As Filed Electronically with the Securities and Exchange Commission on
December 21, 2005
Securities Act File No. [ ]
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
LIBERTY VARIABLE INVESTMENT TRUST
(Exact Name of Registrant as Specified in Charter)
-----------------
101 South Tryon Street
Charlotte, North Carolina 28255
(Address of Principal Executive Offices) (Zip Code)
1-800-345-6611
(Registrant's Area Code and Telephone Number)
R. Scott Henderson, Esq.
Columbia Management Group, Inc.
One Financial Center
Boston, Massachusetts 02111
(Name and Address of Agent for Service)
-----------------
With copies to:
Brian D. McCabe, Esq. Cameron S. Avery, Esq.
Ropes & Gray LLP Bell, Boyd & Lloyd LLC
One International Place 70 West Madison Street, Suite 3300
Boston, Massachusetts 02110 Chicago, Illinois 60602
-----------------
TITLE OF SECURITIES BEING REGISTERED:
Class A Shares of the Liberty Growth and Income Fund, Variable Series series of
the Registrant
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
No filing fee is required because an indefinite number of shares have
previously been registered pursuant to Rule 24f-2 under the Investment Company
Act of 1940.
It is proposed that this filing will become effective on January 23, 2006
pursuant to Rule 488 under the Securities Act of 1933.
NATIONS VALUE PORTFOLIO
101 South Tryon Street, Charlotte, North Carolina 28255
Dear Investor:
I am writing to ask for your voting instructions on the proposed merger of
Nations Value Portfolio (the "Acquired Fund"), a series of Nations Separate
Account Trust, into Liberty Growth and Income Fund, Variable Series (the
"Acquiring Fund"), a series of Liberty Variable Investment Trust. As an investor
through a variable annuity contact or variable insurance policy, you can
instruct your insurance company as to how to vote on these policies. At a
special meeting of shareholders of the Acquired Fund to be held on [March 8,
2006] your insurance company will vote on the proposals as instructed by you and
other investors holding contracts or policies through your insurance company.
The proposed merger of the Acquired Fund is one of several mergers
recommended by Columbia Management Advisors, LLC. ("Columbia Management"), the
investment adviser to the Liberty Variable Investment Trust. Columbia
Management's overall goal in proposing these fund mergers is twofold. First, by
merging funds with generally similar investment strategies, Columbia Management
can create larger, more efficient investment portfolios. Second, by streamlining
its product offering, Columbia Management can more effectively concentrate its
investment management and distribution resources on a more focused group of
portfolios. Columbia Management recommended the merger of the Acquired Fund to
enable shareholders (that is, your insurance company and others) to invest in a
larger, more efficient investment portfolio while continuing to access a similar
investment strategy.
Should the merger be approved and other conditions to the merger be
satisfied, such investment will be exchanged, without immediate federal income
tax consequences, for an equal investment (that is, dollar value) in Class A
shares of the Acquiring Fund. More information on the specific details of and
reasons for the Acquired Fund's merger is contained in the enclosed combined
Prospectus/Proxy Statement. Please read it carefully.
THE TRUSTEES OF THE ACQUIRED FUND UNANIMOUSLY RECOMMEND THAT YOU INSTRUCT
YOUR INSURANCE COMPANY TO VOTE FOR THE MERGER.
YOUR VOTING INSTRUCTION IS IMPORTANT. YOU CAN INSTRUCT YOUR INSUARNCE
COMPANY HOW TO VOTE BY COMPLETING THE ENCLOSED VOTING INSTRUCTION CARD. A
SELF-ADDRESSED POSTAGE-PAID ENVELOPE HAS BEEN ENCLOSED FOR YOUR CONVENIENCE.
We appreciate your participation and prompt response in this matter and
thank you for your continued support.
Sincerely,
Christopher L. Wilson
President and Chief
Executive Officer
Nations Separate Account
Trust
[January 27, 2006]
NOTICE OF A SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
[MARCH 8, 2006]
NATIONS VALUE PORTFOLIO
A Series of Nations Separate Account Trust
101 South Tryon Street
Charlotte, North Carolina 28255
1-800-321-7854
To the shareholders of Nations Value Portfolio:
NOTICE IS HEREBY GIVEN that a special meeting of the shareholders of
Nations Value Portfolio (the "Acquired Fund") will be held at [10:00 a.m.
Eastern time on March 8, 2006,] at the offices of Columbia Management Advisors,
LLC, One Financial Center, Boston, Massachusetts 02111-2621, for the following
purposes:
1. To approve an Agreement Plan of Reorganization providing for (i)
the sale of all of the assets of the Acquired Fund to, and the assumption
of all of the liabilities of the Acquired Fund by, Liberty Growth and
Income Fund, Variable Series (the "Acquiring Fund"), a series of Liberty
Variable Investment Trust, in exchange for shares of the Acquiring Fund,
and (ii) the distribution of such shares to the shareholders of the
Acquired Fund in complete liquidation of the Acquired Fund.
2. To consider and act upon such other matters as properly come before
the meeting or any adjourned session of the meeting.
Shareholders of record of the Acquired Fund at the close of business on
January 3, 2006, are entitled to notice of and to vote at the meeting and
any adjourned session of the meeting.
By Order of the Board of Trustees,
R. Scott Henderson,
Secretary
[January 27, 2006]
NOTICE: YOUR VOTE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU OWN.
PLEASE SEE THE ENCLOSED PROSPECTUS/PROXY STATEMENT AND OTHER MATERIALS
FOR INSTRUCTIONS ON HOW TO VOTE EASILY AND QUICKLY.
PROSPECTUS/PROXY STATEMENT
[January 23, 2006]
Acquisition of the Assets and Liabilities of
NATIONS VALUE PORTFOLIO
c/o Nations Separate Account Trust
101 South Tryon Street
Charlotte, North Carolina 28255
1-800-345-6611
by and in Exchange for Class A Shares of
LIBERTY GROWTH AND INCOME FUND, VARIABLE SERIES
c/o Liberty Variable Investment Trust
One Financial Center
Boston, Massachusetts 02111
1-866-348-1468
TABLE OF CONTENTS
I. Questions and Answers Regarding Approval of the Merger...............
II. Proposal -- Merger of the Acquired Fund into the Acquiring Fund......
The Proposal.........................................................
Principal Investment Risks...........................................
Information about the Merger.........................................
III. General..............................................................
Voting Information...................................................
Information about Proxies and the Conduct of the Meeting.............
Appendix A -- Form of Agreement and Plan of Reorganization................ A-1
Appendix B -- Fund Information............................................ B-1
Appendix C -- Capitalization.............................................. C-1
Appendix D -- Information Applicable to the Acquiring Fund................ D-1
Appendix E -- Financial Highlights for the Acquiring Fund................. E-1
Appendix F -- Comparison of Organizational Documents...................... F-1
This prospectus/proxy statement (this "Prospectus/Proxy Statement") and the
enclosed proxy card (the "Proxy Card") are expected to be mailed to shareholders
and Contract Owners (defined below) beginning on or about [January 27, 2006].
This Prospectus/Proxy Statement contains information Contract Owners
(defined below) should know before voting on the approval of the Agreement and
Plan of Reorganization, dated as of [January 3, 2006] (the "Record Date"), with
respect to the proposed reorganization of Nations Value Portfolio (the "Acquired
Fund"), a series of Nations Separate Account Trust ("Nations Trust"), into
Liberty Growth and Income Fund, Variable Series (the "Acquiring Fund" and,
together with the Acquired Fund, each a "Fund" and collectively the "Funds"), a
series of Liberty Variable Investment Trust ("Liberty Trust" and, together with
Nations Trust, each a "Trust" and collectively the "Trusts") (the "Agreement and
Plan of Reorganization").
