% of
the value of its total assets (taken at market value at the
time of such loans); (b) purchase money market instruments and
enter into repurchase agreements; and (c) acquire publicly-
distributed or privately-placed debt securities;
(6) borrow except that it may (a) borrow for non-leveraging,
temporary or emergency purposes, (b) engage in reverse
repurchase agreements and make other borrowings, provided that
the combination of (a) and (b) shall not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds,
and other persons to the extent permitted by applicable law;
(7) invest in a security if more than 25% of its total assets
(taken at market value at the time of a particular purchase)
would be invested in the securities of issuers in any
particular industry, except that this restriction does not
apply to securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities; or
(8) issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
Following are the non-fundamental investment objectives of each
Equity Portfolio. An Equity Portfolio may not:
(a) invest in any of the following: (1) interests in oil, gas, or
other mineral leases or exploration or development programs
(except readily marketable securities, including but not
limited to master limited partnership interests, that may
represent indirect interests in oil, gas, or other mineral
exploration or development programs); (2) puts, calls,
straddles, spreads, or any combination thereof (except that it
may enter into transactions in options, futures, and options
on futures); (3) shares of other open-end investment
companies, except in connection with a merger, consolidation,
acquisition, or reorganization; and (4) limited partnerships
in real estate unless they are readily marketable;
(b) invest in companies for the purpose of exercising control or
management;
(c) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal
to more than 5% of its total assets (valued at time of
purchase) in the case of any one other investment company and
10% of such assets (valued at time of purchase) in the case of
all other investment companies in the aggregate; any such
purchases are to be made in the open market where no profit to
a sponsor or dealer results from the purchase, other than the
customary broker's commission, except for securities acquired
as part of a merger, consolidation or acquisition of assets;
(d) purchase or hold securities of an issuer if 5% of the
securities of such issuer are owned by those officers,
trustees, or directors of the Trust or of its investment
adviser, who each own beneficially more than 1/2 of 1% of the
securities of that issuer;
<PAGE> 53
(e) mortgage, pledge, or hypothecate its assets, except as may be
necessary in connection with permitted borrowings or in
connection with options, futures, and options on futures;
(f) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets in
warrants that are not listed on the New York or American Stock
Exchange or [International Portfolio only] a recognized
foreign exchange;
(g) write an option on a security unless the option is issued by
the Options Clearing Corporation, an exchange, or similar
entity;
(h) [All except International Portfolio] invest more than 25% of
its total assets (valued at time of purchase) in securities of
foreign issuers (other than securities represented by American
Depositary Receipts (ADRs) or securities guaranteed by a U.S.
person);
(i) buy or sell an option on a security, a futures contract, or an
option on a futures contract unless the option, the futures
contract, or the option on the futures contract is offered
through the facilities of a recognized securities association
or listed on a recognized exchange or similar entity;
(j) purchase a put or call option if the aggregate premiums paid
for all put and call options exceed 20% of its net assets
(less the amount by which any such positions are in-the-
money), excluding put and call options purchased as closing
transactions;
(k) purchase securities on margin (except for use of short-term
credits as are necessary for the clearance of transactions),
or sell securities short unless (1) it owns or has the right
to obtain securities equivalent in kind and amount to those
sold short at no added cost or (2) the securities sold are
"when issued" or "when distributed" securities which it
expects to receive in a recapitalization, reorganization, or
other exchange for securities it contemporaneously owns or has
the right to obtain and provided that transactions in options,
futures, and options on futures are not treated as short
sales;
(l) invest more than 5% of its total assets (taken at market value
at the time of a particular investment) in securities of
issuers (other than issuers of federal agency obligations or
securities issued or guaranteed by any foreign country or
asset-backed securities) that, together with any predecessors
or unconditional guarantors, have been in continuous operation
for less than three years ("unseasoned issuers");
(m) [All except International Portfolio] invest more than 5% of
its total assets (taken at market value at the time of a
particular investment) in restricted securities, other than
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933; [International Portfolio only] invest
more than 10% of its total assets (taken at market value at
the time of a particular investment) in restricted securities,
other than securities eligible for resale pursuant to Rule
144A under the Securities Act of 1933;
(n) invest more than 15% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities and securities of unseasoned issuers;
(o) invest more than 5% of its net assets (taken at market value
at the time of a particular investment) in illiquid
securities, including repurchase agreements maturing in more
than seven days.
<PAGE> 54
Notwithstanding the foregoing investment restrictions,
International Portfolio may purchase securities pursuant to the
exercise of subscription rights, subject to the condition that
such purchase will not result in International Portfolio's ceasing
to be a diversified investment company. Far Eastern and European
corporations frequently issue additional capital stock by means of
subscription rights offerings to existing shareholders at a price
substantially below the market price of the shares. The failure
to exercise such rights would result in International Portfolio's
interest in the issuing company being diluted. The market for
such rights is not well developed in all cases and, accordingly,
International Portfolio may not always realize full value on the
sale of rights. The exception applies in cases where the limits
set forth in the investment restrictions would otherwise be
exceeded by exercising rights or would have already been exceeded
as a result of fluctuations in the market value of International
Portfolio's portfolio securities with the result that
International Portfolio would be forced either to sell securities
at a time when it might not otherwise have done so, to forego
exercising the rights.
ITEM 14. MANAGEMENT OF BASE TRUST.
The officers and trustees of Base Trust are listed below.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AGE WITH THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
Gary A. Anetsberger 40 Senior Vice-President Chief Financial Officer of the Mutual Funds
division of Stein Roe & Farnham Incorporated (the
"Adviser"); senior vice president of the Adviser
since April, 1996; vice president of the Adviser
prior thereto
Timothy K. Armour 48 President; Trustee President of the Mutual Fund division of the Adviser
(1)(2) and director of the Adviser since June, 1992; senior
vice president and director of marketing of Citibank
Illinois prior thereto
Jilaine Hummel Bauer 41 Executive Vice-President; General counsel and secretary of the Adviser since
Secretary November, 1995; senior vice president of the Adviser
since April, 1992; vice president of the Adviser prior
thereto
Kenneth L. Block (3) 76 Trustee Chairman Emeritus of A. T. Kearney, Inc.
(international management consultants)
William W. Boyd (3) 69 Trustee Chairman and Director of Sterling Plumbing Group, Inc.
(manufacturer of plumbing products) since 1992;
chairman, president, and chief executive officer of
Sterling Plumbing Group, Inc. prior thereto
Lindsay Cook (1) 44 Trustee Senior Vice President of Liberty Financial Companies,
Inc. (the indirect parent of the Adviser)
Douglas A. Hacker(3) 41 Trustee Senior vice president and chief financial officer,
United Airlines, since July, 1994; senior vice
president--Finance, United Airlines, February, 1993 to
July, 1994; vice president, American Airlines prior
thereto
Francis W. Morley 76 Trustee Chairman of Employer Plan Administrators and
Consultants Co. (designer, administrator, and
communicator of employee benefit plans)
<PAGE> 55
Charles R. Nelson(3) 54 Trustee Van Voorhis Professor of Political Economy of the
University of Washington
Nicolette D. Parrish 46 Vice-President; Senior Compliance Administrator for the Adviser since
Assistant Secretary November, 1995; senior legal assistant for the Adviser
prior thereto
Cynthia A. Prah 34 Vice-President Manager of Shareholder Transaction Processing for the
Adviser
Sharon R. Robertson 34 Controller Accounting Manager for the Adviser's Mutual Funds
division
Janet B. Rysz 41 Assistant Secretary Assistant Secretary of the Adviser
Thomas C. Theobald 59 Trustee Managing partner, William Blair Capital Partners
(3) (private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation prior thereto
Heidi J. Walter 29 Vice-President Legal counsel for the Adviser since March, 1995;
associate with Beeler Schad & Diamond, P.C., prior
thereto
Gordon R. Worley (3) 77 Trustee Private investor
Hans P. Ziegler 55 Executive Vice-President Chief Executive Officer of the Adviser since May,
1994; president of the Investment Counsel division of
the Adviser from July, 1993 to June, 1994; president
and chief executive officer, Pitcairn Financial
Management Group prior thereto
Margaret O. Zwick 30 Treasurer Compliance Manager for the Adviser's Mutual Funds
division since August, 1995; held positions of
Compliance Accountant, Section Manager, Supervisor,
and Fund Accountant with the division
<FN>
____________________________________
(1) Trustee who is an "interested person" of Base Trust and of the
Adviser, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
</TABLE>
Each trustee and officer of Base Trust holds the same position
with Stein Roe Municipal Trust, Stein Roe Investment Trust, Stein
Roe Income Trust, Stein Roe Advisor Trust and Stein Roe
Institutional Trust, other investment companies managed by the
Adviser. The address of Mr. Block is 11 Woodley Road, Winnetka,
Illinois 60093; that of Mr. Boyd is 2900 Golf Road, Rolling
Meadows, Illinois 60008; that of Mr. Cook is 600 Atlantic Avenue,
Boston, Massachusetts 02210; that of Mr. Hacker is P.O. Box 66100,
Chicago, IL 60666; that of Mr. Morley is 20 North Wacker Drive,
Suite 2275, Chicago, Illinois 60606; that of Mr. Nelson is
Department of Economics, University of Washington, Seattle,
Washington 98195; that of Mr. Theobald is Suite 3300, 222 West
Adams Street, Chicago, IL 60606; that of Mr. Worley is 1407
Clinton Place, River Forest, Illinois 60305; and that of the
officers is One South Wacker Drive, Chicago, Illinois 60606.
<PAGE> 56
Officers and trustees affiliated with the Adviser serve without
any compensation from Base Trust. In compensation for their
services to Base Trust, trustees who are not "interested persons"
of Base Trust or the Adviser are paid an attendance fee from each
series of Base Trust for each meeting of the Board or standing
committee thereof attended at which business for that series is
conducted and, effective August 1996, are paid an annual retainer
of $8,000 (divided equally among the Portfolios). The attendance
fees (other than for a Nominating Committee meeting) are based on
each series' net assets as of the preceding December 31. For a
series with net assets of less than $50 million, the fee is $50
per meeting; with $51 to $250 million, the fee is $200 per
meeting; with $251 million to $500 million, $350; with $501
million to $750 million, $500; with $751 million to $1 billion,
$650; and with over $1 billion in net assets, $800. Each non-
interested trustee also receives an aggregate of $500 for
attending each meeting of the Nominating Committee. Base Trust
has no retirement or pension plan. The following table sets forth
compensation paid during the fiscal year ended June 30, 1996 to
each of the trustees:
Aggregate
Name of Compensation Total Compensation from
Trustee from Income Trust the Stein Roe Fund Complex*
- ----------------- ----------------- --------------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Douglas A. Hacker -0- -0-
Thomas C. Theobald -0- -0-
Kenneth L. Block $1,600 $82,417
William W. Boyd 1,600 86,317
Francis W. Morley 1,600 82,017
Charles R. Nelson 1,600 86,317
Gordon R. Worley 1,600 82,817
____________________
*Messrs. Hacker and Theobald were elected trustees on June 18,
1996 and, therefore, received no compensation for the fiscal year
ended June 30, 1995.
**During the period ended June 30, 1996, the Stein Roe Fund
Complex consisted of one series of Base Trust, four series of
Stein Roe Municipal Trust, six series of Stein Roe Income Trust,
and eight series of Stein Roe Investment Trust.
ITEM 15. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.