Except for certain seed capital investments, all shares of the Acquired
Fund are owned of record by sub-accounts of separate accounts ("Separate
Accounts") of the insurance companies (the "Participating Insurance Companies")
established to fund benefits under variable annuity contracts and variable life
insurance policies (each a "Contract") issued by the Participating Insurance
Companies. Persons holding Contracts are referred to herein as "Contract
Owners."
The proposal will be considered by shareholders of the Acquired Fund at a
special meeting of shareholders of the Acquired Fund (the "Meeting") that will
be held at the offices of Columbia Management Advisors, LLC. ("Columbia
Management"), One Financial Center, Boston, Massachusetts 02111-2621. Although
the Agreement and Plan of Reorganization contemplates a transaction in which the
Acquired Fund transfers substantially all of its assets and liabilities to the
Acquiring Fund in exchange for shares of the Acquiring Fund, this
Prospectus/Proxy Statement refers to such transaction as a "Merger." Each of the
Funds is a series of a registered open-end management investment company. Please
read this Prospectus/Proxy Statement and keep it for future reference.
The Acquiring Fund seeks long-term growth and income. The Acquiring Fund
pursues this objective by, under normal market conditions, investing at least
80% of its net assets (plus any borrowings for investment purposes) in U.S.
securities, primarily consisting of large-capitalization (large-cap) stocks.
Both the Acquiring Fund and the Acquired Fund have the same investment
adviser, distributor, transfer agent and other service providers. Additionally,
the Acquired Fund and Acquiring Fund are currently managed by the same portfolio
managers.
If the Agreement and Plan of Reorganization is approved by the shareholders
of the Acquired Fund and the Merger is consummated, the Acquired Fund will
transfer all of its assets and liabilities to the Acquiring Fund in exchange for
Class A shares of the Acquiring Fund with the same aggregate net asset value as
the net value of the assets and liabilities transferred. After that exchange,
Class A shares received by the Acquired Fund will be distributed pro rata to its
shareholders and such shareholders would become shareholders of the Acquiring
Fund.
The following documents have been filed with the Securities and Exchange
Commission (the "SEC") and are incorporated into this Prospectus/Proxy Statement
by reference:
. The Statement of Additional Information of the Acquiring Fund dated
[January 23, 2006], relating to this Prospectus/Proxy Statement.
. The Prospectus of the Acquired Fund dated May 1, 2005, as
supplemented.
. The Statement of Additional Information of the Acquired Fund dated May
1, 2005, as supplemented.
. The Report of Independent Registered Public Accounting Firm and the
audited financial statements included in the Annual Report to
Shareholders of the Acquired Fund dated December 31, 2004 and the
unaudited financial statements included in the Semiannual Report to
Shareholders of the Acquired Fund dated June 30, 2005.
The Acquired Fund previously has sent its Annual Report and Semiannual
Report to its shareholders. Contract Owners may obtain a copy of these documents
by calling or writing the Participating Insurance Company that issued their
Contracts. Text-only versions of the Acquired Fund's documents can be viewed
online or downloaded from the EDGAR database on the SEC's Internet site at
www.sec.gov. Shareholders can review and copy information about the Funds by
visiting the Public Reference Room, U.S. Securities and Exchange Commission, 100
F Street, NE, Washington, DC 20549-2521. Shareholders can obtain copies, upon
payment of a duplicating fee, by sending an e-mail request to publicinfo@sec.gov
or by
writing the Public Reference Room at the address above. Information on the
operation of the Public Reference Room may be obtained by calling
1-202-942-8090.
The SEC has not approved or disapproved these securities or determined if
this Prospectus/Proxy Statement is truthful or complete. Any representation to
the contrary is a criminal offense.
An investment in a Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
I. QUESTIONS AND ANSWERS REGARDING APPROVAL OF THE MERGER
The following questions and answers provide an overview of key features of
the Merger and of the information contained in this Prospectus/Proxy Statement.
Please review the Prospectus/Proxy Statement prior to casting a vote. If you
have questions about the Merger, please call 1-800-345-6611.
1. What Merger is being proposed?
The Board of Trustees of the Acquired Fund (the "Trustees") is recommending
that the Acquired Fund be merged into the Acquiring Fund. This means that the
Acquired Fund would transfer all of its assets and liabilities to the Acquiring
Fund in exchange for Class A shares of the Acquiring Fund. If the Merger is
approved and completed, shareholders of the Acquired Fund will receive Class A
shares of the Acquiring Fund with a dollar value equal to the value of their
Acquired Fund shares on the business day prior to the closing of the Merger. The
Merger currently is scheduled to take place on [May 1, 2006], or such other date
as the parties may agree.
2. Why is the Merger being proposed?
The Trustees recommend approval of the Merger because the Merger offers
shareholders of the Acquired Fund the opportunity to invest in a larger combined
portfolio that generally has similar investment goals and strategies. Spreading
fixed costs over a broader asset base allows the potential for more efficient
operation and lower overall expense ratios. In reviewing the Acquisition, the
Trustees also considered that, based on estimated expense ratios, shareholders
of the Acquired Fund, after the Merger, are expected to experience operating
expense ratios that are lower than the net operating expense ratios of such
shareholder's current shares.
Please review "Reasons for the Merger and Trustees' Considerations" under
"Information about the Merger" in Section II of this Prospectus/Proxy Statement
for more information regarding the factors considered by the Trustees.
3. How do the management fees and the expense ratios of the Funds compare, and
what are they estimated to be following the Merger?
The tables below allow a shareholder to compare the management fees and the
expense ratios of each Fund and to analyze the estimated expenses that Columbia
Management expects the Acquiring Fund to bear in the first year following the
Merger. Annual Fund Operating Expenses are paid by each Fund. They include
management fees, distribution and service (12b-1) fees (if applicable) and
administrative costs, including fund accounting and custody services. The
expenses do not reflect any insurance-related charges or expenses. If these
charges or expenses had been included, the expenses shown would have been
higher.
In addition, following the presentation of that information, Annual Fund
Operating Expenses and Example Expenses are presented on a pro forma combined
basis. The Annual Fund Operating Expenses shown in the table below represent
expenses as of each Fund's most recent fiscal year (ended December 31, 2004),
and those projected for the Acquiring Fund on a pro forma basis after giving
effect to the proposed Merger, and based on pro forma combined net assets as of
June 30, 2005.
Shareholders of the Funds do not currently pay sales charges and will not
pay sales charges as a result of the Merger.
Based on the expense ratios shown below, the expense ratio of Class A
shares of the Acquiring Fund is expected to be lower than the net operating
expense ratio of shares of the Acquired Fund.
Merger expenses have been allocated to the Acquired Fund, which have
reduced the Acquired Fund's net asset value by approximately [$ ] per share
--
based on shares outstanding as of [ ]). Based on the expense ratios shown
--
below, it is projected that, after the Merger, former Acquired Fund shareholders
will benefit from expense savings that will offset the allocated Merger
expenses. However, the benefit of these projected expense savings will not be
realized immediately. It is projected that the aggregate expense savings will
not exceed the allocated Merger expenses until approximately [ ] months after
--
the Merger. If a shareholder redeems his or her shares prior to that time, the
shareholder will receive no net benefit from the projected expense savings.