As of the effective date of this Registration Statement, there
were two record holders of Municipal Money Portfolio, Stein Roe
Municipal Money Market Fund and Colonial Municipal Money Market
Fund; and there were no record holders of any other Portfolio.
ITEM 16. INVESTMENT MANAGEMENT AND ADMINISTRATIVE SERVICES.
Base Trust has retained the services of Stein Roe & Farnham
Incorporated (the "Adviser") as investment adviser and
administrator for each Portfolio. The Adviser is a wholly owned
subsidiary of SteinRoe Services Inc. ("SSI"), which is a wholly
owned subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority owned subsidiary of LFC Holdings,
Inc., which is a wholly owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly owned subsidiary of Liberty Mutual
Insurance Company. Liberty Mutual Insurance Company is a mutual
insurance
<PAGE> 57
company, principally in the property/casualty insurance field,
organized under the laws of Massachusetts in 1912.
The directors of Stein Roe are Kenneth R. Leibler, C. Allen
Merritt, Jr., Timothy K. Armour, and Hans P. Ziegler. Mr. Leibler
is President and Chief Executive Officer of Liberty Financial; Mr.
Merritt is Senior Vice President and Treasurer of Liberty
Financial; Mr. Armour is President of Stein Roe's Mutual Funds
division; and Mr. Ziegler is Chief Executive Officer of Stein Roe.
The business address of Messrs. Leibler and Merritt is Federal
Reserve Plaza, Boston, Massachusetts 02210; and that of Messrs.
Armour, and Ziegler is One South Wacker Drive, Chicago, Illinois
60606.
The Adviser and its predecessor have been providing investment
advisory services since 1932. The Adviser acts as investment
adviser to wealthy individuals, trustees, pension and profit
sharing plans, charitable organizations, and other institutional
investors. As of June 30, 1996, the Adviser managed over $24.7
billion in assets: over $7.4 billion in equities and over $17.3
billion in fixed-income securities (including $1.2 billion in
municipal securities). The $24.7 billion in managed assets
included over $7 billion held by open-end mutual funds managed by
the Adviser (approximately 16% of the mutual fund assets were held
by clients of the Adviser). These mutual funds were owned by over
189,000 shareholders. The $7 billion in mutual fund assets
included over $660 million in over 38,000 IRA accounts. In
managing those assets, the Adviser utilizes a proprietary
computer-based information system that maintains and regularly
updates information for approximately 6,500 companies. The
Adviser also monitors over 1,400 issues via a proprietary credit
analysis system. At June 30, 1996, the Adviser employed
approximately 16 research analysts and 32 account managers. The
average investment-related experience of these individuals was 20
years.
Please refer to the description of the Adviser, management
agreement and fees in Part A, Item 5. The Adviser provides office
space and executive and other personnel to Base Trust. Each
Portfolio pays all expenses other than those paid by the Adviser,
including but not limited to printing and postage charges and
securities registration and custodian fees and expenses incidental
to its organization. For the fiscal year ended June 30, 1995,
Base Trust did not pay the Adviser any fees. For the fiscal year
ended June 30, 1996, the Adviser received aggregate fees of
$290,904 from the Municipal Money Market Portfolio.
The management agreement also provides that neither the Adviser
nor any of its directors, officers, stockholders (or partners of
stockholders), agents, or employees shall have any liability to
Base Trust or any shareholder for any error of judgment, mistake
of law or any loss arising out of any investment, or for any other
act or omission in the performance by the Adviser of its duties
under the advisory agreement, except for liability resulting from
willful misfeasance, bad faith or gross negligence on the
Adviser's part in the performance of its duties or from reckless
disregard by the Adviser of the Adviser's obligations and duties
under the advisory agreement.
Any expenses that are attributable solely to the organization,
operation, or business of a Portfolio shall be paid solely out of
that Portfolio's assets. Any expenses incurred by Base Trust that
are not solely attributable to a particular series of Base Trust
are
<PAGE> 58
apportioned in such manner as the Adviser determines is fair and
appropriate, unless otherwise specified by the Board of Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with Base Trust, the Adviser
receives a fee for performing certain bookkeeping and accounting
services for each Portfolio. For these services, the Adviser
receives an annual fee of $25,000 plus .0025 of 1% of average net
assets over $50 million. For the fiscal year ended June 30, 1996,
the Adviser received fees of $20,746 from Base Trust for these
services.
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for Base
Trust. It is responsible for holding all securities and cash of
each Portfolio, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering
expenses of each Portfolio, and performing other administrative
duties, all as directed by authorized persons. The custodian does
not exercise any supervisory function in such matters as purchase
and sale of portfolio securities, payment of dividends, or payment
of expenses of a Portfolio. A Portfolio may invest in obligations
of the custodian and may purchase or sell securities from or to
the custodian.
INDEPENDENT AUDITORS
The independent auditors for Municipal Money Portfolio and High
Yield Portfolio are Ernst & Young LLP, 233 South Wacker Drive,
Chicago, Illinois 60606; the independent public accountants for
each Equity Portfolio are Arthur Andersen LLP, 33 West Monroe
Street, Chicago, Illinois 60603. The auditors audit and report on
the Portfolios' annual financial statements, review certain
regulatory reports and the Portfolios' federal income tax returns,
and perform other professional accounting, auditing, tax and
advisory services when engaged to do so by Base Trust.
ITEM 17. BROKERAGE ALLOCATION AND OTHER PRACTICES.
The Adviser places the orders for the purchase and sale of
portfolio securities for each Portfolio, including options and
futures transactions for High Yield Portfolio and each Equity
Portfolio.
Municipal Money Portfolio purchases portfolio securities both in
underwritings and in the over-the-counter market. Included in the
price paid to an underwriter of a portfolio security is the spread
between the price paid by the underwriter to the issuer and the
price paid by the purchaser. The Portfolio's purchases and sales
of portfolio securities in the over-the-counter market usually are
transacted with a broker or dealer on a net basis, without any
brokerage commission being paid by the Portfolio, but do reflect
the spread between the bid and asked prices. The Adviser may also
transact purchases of portfolio securities directly with the
issuers.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important factor
in this decision, but
<PAGE> 59
a number of other judgmental factors may also enter into the
decision. These include: the Adviser's knowledge of current
transaction costs; the nature of the security being traded; the
size of the transaction; the desired timing of the trade; the
activity existing and expected in the market for the particular
security; confidentiality; the execution, clearance and settlement
capabilities of the broker or dealer selected and others that are
considered; the Adviser's knowledge of the financial stability of
the broker or dealer selected and such other brokers or dealers;
and the Adviser's knowledge of actual or apparent operational
problems of any broker or dealer. Recognizing the value of these
factors, the Portfolio may incur a transaction charge in excess of
that which another broker or dealer may have charged for effecting
the same transaction. Evaluations of the reasonableness of the
costs of portfolio transactions, based on the foregoing factors,
are made on an ongoing basis by the Adviser's staff and reports
are made annually to the Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to be
capable of providing the best combination of price and execution
with respect to a particular portfolio transaction for the
Portfolio, the Adviser often selects a broker or dealer that has
furnished it with research products or services such as research
reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings,
dividends and similar data, and computer data bases, quotation
equipment and services, research-oriented computer software and
services, and services of economic and other consultants.
Selection of brokers or dealers is not made pursuant to an
agreement or understanding with any of the brokers or dealers;
however, the Adviser uses an internal allocation procedure to
identify those brokers or dealers who provide it with research
products or services and the amount of research products or
services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate,
including the Portfolio, to such brokers or dealers to ensure the
continued receipt of research products or services the Adviser
feels are useful. In certain instances, the Adviser receives from
brokers and dealers products or services which are used both as
investment research and for administrative, marketing, or other
non-research purposes. In such instances, the Adviser makes a
good faith effort to determine the relative proportions of such
products or services which may be considered as investment
research. The portion of the costs of such products or services
attributable to research usage may be defrayed by the Adviser
(without prior agreement or understanding, as noted above) through
brokerage commissions generated by transactions of clients
(including the Portfolio), while the portions of the costs
attributable to non-research usage of such products or services is
paid by the Adviser in cash. No person acting on behalf of the
Portfolio is authorized, in recognition of the value of research
products or services, to pay a price in excess of that which
another broker or dealer might have charged for effecting the same
transaction. Research products or services furnished by brokers
and dealers through whom transactions are effected may be used in
servicing any or all of the clients of the Adviser and not all
such research products or services are used in connection with the
management of the Portfolio.
With respect to each Equity Portfolio's purchases and sales of
portfolio securities transacted with a broker or dealer on a net
basis, the Adviser may also consider the part, if any, played by
the broker or dealer in bringing the security involved to the
Adviser's
<PAGE> 60
attention, including investment research related to the security
and provided to the Portfolio.
The Board has reviewed the legal developments pertaining to and
the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. The Board has been advised
by counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers ("NASD"). Therefore, except
with respect to purchases of Municipal Securities which are not
subject to NASD Rules, Municipal Money Portfolio will not attempt
to recapture underwriting discounts or selling concessions.
Municipal Money Portfolio attempts to recapture selling
concessions on purchases during underwritten offerings; however,
the Adviser will not be able to negotiate discounts from the fixed
offering price for those issues for which there is a strong
demand, and will not allow the failure to obtain a discount to
prejudice its ability to purchase an issue for the Portfolio. The
Board periodically reviews Municipal Money Portfolio's efforts to
recapture concessions and whether it is in the best interests of
the Portfolio to continue to attempt to recapture underwriting
discounts or selling concessions.
Base Trust has arranged for its custodian to act as a soliciting
dealer to accept any fees available to the custodian as a
soliciting dealer in connection with any tender offer for
portfolio securities. The custodian will credit any such fees
received against its custodial fees. In addition, the Board of
Trustees has reviewed the legal developments pertaining to and the
practicability of attempting to recapture underwriting discounts
or selling concessions when portfolio securities are purchased in
underwritten offerings. However, the Board has been advised by
counsel that recapture by a mutual fund currently is not permitted
under the Rules of Fair Practice of the National Association of
Securities Dealers.
ITEM 18. CAPITAL STOCK AND OTHER SECURITIES.
Under the Declaration of Trust, the trustees are authorized to
issue Interests in Base Trust. Investors are entitled to
participate pro rata in distributions of taxable income, loss,
gain, and credit of Base Trust (unless another sharing method is
required for federal income tax reasons in accordance with the
sharing method adopted by the trustees). Upon liquidation or
dissolution of Base Trust, investors are entitled to share pro
rata in the net assets available for distribution to its investors
(unless another sharing method is required for federal income tax
reasons, in accordance with the sharing method adopted by the
trustees). Investments in Base Trust have no preferences,
preemptive, conversion, or similar rights and are fully paid and
nonassessable, except as set forth below. Investments in Base
Trust may not be transferred. No certificates representing an
investor's Interest in Base Trust will be issued.
Each whole Interest (or fractional Interest) outstanding on the
record date established in accordance with the By-Laws shall be
entitled to a number of votes on any matter on which it is
entitled to vote equal to the net asset value of the Interest (or
fractional Interest) in United States dollars determined at the
close of business on the record date (for example, an Interest
having a net asset value of $10.50 would be entitled to 10.5
votes). As a common law trust, Base Trust is not required to hold
annual shareholder meetings.
<PAGE> 61
However, special meetings may be called for purposes such as
electing or removing trustees, changing fundamental policies, or
approving an investment advisory contract. If requested to do so
by the holders of at least 10% of Base Trust's outstanding
Interests, Base Trust will call a special meeting for the purpose
of voting upon the question of removal of a trustee or trustees
and will assist in the communications with other holders as
required by Section 16(c) of the Investment Company Act of 1940.