Annual Fund Operating Expenses
(deducted directly from Fund assets)
Nations Value Portfolio/(1)/
Shares
------
Management fee (%)/(1)/................................................ 0.77
Distribution and service (12b-1) fees (%).............................. 0.25
Other expenses (%)..................................................... 0.20
Total annual fund operating expenses (%)............................... 1.22
Expense waiver/reimbursement (%)....................................... (0.25)
Net annual fund operating expenses (%)/(2)/............................ 0.97
Liberty Growth and Income Fund, Variable Series
Class A
-------
Management fee (%)/(3)/............................................... 0.77
Distribution and service (12b-1) fees (%)............................. 0.00
Other expenses (%).................................................... 0.07
Total annual fund operating expenses(%)/(4)/.......................... 0.84
Liberty Growth and Income Fund, Variable Series
(pro forma combined)
Class A
-------
Management fee (%) /(3)/.............................................. 0.77
Distribution and service (12b-1) fees (%)............................. 0.00
Other expenses (%).................................................... 0.09
Total annual fund operating expenses (%)/(4)/......................... 0.86
- ----------
/(1)/ The Acquired Fund pays a management fee of 0.54 and an administration fee
of 0.23. The management fees charged to the Acquired Fund decline as
Acquired Fund assets grow as a percentage of the Acquired Fund's average
daily assets. The breakpoint schedule for the Acquired Fund is as follows:
0.54% for assets up to $500 million; 0.49% for assets in excess of $500
million and up to $1 billion; and 0.35% for assets in excess of $1 billion.
/(2)/ The Acquired Fund's investment advisor and/or some of its other service
providers have agreed to waive fees and/or reimburse expenses until April
30, 2006. The figure shown here is after waivers and/or reimbursements.
There is no guarantee that this limitation will continue after April 30,
2006.
/(3)/ The management fee has been restated to reflect contractual changes to the
management fee for the Acquiring Fund effective November 1, 2004. The
management fees charged to the Acquiring Fund decline as Acquiring Fund
assets grow as a percentage of the Acquiring Fund's average daily assets.
The breakpoint schedule for the Acquiring Fund is as follows: 0.77% for
assets up to $500 million; 0.72% for assets in excess of $500 million and
up to $1 billion; 0.67% for assets in excess of $1 billion and up to $3
billion; 0.60% for assets in excess of $3 billion and up to $6 billion; and
0.58% for assets in excess of $6 billion.
/(4)/ The Acquiring Fund's advisor has voluntarily agreed to waive advisory fees
and reimburse the Acquiring Fund for certain expenses so that the total
annual fund operating expenses (exclusive of distribution and service fees,
brokerage commissions, interest, taxes and extraordinary expenses, if any)
will not exceed 0.80%. If the waiver were reflected in the table the total
annual operating expenses would be 0.80% for Class A. This arrangement
maybe modified or terminated by the distributor at any time. The Acquiring
Fund's advisor has agreed to extend this waiver on a contractual basis
through April 30, 2007 if the merger occurs.
Example Expenses
Example Expenses help shareholders compare the cost of investing in the
Acquired Fund currently with the cost of investing in the Acquiring Fund both
currently and on a pro forma combined basis and also allow shareholders to
compare these costs with the cost of investing in other mutual funds. The "1
Year" column in the table for the Acquired Fund reflects any fee waivers and
expense reimbursements described in the footnotes to the Annual Fund Operating
Expenses table. The Example Expenses use the following hypothetical conditions:
. $10,000 initial investment.
. 5% total return for each year.
. Each Fund's operating expenses remain the same.
. Reinvestment of all dividends and distributions.
Example Expenses
(actual costs may be higher or lower)
Nations Value Portfolio/(1)/ 1 Year 3 Years 5 Years 10 Years
- ---------------------------- ------ ------- ------- --------
Shares $99 $362 $646 $1,455
[/(1)/ The waivers and/or reimbursements shown above under "Annual Fund
Operating Expenses" expire April 30, 2006 and are not reflected in the 3, 5 and
10 year examples.]
Liberty Growth and Income Fund, Variable Series(2) 1 Year 3 Years 5 Years 10 Years
- -------------------------------------------------- ------ ------- ------- --------
Class A $86 $268 $466 $1,037
Liberty Growth and Income Fund, Variable Series (2)
(pro forma combined) 1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------- ------ ------- ------- --------
Class A $88 $274 $477 $1,061
(2) The 1,3,5 and 10 year examples in the table do not take into account any
expense reduction arrangements described in Footnote 5 to the Annual Fund
Operating Expenses table. Your actual costs may be higher or lower.
The projected post-Merger pro forma combined Annual Fund Operating Expenses
and Example Expenses presented above are based on numerous material assumptions,
including (1) that the current contractual agreements will remain in place and
(2) that certain fixed costs involved in operating the Acquired Fund will be
eliminated. Although these projections represent good faith estimates, there can
be no assurance that any particular level of expenses or expense savings will be
achieved because expenses depend on a variety of factors, including the future
level of Acquiring Fund assets, many of which are beyond the control of the
Acquiring Fund or Columbia Management.
Hypothetical Investment and Expense Information
Please see Appendix D for information relating to supplemental hypothetical
investment expense information that provides additional information in a
different format from the preceding Annual Fund Operating Expenses and Example
Expenses tables about the effect of the expenses of the Acquiring Fund,
including investment advisory fees and other Acquiring Fund costs, on the
Acquiring Fund's returns over a 10-year period.
4. How do the investment goals, principal investment strategies and policies
of the Funds compare?
The table below shows the investment goals and principal investment
strategies of each Fund:
Nations Value Portfolio Liberty Growth and Income Fund,
(Acquired Fund) Variable Series (Acquiring Fund)
----------------------------------- -----------------------------------
Investment The Acquired Fund seeks growth of The Acquiring Fund seeks long-term
Goal(s)/Objective(s) capital by investing in companies growth and income.
that are believed to be
undervalued.
Principal Investment . The Acquired Fund normally . Under normal market
Strategies invests at least 80% of its conditions, the Acquiring Fund
assets in common stocks of invests at least 80% of its
U.S. companies. It generally net assets (plus any
invests in companies in a borrowings for investment
broad range of industries with purposes) in U.S. securities,
market capitalizations of at primarily consisting of
least $1 billion and daily large-capitalization
trading volumes of at least $3 (large-cap) stocks. Large-cap
million. stocks are stocks of
large-size companies that have
. The Acquired Fund may also market capitalizations similar
invest up to 20% of its assets in size to those companies in
in foreign securities. the Russell 1000 Value Index.
Up to 10% of the Acquiring
. The Acquired Fund may also Fund's assets may be invested
invest in real estate in debt securities. When
investment trusts. purchasing securities for the
Acquiring Fund, the Fund's
investment advisor generally
chooses securities of
companies it believes are
undervalued.
. In selecting debt securities
for the Acquiring Fund, the
advisor may invest in: (i)
debt securities that are
convertible into common stock;
(ii) corporate debt securities
that are rated investment
grade stocks by at least two
nationally recognized rating
organizations (investment
grade stocks have a rating of
BBB or higher by Standard &
Poor's or Baa or higher by
Moody's Investor's Service,
Inc.); and (iii) debt
securities that are not
guaranteed by the U.S.
government.
The following highlights differences in the Funds' investment policies and
restrictions. For purposes of this discussion, a "fundamental" investment policy
or restriction is one that may not be changed without a shareholder vote.
FUNDAMENTAL POLICIES
The Acquiring Fund and the Acquired Fund have substantially identical
fundamental policies. As a matter of fundamental policy, neither the Acquiring
Fund nor the Acquired Fund may:
. purchase or sell real estate, except that the fund may purchase
securities of issuers which deal or invest in real estate, and may
purchase securities which are secured by real estate or interests in
real estate and it may hold and dispose of real estate or interests in
real estate acquired through the exercise of its rights as a holder of
securities which are secured by real estate or interests therein.