All Interests of Base Trust are voted together in the election of
trustees. On any other matter submitted to a vote of holders,
Interests are voted by individual series and not in the aggregate,
except that Interests are voted in the aggregate when required by
the Investment Company Act of 1940 or other applicable law. When
the Board of Trustees determines that the matter affects only the
interests of one or more series, holders of the unaffected series
are not entitled to vote on such matters.
Base Trust may enter into a merger or consolidation or sell all or
substantially all of its assets if approved by the vote of two-
thirds of its investors (with the vote of each being in proportion
to the respective percentages of the Interests in Base Trust),
except that if the trustees recommend such sale of assets, the
approval by vote of a majority of the investors (with the votes of
each being in proportion to their respective percentages of the
Interests of Base Trust) will be sufficient. Base Trust, or a
series thereof, will dissolve upon the complete withdrawal,
resignation, retirement, or bankruptcy of any investor and will
terminate unless reconstituted and continued with the consent of
all remaining investors. Base Trust, or a series thereof, may
also be terminated (1) if approved by the vote of two-thirds of
its investors (with the votes of each being in proportion to the
amount of their investment), or (2) by the trustees by written
notice to its investors. The Declaration of Trust contains a
provision limiting the life of Base Trust to a term of years;
consequently, Base Trust will terminate on December 31, 2080.
Base Trust is organized as a trust under the laws of the
Commonwealth of Massachusetts. Investors in any series of Base
Trust may be held personally liable, jointly and severally, for
the obligations and liabilities of that series, subject, however,
to indemnification by that series in the event that there is
imposed upon an investor a greater portion of the liabilities and
obligations of the series than its proportionate interest in the
series. The Declaration of Trust also provides that Base Trust
shall maintain appropriate insurance (for example, fidelity
bonding and errors and omissions insurance) for the protection of
Base Trust, its investors, trustees, officers, employees, and
agents covering possible tort and other liabilities. Thus, the
risk of an investor incurring financial loss on account of
investor liability is limited to circumstances in which both
inadequate insurance exists and Base Trust itself is unable to
meet its obligations.
The Declaration of Trust further provides that obligations of Base
Trust are not binding upon the trustees individually but only upon
the property of Base Trust and that the trustees will not be
liable for any action or failure to act, but nothing in the
Declaration of Trust protects a trustee against any liability to
which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of his office.
Base Trust reserves the right to create and issue any number of
series, in which case investors in each series would participate
only in the earnings and assets of the particular series.
Investors in each series would be entitled to vote separately to
approve advisory
<PAGE> 62
agreements or changes in investment policy, but investors of all
series may vote together in election or selection of trustees,
principal underwriters, and accountants for Base Trust. Upon
liquidation or dissolution of Base Trust, the investors in each
series would be entitled to share pro rata in the net assets of
their respective series available for distribution to investors
(unless another sharing method is required for federal income tax
reasons, in accordance with the sharing method adopted by the
trustees). Interests of any series of Base Trust may be divided
into two or more classes of Interests having such preferences or
special or relative privileges as the trustees of Base Trust may
determine.
Base Trust will in no case have more than 500 investors in order
to satisfy certain tax requirements. This number may be increased
or decreased should such requirements change. Similarly, if
Congress enacts certain proposed amendments to the Code, it may be
desirable for Base Trust to elect the status of a regulated
investment company ("RIC") as that term is defined in Subchapter M
of the Code, which would require that Base Trust first change its
organizational status from that of a Massachusetts trust to that
of a Massachusetts business trust ("MBT") or other entity treated
as a corporation under the Code. Base Trust's Declaration of
Trust empowers the trustees, on behalf of the Trust, to change
Base Trust's organizational form to that of a MBT or otherwise
reorganize as an entity treated as a corporation under the Code
and to elect RIC status without a vote of the investors. Any such
action on the part of the trustees on behalf of Base Trust would
be contingent upon there being no adverse tax consequences to such
action.
ITEM 19. PURCHASE, REDEMPTION, AND PRICING OF SECURITIES.
Interests in a Portfolio will be issued solely in private
placement transactions that do not involve any "public offering"
within the meaning of Section 4(2) of the 1933 Act. Investments
in a Portfolio may only be made by investment companies, insurance
company separate accounts, common or commingled trust funds, or
similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell or the
solicitation of an offer to buy any "security" within the meaning
of the 1933 Act.
The net asset value per share of each Portfolio is determined by
dividing its total assets (i.e., the total current market value of
its investment in the Portfolio) less its liabilities (including
accrued expenses and dividends payable), by the total number of
shares of the Portfolio outstanding at the time of the
determination. Each Portfolio's net asset value per share is
calculated as of 3:00 p.m. (central time) on each day the New York
Stock Exchange is open for trading.
The value of each investor's investment in a Portfolio will be
based on its pro rata share of the total net asset value of the
Portfolio (i.e., the value of its portfolio securities and other
assets less its liabilities) as of the same date and time.
Please refer to Purchase of Securities in Part A, which is
incorporated herein by reference. Municipal Money Portfolio
values its portfolio by the "amortized cost method" by which it
attempts to maintain its net asset value at $1.00 per share. This
involves valuing an instrument at its cost and thereafter assuming
a constant amortization to
<PAGE> 63
maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
Although this method provides certainty in valuation, it may
result in periods during which value as determined by amortized
cost is higher or lower than the price the Portfolio would receive
if it sold the instrument. Other assets are valued at a fair
value determined in good faith by the Board of Trustees.
In connection with Municipal Money Portfolio's use of amortized
cost and the maintenance of its per share net asset value of
$1.00, Base Trust has agreed, with respect to Municipal Money
Portfolio: (1) to seek to maintain a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining
relative stability of principal and not in excess of 90 days; (2)
not to purchase a portfolio instrument with a remaining maturity
of greater than thirteen months (for this purpose Municipal Money
Portfolio considers that an instrument has a maturity of thirteen
months or less if it is a "short-term" obligation as defined in
the Glossary); and (3) to limit its purchase of portfolio
instruments to those instruments that are denominated in U.S.
dollars which the Board of Trustees determines present minimal
credit risks and that are of eligible quality as determined by any
major rating service as defined under SEC Rule 2a-7 or, in the
case of any instrument that is not rated, of comparable quality as
determined by the Board.
Municipal Money Portfolio has also agreed to establish procedures
reasonably designed to stabilize its price per share as computed
for the purpose of sales and redemptions at $1.00. Such
procedures include review of its portfolio holdings by the Board
of Trustees, at such intervals as it deems appropriate, to
determine whether its net asset value calculated by using
available market quotations or market equivalents deviates from
$1.00 per share based on amortized cost. Calculations are made to
compare the value of its investments valued at amortized cost with
market value. Market values are obtained by using actual
quotations provided by market makers, estimates of market value,
values from yield data obtained from reputable sources for the
instruments, values obtained from the Adviser's matrix, or values
obtained from an independent pricing service. Any such service
might value Municipal Money Portfolio's investments based on
methods which include consideration of: yields or prices of
Municipal Securities of comparable quality, coupon, maturity and
type; indications as to values from dealers; and general market
conditions. The service may also employ electronic data
processing techniques, a matrix system, or both to determine
valuations.
In connection with Municipal Money Portfolio's use of the
amortized cost method of portfolio valuation to maintain its net
asset value at $1.00 per share, the Portfolio might incur or
anticipate an unusual expense, loss, depreciation, gain or
appreciation that would affect its net asset value per share or
income for a particular period. The extent of any deviation
between the net asset value based upon available market quotations
or market equivalents and $1.00 per share based on amortized cost
will be examined by the Board of Trustees as it deems appropriate.
If such deviation exceeds 1/2 of 1%, the Board of Trustees will
promptly consider what action, if any, should be initiated. In
the event the Board of Trustees determines that a deviation exists
that may result in material dilution or other unfair results to
investors or existing shareholders, it will take such action as it
considers appropriate to eliminate or reduce to the extent
reasonably practicable such dilution or unfair results. Actions
which the Board might take include: selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten
<PAGE> 64
average portfolio maturity; increasing, reducing, or suspending
dividends or distributions from capital or capital gains; or
redeeming shares in kind. The Board might also establish a net
asset value per share by using market values, as a result of which
the net asset value might deviate from $1.00 per share.
ITEM 20. TAX STATUS.
Base Trust is organized as a trust under the laws of the
Commonwealth of Massachusetts. Under the anticipated method of
operation of Base Trust, Base Trust will not be subject to any
federal income tax, nor is it expected to have any Massachusetts
income tax liability. Base Trust has received a private letter
ruling from the Internal Revenue Service to confirm its federal
tax treatment in certain respects. Each investor in a Portfolio
will be taxed on its share (as determined in accordance with the
governing instruments of Base Trust) of the Portfolio's ordinary
income and capital gain in determining its income tax liability.
The determination of such share will be made in accordance with a
method designed to satisfy the Code and regulations promulgated
thereunder. There can be no assurance, however, that the Internal
Revenue Service will agree with such a method of allocation.
The fiscal year end of Municipal Money Portfolio and High Yield
Portfolio is June 30, and that of each Equity Portfolio is
September 30. Although, as described above, the Portfolios will
not be subject to federal income tax, they will file appropriate
income tax returns.
It is intended that each Portfolio's assets, income, and
distributions will be managed in such a way that an investor in
the Portfolio will be able to satisfy the requirements of
Subchapter M of the Code for qualification as a RIC, assuming that
the investor invests all of its assets in the Portfolio.
There are certain tax issues that will be relevant to only certain
of the investors, specifically investors that are segregated asset
accounts and investors who contribute assets rather than cash to a
Portfolio. It is intended that such segregated asset accounts
will be able to satisfy diversification requirements applicable to
them and that such contributions of assets will not be taxable
provided certain requirements are met. Such investors are advised
to consult their own tax advisors as to the tax consequences of an
investment in a Portfolio.
ADDITIONAL INCOME TAX CONSIDERATIONS
In order for an investment company investing in a Portfolio to
qualify for federal income tax treatment as a regulated investment
company, at least 90% of its gross income for a taxable year must
be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of
stock or 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 stock, securities, or currencies. In addition, gains
realized on the sale or other disposition of any of the following
held or less than three months must be limited to less than 30% of
its annual gross income: (1) stock or securities, (2) options,
futures, or forward contracts (other than on foreign currencies),
and (3) foreign currencies and currency forward contracts that are
not directly related to its principal business of investing in
stocks,
<PAGE> 65
securities, and options and futures with respect to stocks or
securities. Each such investment company will also be required to
distribute each year at least 90% of its investment company
taxable income (in order to escape federal income tax on
distributed amounts) and to meet certain tax diversification
requirements. Because such investment companies may invest all of
their assets in a Portfolio, the Portfolio must satisfy all of
these tax requirements in order for such other investment company
to satisfy them. In order to avoid realizing excessive gains on
securities held less than three months, a Portfolio may be
required to defer the closing out of certain positions beyond the
time when it would otherwise be advantageous to do so. Year-end
mark-to-market gains on positions open for less than three months
as of the end of a Portfolio's fiscal year are not considered
gains on securities held for less than three months for purposes
of the 30% test.
Each Portfolio will allocate at least annually to its shareholders
its distributive share of any net investment income and net
capital gains which have been recognized for federal income tax
purposes (including unrealized gains at the end of the Portfolio's
taxable year on certain options and futures transactions that are
required to be marked-to-market).