. purchase any securities which would cause 25% or more of the value of
its total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that: (a) there is no
limitation with respect to obligations issued or guaranteed by the
U.S. Government, any state or territory of the United States, or any
of their agencies, instrumentalities or political subdivisions; and
(b) notwithstanding this limitation or any other fundamental
investment limitation, assets may be invested in the securities of one
or more management investment companies to the extent permitted by the
1940 Act, the rules and regulations thereunder and any exemptive
relief obtained by the Acquired Fund.
. purchase securities (except securities issued or guaranteed by the
U.S. Government, its agencies or instrumentalities) of any one issuer
if, as a result, more than 5% of its total assets will be invested in
the securities of such issuer or it would own more than 10% of the
voting securities of such issuer, except that: (a) up to 25% of its
total assets may be invested without regard to these limitations and
(b) a Fund's assets may be invested in the securities of one or more
management investment companies to the extent permitted by the 1940
Act, the rules and regulations thereunder, or any applicable exemptive
relief.
. underwrite any issue of securities within the meaning of the 1933 Act
except when it might technically be deemed to be an underwriter either
(a) in connection with the disposition of a portfolio security or (b)
in connection with the purchase of securities directly from the issuer
thereof in accordance with its investment objective. This restriction
shall not limit the Acquired Fund's ability to invest in securities
issued by other registered management investment companies.
. make loans, except to the extent permitted by the 1940 Act, the rules
and regulations thereunder and any exemptive relief obtained by the
Acquired Fund.
. borrow money or issue senior securities except to the extent permitted
under by the 1940 Act, the rules and regulations thereunder and nay
exemptive relief obtained by the portfolios.
NON-FUNDAMENTAL POLICIES
. The Acquiring Fund may not purchase or sell commodity contracts if the
total initial margin and premiums on the contracts would exceed 5% of
its total assets. As a matter of fundamental policy, the Acquired Fund
may not purchase or sell commodities, except that the Acquired Fund
may, to the extent consistent with its investment objective, invest in
securities of companies that purchase or sell commodities or which
invest in such programs, and purchase and sell options, forward
contracts, futures contracts, and options on futures contracts. This
limitation does not apply to foreign currency transactions, including
without limitation forward currency contracts.
. The Acquiring Fund may not purchase securities on margin, but may
receive short-term credit to clear securities transactions and may
make initial or maintenance margin deposits in connection with futures
transactions. The Acquired Fund has no similar policy.
. The Acquiring Fund may not have a short securities position, unless it
owns, or owns rights (exercisable without payment) to acquire, an
equal amount of such securities. The Acquired Fund has a similar
policy, except that the owned or acquirable securities must be
equivalent in both kind and amount to the securities sold short (short
sales "against the box"). The Acquired Fund may also sell securities
short when it segregates assets in an amount at least equal to the
underlying security or asset.
The Acquired Fund is subject to certain other non-fundamental policies to
which the Acquiring Fund is not subject:
. The Acquired Fund may invest in shares of other open-end management
investment companies, subject to the limitations of the 1940 Act, the
rules thereunder, and any orders obtained thereunder now or in the
future;
. The Acquired Fund may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the
aggregate) one-third of its total assets, provided that such loans of
portfolio securities are fully collateralized based on values that are
marked to market daily; and
. The Acquired Fund may not make investments for the purpose of
exercising control of management. (Investments by the Fund in entities
created under the laws of foreign countries solely to facilitate
investment in securities in those countries will not be deemed the
making of investments for the purpose of exercising control.)
For a complete list of each Fund's investment policies and restrictions,
see each Fund's Statement of Additional Information.
5. What class of the Acquiring Fund shares will shareholders receive if the
Merger occurs?
If the Merger occurs, holders of shares of the Acquired Fund will receive
Class A shares of the Acquiring Fund. The merger will not result in any changes
to the procedures for purchasing and redeeming shares of the Acquiring Fund.
For more information on the Acquiring Fund's current distribution,
purchase, redemption and exchange policies, see Appendix D.
6. What are the federal income tax consequences of the Merger?
The Merger is expected to be tax-free to Separate Accounts as shareholders
for federal income tax purposes. This means that neither Separate Accounts,
Contract Owners nor the Acquired Fund are expected to recognize a gain or loss
directly as a result of the Merger. Although the Merger will end the tax year of
the Acquired Fund, and possibly accelerate distributions from the Acquired Fund
to Separate Accounts as shareholders, there will be no tax consequences to
Contract Owners.
The cost basis and holding period of shares in the Acquired Fund are
expected to carry over to new shares in the Acquiring Fund.
Certain other tax consequences are discussed below under "Federal Income
Tax Consequences."
7. Who bears the expenses associated with the Merger?
Columbia Management, the Acquiring Fund and the Acquired Fund each will
bear a portion of the out-of-pocket expenses associated with the Merger.
Out-of-pocket expenses associated with the Merger include, but are not limited
to: (1) the expenses associated with the preparation, printing and mailing of
any shareholder communications, including this Prospectus/Proxy Statement, and
any filings with the SEC and/or other governmental authorities in connection
with the Merger; (2) the fees and expenses of any proxy solicitation firm
retained in connection with the Merger; (3) the legal fees and expenses incurred
by the Funds in connection with the Merger; and (4) the trustees' fees and
out-of-pocket expenses incurred in connection with the Merger.
The out-of-pocket expenses of the Merger are first allocated to the
Acquiring Fund or to the Acquired Fund. Merger-related costs that are
specifically allocable to one Fund are allocated to that Fund (e.g., the costs
of printing and mailing this Prospectus/Proxy Statement are allocated
exclusively to the Acquired Fund). Costs of the Merger that are not specifically
allocable to either Fund are divided equally between the Funds. Following this
initial allocation between the Funds, Columbia Management limits the expenses
actually allocated to a Fund in each Merger to the lesser of (i) the anticipated
reductions in expenses borne by that Fund over the first year following the
Merger and (ii) 75% of the initial allocation to that Fund. Any reduction in the
Merger expenses allocable to a Fund as a result of these limitations is borne by
Columbia Management, not the other Fund. The estimated costs of the Merger to be
borne by the Acquired Fund and the Acquiring Fund are approximately $ 20,250 and
$0 (approximately $ [ ] and $[ ] per share based on shares outstanding as of
-- --
the Record Date), respectively, assuming completion of the Merger. Should the
Merger fail to occur, Columbia Management will bear all costs associated with
the Merger.
8. Who is eligible to vote?
As of the Record Date, the Acquired Fund had [ ] shares outstanding.
------
Only shareholders who owned shares on the Record Date are entitled to vote at
the Meeting or any adjournment of the Meeting. Except for certain seed capital
investments, all shares of the Acquired Fund are owned of record by sub-accounts
of Separate Accounts of the Participating Insurance Companies established to
fund benefits under Contracts issued by such Participating Insurance Companies.
All shareholders of the Acquired Fund will vote together as a single class
on this proposal. Each shareholder will be entitled to vote based on the ratio
its interest bears to the interests of all shareholders entitled to vote.
Shareholders may vote either in person or by duly executed proxy and each
shareholder shall be entitled to a vote proportionate to its interest in Nations
Trust. No proxy shall be valid after eleven (11) months from the date of
execution, unless a longer period is expressly stated in such proxy. Shares
represented by properly executed proxies, unless revoked before or at the
Meeting, will be voted according to shareholder instructions. If a shareholder
signs a proxy but does not fill in a vote, the shareholder's shares will be
voted to approve the Merger, and if any other business comes before the Meeting,
the shareholder's shares will be voted at the discretion of the persons named as
proxies.
Each Contract Owner is entitled to instruct his or her Participating
Insurance Company as to how to vote its shares held on behalf of such Contract
Owner. Please refer to "Contract Owner Instructions" located in Section III for
more information.
9. Why is the Acquiring Fund expected to be reorganized following the Merger?
At a meeting held on May 11, 2005, the Trustees, including all Trustees who are
not "interested persons" of the Acquiring Fund (as defined in section 2(a)(19)
of the 1940 Act) (each, for purposes of this question 9, an "Independent
Trustee"), unanimously approved the reorganization of the Acquiring Fund as a
series of an existing Massachusetts business trust, SteinRoe Variable Investment
Trust (the "Trust Reorganization"). In the Trust Reorganization, the Acquiring
Fund will be reorganized into a newly created series of SteinRoe Variable
Investment Trust. The primary purpose of the Trust Reorganization is to
facilitate compliance monitoring and administration for the Columbia Funds.
Consummation of the Trust Reorganization with respect to the
Acquiring Fund is expected to occur immediately following completion of the
Merger. The Merger is not conditioned on the completion of the Trust
Reorganization. Shareholders of the Acquired Fund are not being asked to approve
the Trust Reorganization.
Please refer to Appendix F for a comparison of the significant
differences between the organizational documents that apply to the Acquired
Fund, the Acquiring Fund and SteinRoe Variable Investment Trust.
II. PROPOSAL -- MERGER OF THE ACQUIRED FUND INTO THE ACQUIRING FUND
The Proposal
Shareholders of the Acquired Fund are being asked to approve the Agreement
and Plan of Reorganization, the form of which is attached as Appendix A to this
Prospectus/Proxy Statement. By approving the Agreement and Plan of
Reorganization, you are approving the merger of the Acquired Fund into the
Acquiring Fund.
Principal Investment Risks
What are the principal investment risks of the Acquiring Fund, and how do
they compare with those of the Acquired Fund?
The principal risks associated with each Fund are similar because the Funds
generally have similar investment goals and principal investment strategies. The
actual risks of investing in each Fund depend on the securities held in each
Fund's portfolio and on market conditions, both of which change over time. The
table below shows the principal investment risks of each Fund:
- --------------------------------------------------------------------------------
Liberty Growth and Income,
Nations Value Portfolio Variable Series
(Acquired Fund) (Acquiring Fund)
- --------------------------------------------------------------------------------
Principal . Investment Strategy Risk: . Management Risk: Management
Investment The team chooses stocks Risk means that the advisor's
Risks that it believes are investment decisions might
undervalued, with the produce losses or cause the
expectation that they Acquiring Fund to
will rise in value. There underperform when compared to
is a risk that the value other funds with similar
of these investments will investment goals. Market risk
not rise as high as the means that security prices in
team expects, or will a market, sector or industry
fall. may fall, reducing the value
of your investment. Because
. Stock Market Risk: The of management and market
value of the risk, there is no guarantee
that the Fund will
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
stocks the Portfolio achieve its investment goals
holds can be affected by or perform favorably among
changes in U.S. or comparable funds.
foreign economies and
financial markets, and . Interest Rate Risk: Interest
the companies that issue rate risk is the risk of a
the stocks, among other change in the price of a bond
things. Stock prices can when prevailing interest
rise or fall over short rates increase or decline. In
as well as long periods. general, if interest rates
In general, stock markets rise, bond prices fall, and
tend to move in cycles, if interest rates fall, bond
with periods of rising prices rise. Changes in the
prices and periods of values of bonds usually will
falling prices. not affect the amount of
income the Fund receives from
. Foreign Investment Risk: them but will affect the
Because the Portfolio may value of the Fund's shares.
invest up to 20% of its Interest rate risk is
assets in foreign generally greater for bonds
securities, it can be with longer maturities.
affected by the risks of
foreign investing. . Debt Security Risk: Because
Foreign investments may the Fund may invest in debt
be riskier than U.S. securities issued or
investments because of supported by private
political and economic entities, including corporate
conditions, changes in bonds and mortgage-backed and
currency exchange rates, asset-backed securities, the
foreign controls on Fund is subject to issuer
investment, difficulties risk.
selling some securities
and lack of or limited . Issuer Risk: Issuer risk is
financial information. the possibility that changes
Significant levels of in the financial condition of
foreign taxes, including the issuer of a security,
potentially confiscatory changes in general economic
levels of taxation and conditions, or changes in
withholding taxes, also economic conditions that
may apply to some foreign affect the issuer may impact
investments. its actual or perceived
willingness or ability to
make timely payments of
interest or principal. This
could result in a decrease in
the price of the security and
in some cases a decrease in
income.
. Equity Security Risk: Since
it purchases equity
securities, the Fund is
subject to equity risk. This
is the risk that stock prices
will fall over short or
extended periods of time.
Although the stock market has
historically outperformed
other asset classes over the
long term, the stock market
tends to move in cycles.
Individual stock prices may
fluctuate drastically from
day to day and may
underperform other asset
classes over an extended
period of time. Individual
companies may report poor
results or be negatively
affected by industry and/or
economic trends and
developments. The prices of
securities issued by such
companies may suffer a
decline in response. These
price movements may result
from factors affecting
individual companies,
industries or the securities
market as a whole.
. Value Stock Risk: Value
stocks are stocks of
companies that may have
experienced adverse business
or industry developments or
may be subject to special
risks that have caused the
stocks to be out of favor
and, in the advisor's
opinion, undervalued. If the
advisor's
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
assessment of a company's
prospects is wrong, the price
of the company's stock may
fall, or may not approach the
value the advisor has placed
on it.
. Convertible Security Risk:
Convertible securities are
securities that can be
converted into common stock,
such as certain debt
securities and preferred
stock. Convertible securities
are subject to the usual
risks associated with fixed
income investments, such as
interest rate risk and credit
risk. In addition, because
they react to changes in the
value of the equity
securities into which they
will convert, convertible
securities are also subject
to market risk.
- --------------------------------------------------------------------------------
For more information about the principal investment risks and other
investment risks of the Acquiring Fund, please see Appendix D.
Please see the answer to question 4 above under "Questions and Answers
Regarding Approval of the Merger" for more information regarding the investment
goals, strategies and policies of the Funds.
Information about the Merger
Terms of the Agreement and Plan of Reorganization
If approved by the shareholders of the Acquired Fund, the Merger is
expected to occur on [May 1, 2006], or such other date as the parties may agree
under the Agreement and Plan of Reorganization. The following is a brief summary
of the principal terms of the Agreement and Plan of Reorganization. Please
review Appendix A to this Prospectus/Proxy Statement for more information
regarding the Agreement and Plan of Reorganization.
. The Acquired Fund will transfer all of the assets and liabilities
attributable to its shares to the Acquiring Fund in exchange for Class
A of the Acquiring Fund with an aggregate net asset value equal to the
net value of the transferred assets and liabilities.
. The assets of each the Acquired Fund and the Acquiring Fund will be
valued for purposes of the Merger as of the close of regular trading
on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on
the business day next preceding the closing date of the Merger
(currently scheduled to be [May 1, 2006]), or such other date as the
parties may agree.
. The Class A shares of the Acquiring Fund received by the Acquired Fund
will be distributed to the shareholders of the Acquired Fund pro rata
in accordance with their percentage ownership of shares of the
Acquired Fund in complete liquidation of the Acquired Fund.
. After the Merger, the Acquired Fund will be terminated under state
law.
. The Merger requires approval by the Acquired Fund's shareholders and
satisfaction of a number of other conditions; the Merger may be
terminated at any time with the approval of the Trustees of Nations
Trust and the Trustees of Liberty.
Shareholders should be aware that the Merger as proposed is not expected to
result in recognition of gain or loss to shareholders for federal income tax
purposes. Shares may be redeemed at any time prior to the consummation of the
Merger.