Each Portfolio intends to distribute substantially all of its
income, tax-exempt and taxable, including any net realized capital
gains, and thereby be relieved of any federal income tax liability
to the extent of such distributions. Municipal Money Portfolio
intends to retain for its shareholders the tax-exempt status with
respect to tax-exempt income received by the Portfolio. The
distributions will be designated as "exempt-interest dividends,"
taxable ordinary income, and capital gains. Municipal Money
Portfolio may also invest in Municipal Securities the interest on
which is subject to the federal alternative minimum tax. The
source of exempt-interest dividends on a state-by-state basis and
the federal income tax status of all distributions will be
reported to shareholders annually. Such report will allocate
income dividends between tax-exempt, taxable income, and
alternative minimum taxable income in approximately the same
proportions as the Portfolio's total income during the year.
Accordingly, income derived from each of these sources by the
Portfolio may vary substantially in any particular distribution
period from the allocation reported to shareholders annually. The
proportion of such dividends that constitutes taxable income will
depend on the relative amounts of assets invested in taxable
securities, the yield relationships between taxable and tax-exempt
securities, and the period of time for which such securities are
held. The Portfolio may, under certain circumstances, temporarily
invest its assets so that less than 80% of gross income during
such temporary period will be exempt from federal income taxes.
Because capital gain distributions reduce net asset value, if a
shareholder purchases shares shortly before a record date he will,
in effect, receive a return of a portion of his investment in such
distribution. The distribution would nonetheless be taxable to
him, even if the net asset value of shares were reduced below his
cost. However, for federal income tax purposes the shareholder's
original cost would continue as his tax basis.
Because the taxable portion of the Portfolio's investment income
consists primarily of interest, none of its dividends, whether or
not treated as "exempt-interest dividends," will qualify under the
Code for the dividends received deduction available to
corporations.
<PAGE> 66
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of the Portfolio is not deductible for
federal income tax purposes. Under rules applied by the Internal
Revenue Service to determine whether borrowed funds are used for
the purpose of purchasing or carrying particular assets, the
purchase of shares may, depending upon the circumstances, be
considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of
shares.
If you redeem at a loss shares of the Portfolio held for six
months or less, that loss will not be recognized for federal
income tax purposes to the extent of exempt-interest dividends you
have received with respect to those shares. If any such loss
exceeds the amount of the exempt-interest dividends you received,
that excess loss will be treated as a long-term capital loss to
the extent you receive any long-term capital gain distribution
with respect to those shares.
High Yield Portfolio and each Equity Portfolio expects that less
than 100% of its dividends will qualify for the deduction for
dividends received by corporate shareholders.
To the extent a Portfolio invests in foreign securities, it may be
subject to withholding and other taxes imposed by foreign
countries. Tax treaties between certain countries and the United
States may reduce or eliminate such taxes. Investors may be
entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in
the Code. Specifically, if more than 50% of a Portfolio's total
assets at the close of any fiscal year consist of stock or
securities of foreign corporations, a Portfolio may file an
election with the Internal Revenue Service pursuant to which
shareholders of a Portfolio will be required to (1) include in
ordinary gross income (in addition to taxable dividends actually
received) their pro rata shares of foreign income taxes paid by a
Portfolio even though not actually received, (2) treat such
respective pro rata shares as foreign income taxes paid by them,
and (3) deduct such pro rata shares in computing their taxable
incomes, or, alternatively, use them as foreign tax credits,
subject to applicable limitations, against their United States
income taxes. Shareholders who do not itemize deductions for
federal income tax purposes will not, however, be able to deduct
their pro rata portion of foreign taxes paid by a Portfolio,
although such shareholders will be required to include their share
of such taxes in gross income. Shareholders who claim a foreign
tax credit may be required to treat a portion of dividends
received from a Portfolio as separate category income for purposes
of computing the limitations on the foreign tax credit available
to such shareholders. Tax-exempt shareholders will not ordinarily
benefit from this election relating to foreign taxes. Each year,
a Portfolio will notify shareholders of the amount of (1) each
shareholder's pro rata share of foreign income taxes paid by the
Portfolio and (2) the portion of dividends which represents income
from each foreign country, if the Portfolio qualifies to pass
along such credit.
ITEM 21. UNDERWRITERS.
Inapplicable.
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ITEM 22. CALCULATION OF PERFORMANCE DATA.
Inapplicable.
ITEM 23. FINANCIAL STATEMENTS
Inapplicable.
GLOSSARY
ISSUER. For purposes of diversification under the Investment
Company Act of 1940, identification of the issuer (or issuers) of
a Municipal Security depends on the terms and conditions of the
obligation. If the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the
subdivision, such subdivision would be regarded as the sole
issuer. Similarly, if the obligation is backed only by the assets
and revenues of the non-governmental user, the non-governmental
user would be deemed to be the sole issuer. In addition, if the
bond is backed by the full faith and credit of the U.S.
Government, agencies or instrumentalities of the U.S. Government
or U.S. Government Securities, the U.S. Government or the
appropriate agency or instrumentality would be deemed to be the
sole issuer, and would not be subject to the 5% limitation
applicable to investments in a single issuer as described under
Investment Restrictions in Part A and restriction number (1) under
Investment Restrictions in this Part B. If, in any case, the
creating municipal government or another entity guarantees an
obligation or issues a letter of credit to secure the obligation,
the guarantee (or letter of credit) would be considered a separate
security issued by such government or entity and would be
separately valued and included in the issuer limitation. In the
case of Municipal Money Portfolio, guarantees and letters of
credit described in this paragraph from banks whose credit is
acceptable to the Portfolio are not restricted in amount by the
restriction against investing more than 25% of their total assets
in securities of non-governmental issuers whose principal business
activities are in the same industry.
SHORT-TERM. This term, as used with respect to Municipal Money
Portfolio, refers to an obligation of one of the following types,
measured from the date of an investment by the Portfolio in the
obligation (regardless of the duration of the obligation from the
date of original issuance):
1. An obligation of the issuer to pay the entire principal and
accrued interest in no more than thirteen months;
2. An obligation (regardless of the duration before its maturity)
issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities, bearing a variable rate of interest
providing for automatic establishment, no less frequently than
annually, of a new rate or successive new rates of interest by
a formula, that can reasonably be expected to have a market
value approximating its principal amount (a) whenever a new
interest rate is established, in the case of an obligation
having a variable rate of interest, or (b) at any time, in the
case of an obligation having a "floating rate of interest" that
changes concurrently with any change in an identified market
interest rate to which it is pegged;
<PAGE> 68
3. Any other obligation (regardless of the duration before its
maturity) that: (a) has a demand feature entitling the holder
to receive from an issuer the entire principal [or, under the
circumstances described under Basic Investment Strategy in Part
A for Municipal Money Portfolio, the issuer of a guarantee or a
letter of credit with respect to a participation interest in
the obligation (acquired from such issuer)], (i) at any time
upon no more than thirty days' notice or (ii) at specified
intervals not exceeding thirteen months and upon no more than
thirty days' notice, (b)(i) has a variable rate of interest
that changes on set dates or (ii) has a floating rate of
interest (as defined in 2 above), and (c) can reasonably be
expected to have a market value approximating its principal
amount (i) whenever a new rate of interest is established, in
the case of an obligation having a variable rate of interest,
or (ii) at any time, in the case of an obligation having a
floating rate of interest; provided that, with respect to each
such obligation that is not rated eligible quality by Moody's
or S&P, the Board of Trustees has determined that the
obligation is of eligible quality; or
4. A repurchase agreement that is to be fully performed (or that
the Portfolio may require be performed) in not more than
thirteen months (regardless of the maturity of the obligation
to which the repurchase agreement relates).
VARIABLE RATE DEMAND SECURITY. This type of security is a
Variable Rate Security (as defined in Part A under Municipal
Securities) which has a demand feature entitling the purchaser to
resell the security to the issuer of the demand feature at an
amount approximately equal to amortized cost or the principal
amount thereof, which may be more or less than the price the
Portfolio paid for it. The interest rate on a Variable Rate
Demand Security also varies either according to some objective
standard, such as an index of short-term tax-exempt rates, or
according to rates set by or on behalf of the issuer.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as
to the credit quality of the security being rated. However, the
ratings are general and are not absolute standards of quality or
guarantees as to the creditworthiness of an issuer. Consequently,
the Adviser believes that the quality of debt securities should be
continuously reviewed and that individual analysts give different
weightings to the various factors involved in credit analysis. A
rating is not a recommendation to purchase, sell or hold a
security, because it does not take into account market value or
suitability for a particular investor. When a security has
received a rating from more than one service, each rating should
be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating
services from other sources that they consider reliable. Ratings
may be changed, suspended or withdrawn as a result of changes in
or unavailability of such information, or for other reasons. The
Adviser, through independent analysis, attempts to discern
variations in credit ratings of the published services, and to
anticipate changes in credit ratings. The following is a
description of the characteristics of certain ratings used by
Moody's Investors Service, Inc. ("Moody's") and Standard & Poor's
Corporation ("S&P").
<PAGE> 70
RATINGS BY MOODY'S
CORPORATE AND MUNICIPAL BONDS:
Aaa. Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is
secure. Although the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations;
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate, and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
CONDITIONAL RATINGS. Bonds for which the security depends upon
the completion of some act or the fulfillment of some condition
are rated conditionally. These are bonds secured by (a) earnings
of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or
<PAGE> 71
(d) payments to which some other limiting condition attaches.
Parenthetical rating denotes probable credit stature upon
completion of construction or elimination of basis of condition.
NOTES: Those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are
designated by the symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
MUNICIPAL NOTES:
MIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
MIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
MIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
DEMAND FEATURE OF VARIABLE RATE DEMAND SECURITIES:
Moody's may assign a separate rating to the demand feature of a
variable rate demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
COMMERCIAL PAPER:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of
rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
<PAGE> 71
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or
entities, Moody's, in assigning ratings to such issuers, evaluates
the financial strength of the indicated affiliated corporations,
commercial banks, insurance companies, foreign governments, or
other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P:
CORPORATE AND MUNICIPAL BONDS:
AAA. Debt rated AAA has the highest rating. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in
small degree.
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for debt in this category
than for debt in higher-rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. The D rating also is issued
upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
NOTES: The ratings from AA to CCC may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within
the major rating categories. Foreign debt is rated on the same
basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account currency
exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or
interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
<PAGE> 72
PROVISIONAL RATINGS. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of
the project. This rating, however, although addressing credit
quality subsequent to completion of the project, makes no comment
on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
MUNICIPAL NOTES:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess
overwhelming safety characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay
principal and interest.
Notes due in three years or less normally receive a note rating.
Notes maturing beyond three years normally receive a bond rating,
although the following criteria are used in making that
assessment:
- - Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a
note).
- - Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be rated as a note).
DEMAND FEATURE OF VARIABLE RATE DEMAND SECURITIES:
S&P assigns dual ratings to all long-term debt issues that have as
part of their provisions a demand feature. The first rating
addresses the likelihood of repayment of principal and interest as
due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the
long-term maturity and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example,
AAA/A-1+). Normally, demand notes receive note rating symbols
combined with commercial paper symbols (for example, SP-1+/A-1+).
COMMERCIAL PAPER:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree to safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety
characteristics are designed A-1+.
<PAGE> 73
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
None.
(b) Exhibits [Note: As used herein, the term "Registration
Statement" refers to the Registration Statement of the
Registrant on Form N-1A filed under the Investment Company
Act of 1940, File No. 811-7996.]