Shares that Shareholders Will Receive
If the Acquisition occurs, shareholders of the Acquired Fund will receive
Class A shares in the Acquiring Fund. As compared to the Acquired Fund shares
currently owned by shareholders, the Acquiring Fund shares that shareholders
will receive will have the following characteristics:
. They will have an aggregate net asset value equal to the aggregate net
asset value of a shareholder's current shares as of the business day
before the closing of the Merger.
. They will entitle shareholders to voting and other rights generally
similar to those currently enjoyed by shareholders, but as
shareholders of the Acquiring Fund. Please see Appendix F to this
Prospectus/Proxy Statement for more information regarding the
differences between the rights of shareholders of the Acquiring Fund
and shareholders of the Acquired Fund.
. The account options a shareholder has selected for handling
distributions from the Acquired Fund will not change as a result of
the Merger.
Capitalization
Information concerning the capitalization of each of the Funds is contained
in Appendix C to this Prospectus/Proxy Statement.
Reasons for the Merger and Trustees' Considerations
The Trustees of Nations Trust, including all Trustees who are not
"interested persons" (as such term is defined in the 1940 Act), based upon their
evaluation of the information presented to them, and in light of their fiduciary
duties under federal and state law, determined on behalf of the Acquired Fund
that the Merger would be in the best interests of the Acquired Fund's
shareholders and that the interests of existing shareholders in the Acquired
Fund would not be diluted as a result of the Merger. The Trustees have
unanimously approved the Agreement and Plan of Reorganization and the Merger,
and recommend that Acquired Fund shareholders vote in favor of the Merger by
approving the Agreement and Plan of Reorganization.
Columbia Management proposed the Merger to the Trustees of Nations Trust at
meetings held on [ ].
--
At the meeting, the Trustees (with the advice and assistance of independent
counsel) considered, among other things, in no order of priority:
1. the Merger as part of a continuing initiative to streamline and
improve the mutual fund offerings of the Columbia Funds family and the
Nations Funds family by eliminating overlapping funds and clarifying
investor choices;
2. various potential shareholder benefits of the Merger;
3. the current asset level of the Acquired Fund and the combined pro
forma asset level of the Acquiring Fund;
4. the historical performance of the Acquired Fund and the Acquiring Fund
(see "Performance Information" below), although no assurances can be
given that the Acquiring Fund will achieve any particular level of
performance after the Merger;
5. the investment objectives and principal investment strategies of the
Funds;
6. that holders of shares of the Acquired Fund are expected to experience
lower total net operating expense ratios as respective holders of
Class A of the Acquiring Fund after the Merger;
7. the anticipated tax-free nature of the exchange of shares in the
Merger and other expected U.S. federal income tax consequences of the
Merger, including limitations on the use of realized and unrealized
losses for U.S. federal income tax purposes and the potential
diminution of the ability to use such losses to offset future gains
(see "Federal Income Tax Consequences" below);
8. the potential benefits of the Merger to Columbia and its affiliates
(e.g., the benefit of consolidating resources within Columbia
Management);
9. various aspects of the Merger and the Agreement and Plan of
Reorganization, including the fact that the Acquiring Fund will be
part of a Massachusetts business trust;
10. the fact that shareholders of the Acquired Fund will experience no
change in shareholder services as a result of the Merger;
11. that Columbia Management, the Acquired Fund and the Acquiring Fund
will bear the costs associated with the Merger, such costs to be borne
by the Acquired Fund and the Acquiring Fund only to the extent that
Columbia Management anticipates a reduction in expenses to
shareholders of such fund in the first year following the Merger.
If the Merger is approved by the shareholders, the transaction will combine
the Acquired Fund's assets with those of the Acquiring Fund, resulting in a
combined portfolio that is significantly larger than the Acquired Fund's. Larger
mutual funds often have more buying power (for example, they have greater
opportunity to purchase round lots of securities) and generally are better able
to diversify their portfolios.
Columbia Management also believes that the Merger helps eliminate
overlapping products. The Acquired Fund and the Acquiring Fund are both funds
that invest primarily in U.S. securities of large companies. Columbia Management
believes that streamlining its product offerings in a particular asset segment
will help to minimize investor confusion.
The Acquired Fund and Acquiring Fund are currently managed by the same
portfolio managers. Columbia Management believes that shareholders of both the
Acquired Fund and the Acquiring Fund will benefit from centralized fund
management.
Performance Information
The bar charts below show the percentage gain or loss in each calendar year
for the 6-year period ending December 31, 2004, for shares of the Acquired Fund
and the 10-year period ending December 31, 2004, for the Class A shares of the
Acquiring Fund. The bar charts should give you a general idea of how the
Acquired Fund's and the Acquiring Fund's returns have varied from year to year.
The bar charts include the effect of Fund expenses. The calculations of total
returns assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates. Performance results include the effect of expense
reduction arrangements, if any. If these arrangements had not been in place,
total returns would have been lower. As with all mutual funds, past performance
is not an indication of future results. No assurance can be given that the
Acquiring Fund will achieve any particular level of performance after the
Merger.
Additional discussion of the manner of calculating total return is
contained in each Fund's Prospectus and Statement of Additional Information.
Nations Value Portfolio
[CHART]
[Bar Chart]
1999 2.50%
2000 7.47%
2001 -7.20%
2002 -20.73%
2003 30.17%
2004 13.18%
For period shown in bar chart: The Acquired Fund's year-to-
Best quarter: 2nd quarter 2003, 16.39% date total return through June 30,
Worst quarter: 3rd quarter 2002, -20.96% 2005 was 2.30%.
Liberty Growth and Income, Variable Series (Class A)
[CHART]
[Bar Chart]
1995 29.70%
1996 21.84%
1997 32.23%
1998 20.15%
1999 12.00%
2000 3.60%
2001 -0.60%
2002 -21.95%
2003 19.79%
2004 13.76%
For period shown in bar chart: The Acquiring Fund's year-to-
Best quarter: 4th quarter 1998, +21.79% date total return through June 30,
Worst quarter: 3rd quarter 2002, -20.41% 2005 was 0.63%.
The following tables list the average annual total return for the shares of
the Acquired Fund and Class A shares of the Acquiring Fund for the one-year,
five-year and ten-year (or since inception) periods ended December 31, 2004.
The table shows the Acquired Fund's average annual total return for each
period, compared with the Russell 1000 Value Index, an unmanaged index which
measures the performance of the largest U.S. companies based on total market
capitalization, with lower price-to-book ratios and forecasted growth rates
relative to the Russell 1000 Index as a whole. The index is not available for
investment and does not reflect fees, brokerage commissions or other expenses of
investing.
The Acquiring Fund's returns are compared to the Standard & Poor's 500
Index (S&P 500 Index), an unmanaged index that tracks the performance of 500
widely held, large-cap U.S. stocks. Unlike the Fund, indices are not
investments, do not incur fees, expenses or taxes and are not professionally
managed.
Nations Value Portfolio
Average Annual Total Returns -- For Periods Ended December 31, 2004
Since
1 Years 5 Year Inception/(1)/
------- ------ --------------
Shares 13.18% 3.10% 3.32%
Russell 1000 Value Index (Reflects no
deductions for fees or expenses) 16.49% 5.27% 5.48%
- ----------
/(1)/ The inception date of Nations Value Portfolio is March 27, 1998. The
return for the index shown is from that date.