1. Declaration of Trust of Registrant as amended through
August 1, 1995. (Exhibit 1 to Amendment No. 2 to
Registration Statement.)*
2. By-Laws of Registrant. (Exhibit 2 to Amendment No. 2 to
Registration Statement.)*
3. Inapplicable.
4. Inapplicable.
5. Management Agreement between Registrant and Stein Roe &
Farnham Incorporated as amended through 11/1/96.
6. Inapplicable pursuant to Instruction F.4 to Form N-1A.
7. Inapplicable.
8. Custodian Agreement between Registrant and State Street
Bank and Trust Company. (Exhibit 8 to Amendment No. 2 to
Registration Statement.)*
9. (a) Investor Service Agreement between Registrant and
SteinRoe Services Inc. as amended through 11/1/96.
(b) Bookkeeping and Accounting Agreement between
Registrant and Stein Roe & Farnham Incorporated as
amended through 11/1/96.
10. Inapplicable pursuant to Instruction F.4 of Form N-1A.
11. Inapplicable pursuant to Instruction F.4 of Form N-1A.
12. Inapplicable pursuant to Instruction F.4 of Form N-1A.
13. Inapplicable.
14. Inapplicable.
15. Inapplicable.
16. Inapplicable.
17. Inapplicable.
18. Inapplicable
________________________________
*Incorporated by reference.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
The Registrant does not consider that it is directly or indirectly
controlled by, or under common control with, other persons within
the meaning of this Item.
<PAGE> 74
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Title of Class Number of Record Holders
- -------------------------------- ------------------------
Municipal Money Market Portfolio 2
High Yield Portfolio 0
Balanced Portfolio 0
Growth & Income Portfolio 0
Growth Stock Portfolio 0
Growth Investor Portfolio 0
Special Portfolio 0
Special Venture Portfolio 0
International Portfolio 0
ITEM 27. INDEMNIFICATION.
Reference is made to Article X of the Registrant's Declaration of
Trust (Exhibit 1) with respect to indemnification of the trustees
and officers of Registrant against liabilities which may be
incurred by them in such capacities.
Registrant, its trustees and officers, its investment adviser, the
other investment companies advised by the adviser, and persons
affiliated with them are insured against certain expenses in
connection with the defense of actions, suits, or proceedings, and
certain liabilities that might be imposed as a result of such
actions, suits, or proceedings. Registrant will not pay any
portion of the premiums for coverage under such insurance that
would (1) protect any trustee or officer against any liability to
Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office or (2) protect its investment adviser or
principal underwriter, if any, against any liability to Registrant
or its shareholders to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of its duties, or by reason of its
reckless disregard of its duties and obligations under its
contract or agreement with the Registrant; for this purpose the
Registrant will rely on an allocation of premiums determined by
the insurance company.
Colonial Tax-Exempt Money Market Fund ("Colonial Fund"), a series
of Colonial Trust IV ("Colonial Trust") invests substantially all
of its assets in Municipal Money Portfolio. In that connection,
trustees and officers of Registrant have signed the registration
statement of Colonial Trust ("Colonial Registration Statement") on
behalf of Registrant insofar as the Colonial Registration
Statement relates to Colonial Fund, and Colonial Trust, on behalf
of Colonial Fund, has agreed to indemnify Registrant and its
trustees and officers against certain liabilities which may be
incurred by them.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Stein Roe & Farnham Incorporated (the "Adviser") is a wholly owned
subsidiary of SteinRoe Services Inc. ("SSI"), which is a wholly
owned subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority owned subsidiary of LFC Holdings,
Inc., which is a wholly owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly owned subsidiary of Liberty Mutual
Insurance Company. The
<PAGE> 75
Adviser acts as investment adviser to individuals, trustees,
pension and profit-sharing plans, charitable organizations, and
other investors. In addition to Registrant, it also acts as
investment adviser to other investment companies having different
investment policies.
For a two-year business history of officers and directors of the
Adviser, please refer to the Form ADV of Stein Roe & Farnham
Incorporated and to the section of the statement of additional
information (part B) entitled "Investment Advisory Services."
Certain directors and officers of the Adviser also serve and have
during the past two years served in various capacities as
officers, directors, or trustees of SSI and of the Registrant,
Stein Roe Income Trust, Stein Roe Investment Trust, Stein Roe
Municipal Trust, Stein Roe Advisor Trust, Stein Roe Institutional
Trust, SteinRoe Trust, SteinRoe Variable Investment Trust and LFC
Utilities Trust, investment companies managed by the Adviser. A
list of such capacities is given below. (The listed entities are
located at South Wacker Drive, Chicago, Illinois 60606, except for
SteinRoe Variable Investment Trust which is located at 600
Atlantic Avenue, Boston, Massachusetts 02210, and LFC Utilities
Trust which is located at One Financial Center, Boston,
Massachusetts 02111.)
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Gary A. Anetsberger Vice President
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President; Secretary
Kenneth J. Kozanda Vice President; Treasurer
Kenneth R. Leibler Director
C. Allen Merritt, Jr. Director; Vice President
Hans P. Ziegler Director, President, Vice Chairman
Chairman
SR&F BASE TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President;
Secretary Vice-President
Ann H. Benjamin Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
Anthony G. Zulfer, Jr. Trustee
STEIN ROE INCOME TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary Vice-President
Ann H. Benjamin Vice-President
Thomas W. Butch Vice-President
Philip J. Crosley Vice-President
Michael T. Kennedy Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
Anthony G. Zulfer, Jr. Trustee
STEIN ROE INVESTMENT TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary Vice-President
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Alfred F. Kugel Trustee
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Richard B. Peterson Vice-President
Gloria J. Santella Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary Vice-President
Thomas W. Butch Vice-President
Joanne T. Costopoulos Vice-President
Philip J. Crosley Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
Anthony G. Zulfer, Jr. Trustee
STEIN ROE TRUST and STEIN ROE ADVISOR TRUST
Gary A. Anetsberger Senior Vice-President
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Richard B. Peterson Vice-President
Gloria J. Santella Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INSTITUTIONAL TRUST
Gary A. Anetsberger Senior Vice-President
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Ann H. Benjamin Vice-President
Thomas W. Butch Vice-President
Philip J. Crosley Vice-President
Michael T. Kennedy Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEINROE VARIABLE INVESTMENT TRUST
Gary A. Anetsberger Treasurer
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President
Ann H. Benjamin Vice President
E. Bruce Dunn Vice President
Erik P. Gustafson Vice President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
Richard B. Peterson Vice President
LFC UTILITIES TRUST
Gary A. Anetsberger Vice President
Ophelia L. Barsketis Vice President
ITEM 29. PRINCIPAL UNDERWRITERS.
Inapplicable.
<PAGE> 78
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Jilaine Hummel Bauer
Executive Vice-President and Secretary
SR&F Base Trust
One South Wacker Drive
Chicago, Illinois 60606.
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
Inapplicable.
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Investment Company Act of
1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois on the
31st day of October, 1996.
SR&F BASE TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
Trustee and President
<PAGE> 80
SR&F BASE TRUST
INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
Exhibit
Number Description
- ------- ----------------------------------
5 Management agreement
9(a) Investor services agreement
9(b) Accounting and bookkeeping agreement
<PAGE>
Exhibit 5
MANAGEMENT AGREEMENT
BETWEEN
SR&F BASE TRUST AND
STEIN ROE & FARNHAM INCORPORATED
SR&F BASE TRUST, a Massachusetts common law trust
registered under the Investment Company Act of 1940 ("1940 Act")
as an open-end diversified management investment company
("Trust"), hereby appoints STEIN ROE & FARNHAM INCORPORATED, a
Delaware corporation registered under the Investment Advisers
Act of 1940 as an investment adviser, of Chicago, Illinois
("Manager"), to furnish investment advisory and portfolio
management services with respect to the portion of its assets
represented by the shares of beneficial interest issued in each
series listed in Schedule A hereto, as such schedule may be
amended from time to time (each such series hereinafter referred
to as "Portfolio"). Trust and Manager hereby agree that:
1. Investment Management Services. Manager shall manage
the investment operations of Trust and each Portfolio, subject
to the terms of this Agreement and to the supervision and
control of Trust's Board of Trustees ("Trustees"). Manager
agrees to perform, or arrange for the performance of, the
following services with respect to each Portfolio:
(a) to obtain and evaluate such information relating to
economies, industries, businesses, securities and commodities
markets, and individual securities, commodities and indices
as it may deem necessary or useful in discharging its
responsibilities hereunder;
(b) to formulate and maintain a continuing investment program in
a manner consistent with and subject to (i) Trust's agreement
and declaration of trust and by-laws; (ii) the Portfolio's
investment objectives, policies, and restrictions as set
forth in written documents furnished by the Trust to Manager;
(iii) all securities, commodities, and tax laws and
regulations applicable to the Portfolio and Trust; and (iv)
any other written limits or directions furnished by the
Trustees to Manager;
(c) unless otherwise directed by the Trustees, to determine from
time to time securities, commodities, interests or other
investments to be purchased, sold, retained or lent by the
Portfolio, and to implement those decisions, including the
selection of entities with or through which such purchases,
sales or loans are to be effected;
(d) to use reasonable efforts to manage the Portfolio so that it
will qualify as a regulated investment company under
subchapter M of the Internal Revenue Code of 1986, as
amended;
(e) to make recommendations as to the manner in which voting
rights, rights to consent to Trust or Portfolio action, and
any other rights pertaining to Trust or the Portfolio shall
be exercised;
(f) to make available to Trust promptly upon request all of the
Portfolio's records and ledgers and any reports or
information reasonably requested by the Trust; and
(g) to the extent required by law, to furnish to regulatory
authorities any information or reports relating to the
services provided pursuant to this Agreement.
Except as otherwise instructed from time to time by the
Trustees, with respect to execution of transactions for Trust on
behalf of a Portfolio, Manager shall place, or arrange for the
placement of, all orders for purchases, sales, or loans with
issuers, brokers, dealers or other counterparties or agents
selected by Manager. In connection with the selection of all
such parties for the placement of all such orders, Manager shall
attempt to obtain most favorable execution and price, but may
nevertheless in its sole discretion as a secondary factor,
purchase and sell Portfolio securities from and to brokers and
dealers who provide Manager with statistical, research and other
information, analysis, advice, and similar services. In
recognition of such services or brokerage services provided by a
broker or dealer, Manager is hereby authorized to pay such
broker or dealer a commission or spread in excess of that which
might be charged by another broker or dealer for the same
transaction if the Manager determines in good faith that the
commission or spread is reasonable in relation to the value of
the services so provided.
Trust hereby authorizes any entity or person associated
with Manager that is a member of a national securities exchange
to effect any transaction on the exchange for the account of a
Portfolio to the extent permitted by and in accordance with
Section 11(a) of the Securities Exchange Act of 1934 and Rule
11a2-2(T) thereunder. Trust hereby consents to the retention by
such entity or person of compensation for such transactions in
accordance with Rule 11a-2-2(T)(a)(iv).
Manager may, where it deems to be advisable, aggregate
orders for its other customers together with any securities of
the same type to be sold or purchased for Trust or one or more
Portfolios in order to obtain best execution or lower brokerage
commissions. In such event, Manager shall allocate the shares
so purchased or sold, as well as the expenses incurred in the
transaction, in a manner it considers to be equitable and fair
and consistent with its fiduciary obligations to Trust, the
Portfolios, and Manager's other customers.
Manager shall for all purposes be deemed to be an
independent contractor and not an agent of Trust and shall,
unless otherwise expressly provided or authorized, have no
authority to act for or represent Trust in any way.
2. Administrative Services. Manager shall supervise the
business and affairs of Trust and each Portfolio and shall
provide such services and facilities as may be required for
effective administration of Trust and Portfolios as are not
provided by employees or other agents engaged by Trust; provided
that Manager shall not have any obligation to provide under this
Agreement any such services which are the subject of a separate
agreement or arrangement between Trust and Manager, any
affiliate of Manager, or any third party administrator
("Administrative Agreements").
3. Use of Affiliated Companies and Subcontractors. In
connection with the services to be provided by Manager under
this Agreement, Manager may, to the extent it deems appropriate,
and subject to compliance with the requirements of applicable
laws and regulations and upon receipt of written approval of the
Trustees, make use of (i) its affiliated companies and their
directors, trustees, officers, and employees and (ii)
subcontractors selected by Manager, provided that Manager shall
supervise and remain fully responsible for the services of all
such third parties in accordance with and to the extent provided
by this Agreement. All costs and expenses associated with
services provided by any such third parties shall be borne by
Manager or such parties.
4. Expenses Borne by Trust. Except to the extent
expressly assumed by Manager herein or under a separate
agreement between Trust and Manager and except to the extent
required by law to be paid by Manager, Manager shall not be
obligated to pay any costs or expenses incidental to the
organization, operations or business of the Trust. Without
limitation, such costs and expenses shall include but not be
limited to:
(a) all charges of depositories, custodians and other agencies
for the safekeeping and servicing of its cash, securities,
and other property;
(b) all charges for equipment or services used for obtaining
price quotations or for communication between Manager or
Trust and the custodian, transfer agent or any other agent
selected by Trust;
(c) all charges for administrative and accounting services
provided to Trust by Manager, or any other provider of such
services;
(d) all charges for services of Trust's independent auditors and
for services to Trust by legal counsel;
(e) all compensation of Trustees, other than those affiliated
with Manager, all expenses incurred in connection with their
services to Trust, and all expenses of meetings of the
Trustees or committees thereof;
(f) all expenses incidental to holding meetings of holders of
units of interest in the Trust ("Unitholders"), including
printing and of supplying each record-date Unitholder with
notice and proxy solicitation material, and all other proxy
solicitation expense;
(g) all expenses of printing of annual or more frequent
revisions of Trust prospectus(es) and of supplying each then-
existing Unitholder with a copy of a revised prospectus;
(h) all expenses related to preparing and transmitting
certificates representing Trust shares;
(i) all expenses of bond and insurance coverage required by law
or deemed advisable by the Board of Trustees;
(j) all brokers' commissions and other normal charges incident
to the purchase, sale, or lending of portfolio securities;
(k) all taxes and governmental fees payable to Federal, state or
other governmental agencies, domestic or foreign, including
all stamp or other transfer taxes;
(l) all expenses of registering and maintaining the registration
of Trust under the 1940 Act and, to the extent no exemption
is available, expenses of registering Trust's shares under
the 1933 Act, of qualifying and maintaining qualification of
Trust and of Trust's shares for sale under securities laws of
various states or other jurisdictions and of registration and
qualification of Trust under all other laws applicable to
Trust or its business activities;
(m) all interest on indebtedness, if any, incurred by Trust or a
Portfolio; and
(n) all fees, dues and other expenses incurred by Trust in
connection with membership of Trust in any trade association
or other investment company organization.
5. Allocation of Expenses Borne by Trust. Any expenses
borne by Trust that are attributable solely to the organization,
operation or business of a Portfolio shall be paid solely out of
Portfolio assets. Any expense borne by Trust which is not
solely attributable to a Portfolio, nor solely to any other
series of shares of Trust, shall be apportioned in such manner
as Manager determines is fair and appropriate, or as otherwise
specified by the Board of Trustees.
6. Expenses Borne by Manager. Manager at its own expense
shall furnish all executive and other personnel, office space,
and office facilities required to render the investment
management and administrative services set forth in this
Agreement. Manager shall pay all expenses of establishing,
maintaining, and servicing the accounts of Unitholders in each
Portfolio listed in Exhibit A. However, Manager shall not be
required to pay or provide any credit for services provided by
Trust's custodian or other agents without additional cost to
Trust.
In the event that Manager pays or assumes any expenses of
Trust or a Portfolio not required to be paid or assumed by
Manager under this Agreement, Manager shall not be obligated
hereby to pay or assume the same or similar expense in the
future; provided that nothing contained herein shall be deemed
to relieve Manager of any obligation to Trust or a Portfolio
under any separate agreement or arrangement between the parties.
7. Management Fee. For the services rendered, facilities
provided, and charges assumed and paid by Manager hereunder,
Trust shall pay to Manager out of the assets of each Portfolio
fees at the annual rate for such Portfolio as set forth in
Schedule B to this Agreement. For each Portfolio, the
management fee shall accrue on each calendar day, and shall be
payable monthly on the first business day of the next succeeding
calendar month. The daily fee accrual shall be computed by
multiplying the fraction of one divided by the number of days in
the calendar year by the applicable annual rate of fee, and
multiplying this product by the net assets of the Portfolio,
determined in the manner established by the Board of Trustees,
as of the close of business on the last preceding business day
on which the Portfolio's net asset value was determined.
8. Retention of Sub-Adviser. Subject to obtaining the
initial and periodic approvals required under Section 15 of the
1940 Act, Manager may retain one or more sub-advisers at
Manager's own cost and expense for the purpose of furnishing one
or more of the services described in Section 1 hereof with
respect to Trust or one or more Portfolios. Retention of a sub-
adviser shall in no way reduce the responsibilities or
obligations of Manager under this Agreement, and Manager shall
be responsible to Trust and its Portfolios for all acts or
omissions of any sub-adviser in connection with the performance
of Manager's duties hereunder.
9. Non-Exclusivity. The services of Manager to Trust
hereunder are not to be deemed exclusive and Manager shall be
free to render similar services to others.
10. Standard of Care. Neither Manager, nor any of its
directors, officers, stockholders, agents or employees shall be
liable to Trust or its Unitholders for any error of judgment,
mistake of law, loss arising out of any investment, or any other
act or omission in the performance by Manager of its duties
under this Agreement, except for loss or liability resulting
from willful misfeasance, bad faith or gross negligence on
Manager's part or from reckless disregard by Manager of its
obligations and duties under this Agreement.
11. Amendment. This Agreement may not be amended as to
Trust or any Portfolio without the affirmative votes (a) of a
majority of the Board of Trustees, including a majority of those
Trustees who are not "interested persons" of Trust or of
Manager, voting in person at a meeting called for the purpose of
voting on such approval, and (b) of a "majority of the
outstanding shares" of Trust or, with respect to an amendment
affecting an individual Portfolio, a "majority of the
outstanding shares" of that Portfolio. The terms "interested
persons" and "vote of a majority of the outstanding shares"
shall be construed in accordance with their respective
definitions in the 1940 Act and, with respect to the latter
term, in accordance with Rule 18f-2 under the 1940 Act.
12. Effective Date and Termination. This Agreement shall
become effective as to any Portfolio as of the effective date
for that Portfolio specified in Schedule A hereto. This
Agreement may be terminated at any time, without payment of any
penalty, as to any Portfolio by the Board of Trustees of Trust,
or by a vote of a majority of the outstanding shares of that
Portfolio, upon at least sixty (60) days' written notice to
Manager. This Agreement may be terminated by Manager at any
time upon at least sixty (60) days' written notice to Trust.
This Agreement shall terminate automatically in the event of its
"assignment" (as defined in the 1940 Act). Unless terminated as
hereinbefore provided, this Agreement shall continue in effect
with respect to any Portfolio until the end of the initial term
applicable to that Portfolio specified in Schedule A and
thereafter from year to year only so long as such continuance is
specifically approved with respect to that Portfolio at least
annually (a) by a majority of those Trustees who are not
interested persons of Trust or of Manager, voting in person at a
meeting called for the purpose of voting on such approval, and
(b) by either the Board of Trustees of Trust or by a "vote of a
majority of the outstanding shares" of the Portfolio.
13. Ownership of Records; Interparty Reporting. All
records required to be maintained and preserved by Trust
pursuant to the provisions of rules or regulations of the
Securities and Exchange Commission under Section 31(a) of the
1940 Act or other applicable laws or regulations which are
maintained and preserved by Manager on behalf of Trust and any
other records the parties mutually agree shall be maintained by
Manager on behalf of Trust are the property of Trust and shall
be surrendered by Manager promptly on request by Trust; provided
that Manager may at its own expense make and retain copies of
any such records.
Trust shall furnish or otherwise make available to Manager
such copies of the financial statements, proxy statements,
reports, and other information relating to the business and
affairs of each Unitholder in a Portfolio as Manager may, at any
time or from time to time, reasonably require in order to
discharge its obligations under this Agreement.
Manager shall prepare and furnish to Trust as to each
Portfolio statistical data and other information in such form
and at such intervals as Trust may reasonably request.
14. Non-Liability of Trustees and Unitholders. Any
obligation of Trust hereunder shall be binding only upon the
assets of Trust (or the applicable Portfolio thereof) and shall
not be binding upon any Trustee, officer, employee, agent or
Unitholder of Trust. Neither the authorization of any action by
the Trustees or Unitholders of Trust nor the execution of this
Agreement on behalf of Trust shall impose any liability upon any
Trustee or any Unitholder.
15. Use of Manager's Name. Trust may use the name "SR&F
Base Trust" and the Portfolio names listed in Schedule A or any
other name derived from the name "Stein Roe & Farnham" only for
so long as this Agreement or any extension, renewal, or
amendment hereof remains in effect, including any similar
agreement with any organization which shall have succeeded to
the business of Manager as investment adviser. At such time as
this Agreement or any extension, renewal or amendment hereof, or
such other similar agreement shall no longer be in effect, Trust
will cease to use any name derived from the name "Stein Roe &
Farnham" or otherwise connected with Manager, or with any
organization which shall have succeeded to Manager's business as
investment adviser.
16. References and Headings. In this Agreement and in any
such amendment, references to this Agreement and all expressions
such as "herein," "hereof," and "hereunder" shall be deemed to
refer to this Agreement as amended or affected by any such
amendments. Headings are placed herein for convenience of
reference only and shall not be taken as a part hereof or
control or affect the meaning, construction or effect of this
Agreement. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original.