Liberty Growth and Income Fund, Variable Series
Average Annual Total Returns -- For Periods Ended December 31, 2004
1 Year 5 Years 10 Years
------ ------- --------
Class A (%) 13.76 1.84 11.91
S&P 500 Index (%) 10.88 -2.30 12.07
- ----------
Federal Income Tax Consequences
The Merger is intended to be a tax-free reorganization for federal income
tax purposes. Ropes & Gray LLP will deliver to the Acquiring Fund and to the
Acquired Fund an opinion, and the closing of the Merger will be conditioned on
receipt by such Funds of such opinion, to the effect that, on the basis of
existing provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the Treasury regulations promulgated thereunder, current administrative
rules and court decisions, generally for federal income tax purposes:
. the Merger will constitute a reorganization within the meaning of
Section 368(a) of the Code, and the Acquired Fund and the Acquiring
Fund each will be a "party to a reorganization" within the meaning of
Section 368(b) of the Code;
. under Section 361 of the Code, no gain or loss will be recognized by
the Acquired Fund upon the transfer of its assets to the Acquiring
Fund in exchange for Acquiring Fund shares and the assumption by the
Acquiring Fund of the Acquired Fund's liabilities, or upon the
distribution of Acquiring Fund shares by the Acquired Fund to its
Separate Accounts as shareholders in liquidation;
. under Section 354 of the Code, no gain or loss will be recognized by
Separate Accounts as shareholders of the Acquired Fund on the
distribution of Acquiring Fund shares to them in exchange for their
shares of the Acquired Fund;
. under Section 358 of the Code, the aggregate tax basis of the
Acquiring Fund shares that the Acquired Fund's Separate Accounts
receive as shareholders in exchange for their Acquired Fund shares
will be the same as the aggregate tax basis of the Acquired Fund
shares exchanged therefor;
. under Section 1223(1) of the Code, an Acquired Fund Separate Account's
holding period as shareholder of the Acquiring Fund shares received
will be determined by including the holding period for the Acquired
Fund shares exchanged therefor, provided that the Separate Accounts as
shareholder held the Acquired Fund shares as a capital asset;
. under Section 1032 of the Code, no gain or loss will be recognized by
the Acquiring Fund upon receipt of the assets transferred to the
Acquiring Fund in exchange for Acquiring Fund shares and the
assumption by the Acquiring Fund of the liabilities of the Acquired
Fund;
. under Section 362(b) of the Code, the Acquiring Fund's tax basis in
the assets that the Acquiring Fund receives from the Acquired Fund
will be the same as the Acquired Fund's tax basis in such assets
immediately prior to such exchange;
. under Section 1223(2) of the Code, the Acquiring Fund's holding
periods in such assets will include the Acquired Fund's holding
periods in such assets; and
. under Section 381 of the Code, the Acquiring Fund will succeed to the
capital loss carryovers of the Acquired Fund, if any, but the use by
the Acquiring Fund of any such capital loss carryovers (and of capital
loss carryovers of the Acquiring Fund) may be subject to limitation
under Section 383 of the Code.
The opinion will be qualified to reflect that the Code requires that
certain contracts or securities (including, in particular, futures contracts,
certain foreign currency contracts, "nonequity" options and investments in
"passive foreign investment companies") be marked-to-market (treated as sold for
their fair market value) at the end of a taxable year (or upon their termination
or transfer).
The opinion will be based on certain factual certifications made by
officers of the Acquired Fund and Nations Separate Account Trust and will also
be based on customary assumptions. The opinion is not a guarantee that the tax
consequences of the Merger will be as described above. The opinion will note and
distinguish certain published precedent. There is no assurance that the Internal
Revenue Service or a court would agree with the opinion.
This description of the federal income tax consequences of the Merger is
made without regard to the particular circumstances of any Contract Owner.
Contract Owners are urged to consult their own tax advisors as to the specific
consequences to them of the Merger, including the applicability and effect of
state, local, non-U.S. and other tax laws.
THE TRUSTEES OF NATIONS TRUST, ON BEHALF OF THE ACQUIRED FUND, UNANIMOUSLY
RECOMMEND APPROVAL OF THE AGREEMENT AND PLAN OF REORGANIZATION.
Required Vote for Proposal
Approval of the Agreement and Plan of Reorganization will require the
affirmative vote of the lesser of (1) 67% or more of the shareholders present or
represented at such meeting, provided the shareholders of more than 50% of the
interest in the Nations Value Portfolio are present or represented by proxy, or
2) more than 50% of the interest in the Nations Value Portfolio.
III. GENERAL
Voting Information
The Trustees are soliciting proxies from the shareholders of the Acquired
Fund in connection with the Meeting, which has been called to be held at [10:00
a.m. Eastern time] on [March 8, 2006], at Columbia Management's offices at One
Financial Center, Boston, Massachusetts 02111. The meeting notice, this
Prospectus/Proxy Statement and the Proxy Card are expected to be mailed to
shareholders beginning on or about [January 27, 2006].
Information about Proxies and the Conduct of the Meeting
Solicitation of Proxies. Proxies will be solicited primarily through the
mailing of this Prospectus/Proxy Statement and its enclosures, but proxies also
may be solicited through further mailings, telephone calls, personal interviews
or e-mail by officers of the Acquired Fund or by employees or agents of Columbia
Management and its affiliated companies. In addition, Computershare Fund
Services, Inc., 280 Oser Avenue, Hauppage, NY 11788, has been engaged to assist
in the solicitation of proxies, at an estimated cost of $[ ].
--
Voting Process. You can vote in any one of the following ways:
a. By mail, by filling out and returning the enclosed Proxy Card;
b. By phone, fax or Internet (see the enclosed Proxy Card for
instructions); or
c. In person at the Meeting.
Shareholders who owned shares on the Record Date, are entitled to vote at
the Meeting. Each whole share of the Acquired Fund is entitled to one vote, and
each fractional share is entitled to a proportionate fractional vote. Except for
certain seed capital investments, all of the shares of the Acquired Fund are
owned of record by sub-accounts of Separate Accounts of the Participating
Insurance Companies established to fund benefits under Contracts issued by such
Participating Insurance Companies.
Contract Owner Instructions. The Participating Insurance Companies are
mailing copies of these proxy materials to Contract Owners who, by completing
and signing the accompanying voting instruction card, will instruct the Separate
Accounts how they wish the shares of the Fund to be voted. Each Contract Owner
is entitled to instruct his or her Participating Insurance Company as to how to
vote its shares held on behalf of such Contract Holder. The Separate Accounts
will vote shares of the Acquired Fund as instructed on the voting instruction
cards by their Contract Owners. If a Contract Owner simply signs and returns the
voting instruction card, the Separate Accounts will treat the card as an
instruction to vote the shares represented thereby in favor of the Proposal. The
Separate Accounts intend to vote shares for which no voting instruction cards
are returned in the same proportion as the shares for which voting instructions
cards are returned. Shares attributable to amounts retained by the Participating
Insurance Companies will be voted in the same proportion as votes cast by
Contract Owners. Accordingly, there are not expected to be any "broker
non-votes." "Broker non-votes" are shares held by brokers or nominees as to
which (i) the broker or nominee does not have discretionary voting power and
(ii) the broker or nominee has not received instructions from the beneficial
owner or other person who is entitled to instruct how the shares will be voted.
Any Contract Owner giving instructions to a Participating Insurance Company has
the power to revoke such instructions by mail by providing superseding
instructions. All properly executed instructions received in time for the
meeting will be voted as specified in the instructions.
Quorum and Method of Tabulation. Shares represented by a duly executed
proxy will be voted as instructed on the Proxy Card. If no instructions are
given, the proxy will be voted in favor of the Proposal. A shareholder can
revoke a proxy by sending a signed, written letter of revocation to the
Secretary of the Acquired Fund, by properly executing and submitting a
later-dated Proxy Card or by attending the Meeting and voting in person.
Votes cast in person or by proxy at the Meeting will be counted by persons
appointed by the Acquired Fund as tellers for the Meeting (the "Tellers").