Dated: August 15, 1995
SR&F BASE TRUST
By: TIMOTHY K. ARMOUR, President
Attest:
JILAINE HUMMEL BAUER
Secretary
STEIN ROE & FARNHAM INCORPORATED
By: HANS P. ZIEGLER
Chief Executive Officer
Attest:
KEITH J. RUDOLF
Secretary
<PAGE>
SR&F BASE TRUST
MANAGEMENT AGREEMENT
SCHEDULE A
The Portfolios of SR&F Base Trust currently subject to this
Agreement are as follows:
Effective End of
Date Initial Term
----------- ------------
SR&F Municipal Money Market Portfolio 9/28/95 6/30/97
SR&F High Yield Portfolio 11/01/96 6/30/98
Dated: November 1, 1996
SR&F BASE TRUST
By: TIMOTHY K. ARMOUR
President
Attest:
JILAINE HUMMEL BAUER
Secretary
STEIN ROE & FARNHAM INCORPORATED
By: HANS P. ZIEGLER
Chief Executive Officer
Attest:
JILAINE HUMMEL BAUER
Secretary
<PAGE>
SR&F BASE TRUST
MANAGEMENT AGREEMENT
SCHEDULE B
Compensation pursuant to Section 7 of the SR&F Base Trust
Management Agreement shall be calculated in accordance with the
following schedule(s):
SR&F Municipal Money Market Portfolio
- -------------------------------------
0.250% of average daily net asset
SR&F High Yield Portfolio
- -------------------------
0.500% on first $500 million of average net assets
0.475% thereafter
Dated: November 1, 1996
SR&F BASE TRUST
By: TIMOTHY K. ARMOUR
President
Attest:
JILAINE HUMMEL BAUER
Secretary
STEIN ROE & FARNHAM INCORPORATED
By: HANS P. ZIEGLER
Chief Executive Officer
Attest:
JILAINE HUMMEL BAUER
Secretary
<PAGE>
Exhibit 9(a)
INVESTOR SERVICE AGREEMENT
SR&F BASE TRUST, a Massachusetts trust registered under the
Investment Company Act of 1940 (the "Act") as an open-end
diversified management investment company (the "Trust"), hereby
appoints SteinRoe Services Inc., a Massachusetts corporation, of
Chicago, Illinois ("SSI"), to furnish certain investor
accounting, recordkeeping, and administrative services for the
portion of the assets of the Trust represented by the shares of
beneficial interest issued in the Portfolios listed in Schedule
A hereto (the "Portfolios"). In connection therewith, Trust and
SSI hereby agree that:
1 PORTFOLIO SERVICES.
A. Services. SSI will perform the services set forth in
Schedule B hereto relating to the establishment and maintenance
of accounts of holders of beneficial interests in the Portfolio.
It is understood that beneficial interests in the Portfolio will
be held of record only by investment companies, insurance
company separate accounts, common or commingled trust funds or
similar organizations, and that SSI's duties and
responsibilities hereunder shall relate only to such record
investor accounts and not to the accounts of holders of shares
of, or interests in, such institutions.
B. Maintenance of Records. SSI shall maintain all records
relating to the accounts of holders of beneficial interest in
the Portfolio which the Portfolio is required to maintain
pursuant to Rule 31a-1 under the Act and shall preserve such
records for the periods prescribed by Rule 31a-2 thereunder.
All such records are and shall remain the property and under the
control of the Portfolio and shall upon request be made
available during reasonable business hours to the Trust's Board
of Trustees or auditors at SSI's offices.
C. Uncontrollable Events. SSI shall not be liable for
damage, delays or errors occurring by reason of circumstances
beyond its control, including but not limited to acts of civil
or military authority, national emergencies, fires, flood or
catastrophe, acts of God, insurrection, war, riots or failure of
transportation, communication or power supply.
D. Fees and Charges. For the services rendered by SSI
pursuant to this Agreement, each Portfolio will pay SSI a fee in
the amount shown in Schedule B hereto.
E. Out-of-Pocket Expenses. The Trust shall reimburse SSI
for any and all out-of-pocket expenses and charges in performing
services under this Agreement.
2. MAINTENANCE OF RECORDS. All records maintained by SSI in
connection with the performance of its duties under this
Agreement with respect to a Portfolio will remain the property
of the Portfolio and will be preserved by SSI for the periods
prescribed in Rule 31a-2 under the Act or such other applicable
rules that may be adopted from time to time under the Act. In
the event of termination of this Agreement, such records will be
promptly delivered to the Trust. Such records may be inspected
by the Trust or its agents at reasonable times.
3. OWNERSHIP OF SOFTWARE AND RELATED MATERIAL. All computer
programs, magnetic tapes, written procedures, and similar items
developed and used by SSI in the performance of this Agreement
shall be the property of SSI and will not become the property of
the Portfolio or the Trust.
4. REGISTRATION OF SSI AS TRANSFER AGENT. SSI represents that
it is registered with the Securities and Exchange Commission as
a transfer agent under Section 17A of the Securities Exchange
Act of 1934, as amended, and will notify the Trust promptly if
such registration is revoked or if any proceeding is commenced
before the Securities and Exchange Commission which may lead to
such revocation.
5. INSTRUCTIONS, OPINION OF COUNSEL, AND SIGNATURES. At any
time, SSI may apply to an officer of the Trust for instructions
and may consult legal counsel for the Trust or its own legal
counsel in respect of any matter arising in connection with this
Agreement, and SSI shall not be liable for any action taken or
omitted by it in good faith in accordance with such instructions
or with the advice or opinion of such legal counsel. SSI shall
be protected in acting upon any such instruction, advice, or
opinion and upon any other paper or document delivered by the
Portfolio or such legal counsel reasonably believed by SSI to be
genuine and to have been signed by the proper person or persons
and shall not be held to have notice of any change of authority
of any officer or agent of the Trust until receipt of written
notice thereof from the Trust.
6. LIABILITY OF SSI. SSI will at all times act in good faith
in the performance of its duties and obligations under this
Agreement, but assumes no responsibility and shall not be liable
for loss or damage unless caused by the negligence, bad faith,
or willful or wanton misconduct of SSI or its employees. SSI
shall in no event be liable for consequential damages, lost
profits, or other special damages, even if informed of the
possibility of such damage or loss.
7. INDEMNIFICATION BY TRUST. The Trust will indemnify and hold
SSI harmless from all loss, cost, damage and expense, including
reasonable expenses for legal counsel, incurred by SSI arising
from: (i) any action or omission by SSI in the performance of
its duties hereunder, (ii) SSI's acting upon instructions
believed by it to have been executed by a duly authorized
officer of the Trust or (iii) SSI's acting upon information
provided by the Trust in the form and under policies agreed to
by SSI and the Trust. SSI shall not be entitled to such
indemnification for loss, cost, damage or expense arising from
actions or omissions constituting negligence, bad faith or
willful or wanton misconduct of SSI or its agents. Prior to
confessing any claim against it which may be subject to this
indemnification, SSI shall give the Trust reasonable opportunity
to defend against said claim in its own name or in the name of
SSI.
8. LIMITATION OF LIABILITY OF TRUST. The term "SR&F Base
Trust" means and refers to the Trust under a Declaration of
Trust of the Trust dated August 23, 1993, as the same may
subsequently thereto have been or subsequently hereto be
amended. It is expressly agreed that the obligations of the
Trust hereunder shall not be binding upon any of the Trustees,
shareholders, nominees, officers, agents or employees of the
Trust personally, but shall bind only the trust property of the
Portfolio, as provided in the Declaration of Trust of the Trust.
The execution and delivery of this Agreement have been
authorized by the Trustees of the Trust and this Agreement has
been signed by an authorized officer of the Trust, acting as
such, and neither such authorization by such Trustees or such
execution and delivery by such officer shall be deemed to have
been made by any of them but shall bind only the trust property
of the Portfolio as provided in the Declaration of Trust.
9. INDEMNIFICATION BY SSI. SSI will indemnify and hold the
Trust harmless from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the
Trust because of the negligence, bad faith or willful or wanton
misconduct of SSI or its agents.
10. EXECUTION, AMENDMENT, AND TERMINATION. The term of this
Agreement shall begin on the date hereof and continue until
terminated as herein provided. This Agreement may be modified
or amended from time to time by mutual agreement between the
parties hereto and may be terminated by at least 60 days'
written notice given by one party to the other. Upon
termination hereof, the Trust shall pay to SSI such compensation
as may be due as of the date of such termination, and shall
likewise reimburse SSI for its costs, expenses and disbursements
payable under the Agreement to such date.
11. SSI'S USE OF THE SERVICES OF OTHERS. SSI may, at its cost,
employ, retain or otherwise avail itself of the services or
facilities of other persons or organizations necessary,
appropriate or convenient for the discharge of SSI's duties and
obligations hereunder.
12. ASSIGNMENT. This Agreement may not be assigned (as that
term is defined in the Act) by SSI without the prior written
consent of the Trust. The Agreement shall automatically and
immediately terminate in the event of its assignment without the
prior written consent of the Trust.
13. STATE LAW. The Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of
Illinois.
14. CAPTIONS. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any
of the provisions hereof or otherwise affect their construction
or effect.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed as of this 15th day of August, 1995.
STEINROE SERVICES INC.
By: STEPHEN P. LAUTZ,
Vice President
Attest: JILAINE HUMMEL BAUER
Secretary
SR&F BASE TRUST
By: TIMOTHY K. ARMOUR,
President
Attest: JILAINE HUMMEL BAUER
Secretary
<PAGE>
SR&F BASE TRUST
INVESTOR SERVICES AGREEMENT
SCHEDULE A
The Portfolios of SR&F Base Trust currently subject to this
Agreement are as follows:
Name of Portfolio Effective Date
----------------- --------------
SR&F Municipal Money
Market Portfolio 9/28/95
SR&F High Yield Portfolio 11/1/96
Dated: November 1, 1996
SR&F BASE TRUST
By: TIMOTHY K. ARMOUR,
President
Attest: JILAINE HUMMEL BAUER
Secretary
STEINROE SERVICES INC.
By: HANS P. ZIEGLER,
President
Attest: JILAINE HUMMEL BAUER
Secretary
<PAGE>
SCHEDULE B
The services to be performed by SSI with respect to the
beneficial interests in the Portfolio pursuant to paragraph 1
are as follows:
1. Establishing and maintaining investor accounts as
instructed and reporting thereon;
2. Processing additions to and withdrawals of amounts in
investor accounts;
3. Reporting the amount of each investor's beneficial
interest in the Portfolio to the Portfolio and such investors on
a daily basis;
4. Providing such assistance as may be reasonably required
to enable the Trust and its properly authorized auditors,
examiners, and others designated by the Trust to properly
understand and examine all books, records, computer files,
microfilm, magnetic disks, and other items maintained pursuant
to this Agreement, and to assist as required in such
examination; and
5. Any necessary or required tax reporting.
The fee for the foregoing services payable pursuant to
paragraph 1.D shall be $500 per month, payable in arrears on or
before the 10th day of each calendar month.
<PAGE>
Exhibit 9(b)
STEINROE FUNDS
ACCOUNTING AND BOOKKEEPING AGREEMENT
NOVEMBER 1,1994
This Agreement is made this 1st day of November. 1994, by
and between SR&F Base Trust, a Massachusetts common law trust,
(hereinafter referred to as the "Trust") and Stein Roe &
Farnham Incorporated ("SteinRoe"), a Delaware corporation.
1. Appointment. Each Trust hereby appoints SteinRoe to act as
its agent to perform the services described herein with respect
to each series of shares of the Trust (the "Series") identified
in and beginning on the date specified on Appendix I to this
Agreement, as may be amended from time to time. SteinRoe
hereby accepts appointment as each Trust's agent and agrees to
perform the services described herein.
2. Accounting.
(a) Pricing. For each Series of the Trust, SteinRoe shall
value all securities and other assets of the Series,
and compute the net asset value per share of such
Series, at such times and dates and in the manner and
by such methodology as is specified in the then
currently effective prospectus and statement of
additional information for such Series, and pursuant
to such other written procedures or instructions
furnished to SteinRoe by the Trust. To the extent
procedures or instructions used to value securities
or other assets of a Series under this Agreement are
at any time inconsistent with any applicable law or
regulation, the Trust shall provide SteinRoe with
written instructions for valuing such securities or
assets in a manner which the Trust represents to be
consistent with applicable law and regulation.
(b) Net Income. SteinRoe shall calculate with such
frequency as the Trust shall direct, the net income
of each Series of the Trust for dividend purposes and
on a per share basis. Such calculation shall be at
such times and dates and in such manner as the Trust
shall instruct SteinRoe in writing. For purposes of
such calculation, SteinRoe shall not be responsible
for determining whether any dividend or interest
accruable to the Trust is or will be actually paid,
but will accrue such dividend and interest unless
otherwise instructed by the Trust.
(c) Capital Gains and Losses. SteinRoe shall calculate
gains or losses of each Series of the Trust from the
sale or other disposition of assets of that Series as
the Trust shall direct.
(d) Yields. At the request of the Trust, SteinRoe shall
compute yields for each Series of the Trust for such
periods and using such formula as shall be instructed
by the Trust.
(e) Communication of Information. SteinRoe shall provide
the Trust, the Trust's transfer agent and such other
parties as directed by the Trust with the net asset
value per share, the net income per share and yields
for each Series of the Trust at such time and in such
manner and format and with such frequency as the
parties mutually agree.
(f) Information Furnished by the Trust. The Trust shall
furnish SteinRoe with any and all instructions,
explanations, information, specifications and
documentation deemed necessary by SteinRoe in the
performance of its duties hereunder, including,
without limitation, the amounts and/or written
formula for calculating the amounts, and times of
accrual of liabilities and expenses of each Series of
the Trust. The Trust shall also at any time and from
time to time furnish SteinRoe with bid, offer and/or
market values of securities owned by the Trust if the
same are not available to SteinRoe from a pricing or
similar service designated by the Trust for use by
SteinRoe to value securities or other assets.
SteinRoe shall at no time be required to commence or
maintain any utilization of, or subscriptions to, any
such service which shall be the sole responsibility
and expense of the Trust.
3. Recordkeeping.
(a) SteinRoe shall, as agent for the Trust, maintain and
keep current and preserve the general ledger and
other accounts, books, and financial records of the
Trust relating to activities and obligations under
this Agreement in accordance with the applicable
provisions of Section 31(a) of the General Rules and
Regulations under the Investment Company Act of 1940,
as amended (the "Rules").
(b) All records maintained and preserved by SteinRoe
pursuant to this Agreement which the Trust is
required to maintain and preserve in accordance with
the Rules shall be and remain the property of the
Trust and shall be surrendered to the Trust promptly
upon request in the form in which such records have
been maintained and preserved.
(c) SteinRoe shall make available on its premises during
regular business hours all records of a Trust for
reasonable audit, use and inspection by the Trust,
its agents and any regulatory agency having authority
over the Trusts.
4. Instructions, Opinion of Counsel, and Signatures.
(a) At any time Stein Roe may apply to a duly authorized
agent of the Trust for instructions regarding the
Trust, and may consult counsel for such Trust or its
own counsel, in respect of any matter arising in
connection with this Agreement, and it shall not be
liable for any action taken or omitted by it in good
faith in accordance with such instructions or with
the advice or opinion of such counsel. SteinRoe
shall be protected in acting upon any such
instruction, advice, or opinion and upon any other
paper or document delivered by the Trust or such
counsel believed by SteinRoe to be genuine and to
have been signed by the proper person or persons and
shall not be held to have notice of any change of
authority of any officer or agent of the Trust, until
receipt of written notice thereof from such Trust.
(b) SteinRoe may receive and accept a certified copy of a
vote of the Board of Trustees of the Trust as
conclusive evidence of (i) the authority of any
person to act in accordance with such vote or (ii)
any determination or any action by the Board of
Trustees pursuant to its Agreement and Declaration of
Trust as described in such vote, and such vote may be
considered as in full force and effect until receipt
by SteinRoe of written notice to the contrary.
5. Compensation. The Trust shall reimburse SteinRoe from the
assets of the respective applicable Series of the Trust, for
any and all out-of-pocket expenses and charges in performing
services under this Agreement and such compensation as is
provided in Appendix II to this Agreement, as amended from time
to time. SteinRoe shall invoice the Trust as soon as
practicable after the end of each calendar month, with
allocation among the respective Series and full detail, and the
Trust shall promptly pay SteinRoe the invoiced amount.
6. Confidentiality of Records. SteinRoe agrees not to
disclose any information received from the Trust to any other
client of SteinRoe or to any other person except its employees
and agents, and shall use its best efforts to maintain such
information as confidential. Upon termination of this
Agreement, SteinRoe shall return to each Trust all records in
the possession and control of SteinRoe related to such Trust's
activities, other than SteinRoe's own business records, it
being also understood and agreed that any programs and systems
used by SteinRoe to provide the services rendered hereunder
will not be given to any Trust.
7. Liability and Indemnification.
(a) SteinRoe shall not be liable to any Trust for any
action taken or thing done by it or its employees or
agents on behalf of the Trust in carrying out the
terms and provisions of this Agreement if done in
good faith and without negligence or misconduct on
the part of SteinRoe, its employees or agents.
(b) Each Trust shall indemnify and hold SteinRoe, and its
controlling persons, if any, harmless from any and
all claims, actions, suits, losses, costs, damages,
and expenses, including reasonable expenses for
counsel, incurred by it in connection with its
acceptance of this Agreement, in connection with any
action or omission by it or its employees or agents
in the performance of its duties hereunder to the
Trust, or as a result of acting upon instructions
believed by it to have been executed by a duly
authorized agent of the Trust or as a result of
acting upon information provided by the Trust in form
and under policies agreed to by SteinRoe and the
Trust, provided that: (i) to the extent such claims,
actions, suits, losses, costs, damages, or expenses
relate solely to one or more Series, such
indemnification shall be only out of the assets of
that Series or group of Series; (ii) this
indemnification shall not apply to actions or
omissions constituting negligence or misconduct on
the part of SteinRoe or its employees or agents,
including but not limited to willful misfeasance, bad
faith, or gross negligence in the performance of
their duties, or reckless disregard of their
obligations and duties under this Agreement; and
(iii) SteinRoe shall give the Trust prompt notice and
reasonable opportunity to defend against any such
claim or action in its own name or in the name of
SteinRoe.
(c) SteinRoe shall indemnify and hold harmless each Trust
from and against any and all claims, demands,
expenses and liabilities which such Trust may sustain
or incur arising out of, or incurred because of, the
negligence or misconduct of SteinRoe or its agents or
contractors, or the breach by SteinRoe of its
obligations under this Agreement, provided that: (i)
this indemnification shall not apply to actions or
omissions constituting negligence or misconduct on
the part of such Trust or its other agents or
contractors and (ii) such Trust shall give SteinRoe
prompt notice and reasonable opportunity to defend
against any such claim or action in its own name or
in the name of such Trust.
8. Further Assurances. Each party agrees to perform such
further acts and execute such further documents as are
necessary to effectuate the purposes hereof.
9. Dual Interests. It is understood and agreed that some
person or persons may be trustees, officers, or shareholders of
both the Trusts and SteinRoe, and that the existence of any
such dual interest shall not affect the validity hereof or of
any transactions hereunder except as otherwise provided by
specific provision of applicable law.
10. Amendment and Termination. This Agreement may be modified
or amended from time to time, or terminated, by mutual
agreement between the parties hereto and may be terminated by
at least one hundred eighty (180) days' written notice given by
one party to the other. Upon termination hereof, each Trust
shall pay to SteinRoe such compensation as may be due from it
as of the date of such termination, and shall reimburse
SteinRoe for its costs, expenses, and disbursements payable
under this Agreement to such date. In the event that, in
connection with termination, a successor to any of the duties
or responsibilities of SteinRoe hereunder is designated by a
Trust by written notice to SteinRoe, SteinRoe shall promptly
upon such termination and at the expense of such Trust, deliver
to such successor all relevant books, records, and data
established or maintained by SteinRoe under this Agreement and
shall cooperate in the transfer of such duties and
responsibilities, including provision, at the expense of such
Trust, for assistance from SteinRoe personnel in the
establishment of books, records, and other data by such
successor.
11. Assignment. Any interest of SteinRoe under this Agreement
shall not be assigned or transferred either voluntarily or
involuntarily, by operation of law or otherwise, without prior
written notice to each Trust.
12. Notice. Any notice under this Agreement shall be in
writing, addressed and delivered or sent by registered mail,
postage prepaid to the other party at such address as such
other party may designate for the receipt of such notices.
Until further notice to the other parties, it is agreed that
the address of each Trust and SteinRoe is One South Wacker
Drive, Chicago, Illinois 60606, Attention: Secretary.
13. Non-Liability of Trustees and Shareholders. Any
obligation of the Trust hereunder shall be binding only upon
the assets of that Trust (or the applicable Series thereof), as
provided in the Agreement and Declaration of Trust of that
Trust, and shall not be binding upon any Trustee, officer,
employee, agent or shareholder of the Trust or upon any other
Trust. Neither the authorization of any action by the Trustees
or the shareholders of the Trust, nor the execution of this
Agreement on behalf of the Trust shall impose any liability
upon any Trustee or any shareholder. Nothing in this Agreement
shall protect any Trustee against any liability to which such
Trustee would otherwise be subject by willful misfeasance, bad
faith or gross negligence in the performance of his duties, or
reckless disregard of his obligations and duties under this
Agreement. In connection with the discharge and satisfaction
of any claim made by SteinRoe against the Trust involving more
than one Series, the Trust shall have the exclusive right to
determine the appropriate allocations of liability for any such
claim between or among the Series.
14. References and Headings. In this Agreement and in any
such amendment, references to this Agreement and all
expressions such as "herein," "hereof," and "hereunder," shall
be deemed to refer to this Agreement as amended or affected by
any such amendments. Headings are placed herein for
convenience of reference only and shall not be taken as part
hereof or control or affect the meaning, construction or effect
of this Agreement. This Agreement may be executed in any
number of counterparts, each of which shall be deemed an
original.
15. Governing Law. This Agreement shall be governed by the
laws of the State of Illinois.
IN WITNESS WHEREOF, the parties have caused this Agreement
to be executed as of the day and year first above written.
SR&F BASE TRUST
By: Timothy K. Armour, President
Attest:
JILAINE HUMMEL BAUER,
Secretary
STEIN ROE & FARNHAM INCORPORATED
By: Timothy K. Armour,
President - Funds Division
Attest:
JILAINE HUMMEL BAUER,
Assistant Secretary
<PAGE>
SR&F BASE TRUST
ACCOUNTING & BOOKKEEPING AGREEMENT
APPENDIX I
The series of SR&F Base Trust currently subject to this
Agreement are as follows:
Effective
Date
----------
SR&F Municipal Money Market Portfolio 9/28/95
SR&F High Yield Portfolio 11/1/96
Dated: November 1, 1996
SR&F BASE TRUST
By: TIMOTHY K. ARMOUR, President
Attest:
JILAINE HUMMEL BAUER,
Secretary
STEIN ROE & FARNHAM INCORPORATED
By: HANS P. ZIEGLER
Chief Executive Officer
Attest:
JILAINE HUMMEL BAUER,
Assistant Secretary
<PAGE>
SR&F BASE TRUST
ACCOUNTING & BOOKKEEPING AGREEMENT
APPENDIX II
For the services provided under the Accounting &
Bookkeeping Agreement (the "Agreement"), the Trust shall pay
SteinRoe an annual fee with respect to each series, calculated
and paid monthly, equal to $25,000 plus .0025 percent per annum
of the average daily net assets of the series in excess of $50
million. Such fee shall be paid within thirty days after
receipt of monthly invoice.