Thirty-three and one-third percent (33 1/3%) of the shares of the Acquired Fund
entitled to vote on the record date, present in person or represented by proxy,
constitute a quorum for the transaction of business by the shareholders of the
Acquired Fund at the Meeting. In determining whether a quorum is present, the
Tellers will count shares represented by proxies that reflect abstentions as
shares that are present and entitled to vote. Abstentions will have the effect
of a negative vote on the Proposal. Except for certain seed capital investments,
all of the shares of the Acquired Fund are owned of record by sub-accounts of
Separate Accounts of the Participating Insurance Companies established to fund
benefits under Contracts issued by such Participating Insurance Companies.
Underwriter Address. The address of the Acquired Fund's and the Acquiring
Fund's principal underwriter, Columbia Management Distributor, Inc., is One
Financial Center, Boston, Massachusetts 02111-2621.
Share Ownership. Appendix B to this Prospectus/Proxy Statement lists the
total number of shares outstanding as of the Record Date for each class of the
Acquired Fund entitled to vote at the Meeting. It also identifies holders of
more than five percent of any class of shares of the Acquired Fund, and contains
information about the executive officers and Trustees of the Acquired Fund and
their shareholdings in the Acquired Fund.
Adjournments; Other Business. If the Acquired Fund has not received enough
votes by the time of the Meeting to approve the Proposal, the persons named as
proxies may propose that the Meeting be adjourned one or more times to permit
further solicitation of proxies. Any adjournment requires the affirmative vote
of a majority of the total number of shares voted on the matter, but, for
purposes of adjournment only, any number of shares present at the Meeting or
represented by proxy constitutes a quorum. The persons named as proxies will
vote in favor of any such adjournment all proxies that they are entitled to vote
in favor of the Proposal. They will vote against any such adjournment any
proxies that direct them to vote against the Proposal. They will not vote any
proxies that direct them to abstain from voting on the Proposal.
The Meeting has been called to transact any business that properly comes
before it. The only business that management of the Acquired Fund intends to
present or knows that others will present is the Proposal. If any other matters
properly come before the Meeting, and on all matters incidental to the conduct
of the Meeting, the persons named as proxies intend to vote the proxies in
accordance with their judgment, except where the Secretary of the Acquired Fund
has previously received written instructions to the contrary from shareholders
entitled to vote the shares.
Appendix A -- Form of Agreement and Plan of Reorganization
THIS AGREEMENT AND PLAN OF REORGANIZATION dated as of [January 3, 2006],
is by and among Nations Separate Account Trust (the "Trust"), a Delaware
statutory trust, on behalf of Nations Value Portfolio (the "Acquired Fund"),
Liberty Variable Investment Trust (the "Acquiring Trust"), a Massachusetts
business trust, on behalf of Liberty Growth and Income Trust (the "Acquiring
Fund"), and Columbia Management Advisors, Inc. ("Columbia").
This Agreement is intended to be and is adopted as a plan of reorganization
and liquidation within the meaning of Sections 361(a) and Section 368(a) of the
United States Internal Revenue Code of 1986, as amended (the "Code"), and any
successor provision. The reorganization will consist of the transfer of all of
the assets of the Acquired Fund exchange for Class A shares of beneficial
interest of the Acquiring Fund ("Acquisition Shares"), and the assumption by the
Acquiring Fund of the liabilities of the Acquired Fund (other than certain
expenses of the reorganization contemplated hereby) and the distribution of the
Acquisition Shares, to the shareholders of the Acquired Fund in liquidation of
the Acquired Fund, all upon the terms and conditions set forth in this
Agreement. In consideration of the premises and of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ACQUISITION SHARES AND LIQUIDATION OF ACQUIRED FUND.
1.1. Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein:
a. The Acquired Fund will transfer and deliver to the Acquiring
Fund, and the Acquiring Fund will acquire, all the assets of the
Acquired Fund as set forth in paragraph 1.2;
b. The Acquiring Fund will assume all of the Acquired Fund's
liabilities and obligations of any kind whatsoever, whether
absolute, accrued, contingent or otherwise, in existence on the
Closing Date (as defined in paragraph 1.2 hereof) (the
"Obligations"); except that expenses of the reorganization
contemplated hereby to be paid by the Acquired Fund pursuant to
paragraph 9.2 shall not be assumed or paid by the Acquiring Fund;
and
c. The Acquiring Fund will issue and deliver to the Acquired Fund in
exchange for such assets the number of Acquisition Shares
(including fractional shares, if any) determined by dividing the
net asset values of the shares of the Acquired Fund, computed in
the manner and as of the time and date set forth in paragraph
2.1, by the net asset value of one Acquisition Share, computed in
the manner and as of the time and date set forth in paragraph
2.2. Such transactions shall take place at the closing provided
for in paragraph 3.1 (the "Closing").
1.2. The assets of the Acquired Fund to be acquired by the Acquiring Fund
shall consist of all cash, securities, dividends and interest
receivable, receivables for shares sold and all other assets which are
owned by the Acquired Fund on the closing date provided in paragraph
3.1 (the "Closing Date") and any deferred expenses, other than
unamortized organizational expenses, shown as an asset on the books of
the Acquired Fund on the Closing Date. The Acquiring Fund agrees that
all rights to indemnification and all limitations of liability
existing in favor of the Acquired Fund's current and former Trustees
and officers, acting in their capacities as such, under the Acquired
Fund's Declaration of Trust and Bylaws as in effect as of the date of
this Agreement shall survive the reorganization as obligations of the
Acquiring Fund and shall continue in full
force and effect, without any amendment thereto, and shall constitute
rights which may be asserted against the Acquired Fund, its successors
or assigns.
1.3. As provided in paragraph 3.4, as soon after the Closing Date as is
conveniently practicable (the "Liquidation Date"), the Acquired Fund
will liquidate and distribute pro rata to its shareholders of record
("Acquired Fund Shareholders"), determined as of the close of business
on the Valuation Date (as defined in paragraph 2.1), Acquisition
Shares received by the Acquired Fund pursuant to paragraph 1.1. Such
liquidation and distribution will be accomplished by the transfer of
the Acquisition Shares then credited to the account of the Acquired
Fund on the books of the Acquiring Fund to open accounts on the share
records of the Acquiring Fund in the names of the Acquired Fund
Shareholders and representing the respective pro rata number of
Acquisition Shares due such shareholders. The Acquiring Fund shall not
be obligated to issue certificates representing Acquisition Shares in
connection with such exchange.
1.4. With respect to Acquisition Shares distributable pursuant to paragraph
1.3 to an Acquired Fund Shareholder holding a certificate or
certificates for shares of the Acquired Fund, if any, on the Valuation
Date, the Acquiring Fund will not permit such shareholder to receive
Acquisition Share certificates therefor, exchange such Acquisition
Shares for shares of other investment companies, effect an account
transfer of such Acquisition Shares, or pledge or redeem such
Acquisition Shares until the Acquiring Fund has been notified by the
Acquired Fund or its agent that such Acquired Fund Shareholder has
surrendered all his or her outstanding certificates for Acquired Fund
shares or, in the event of lost certificates, posted adequate bond.
1.5. As soon as practicable after the Closing Date, the Acquired Fund shall
make all filings and take all other steps as shall be necessary and
proper to effect its complete dissolution.
2. VALUATION.
2.1. For the purpose of paragraph 1, the value of the Acquired Fund's
assets to be acquired by the Acquiring Fund hereunder shall be the net
asset value computed as of the close of regular trading on the New
York Stock Exchange on the business day next preceding the Closing
(such time and date being herein called the "Valuation Date") using
the valuation procedures set forth in the Declaration of Trust of the
Acquiring Fund and the then current prospectus or prospectuses or
statement or statements of additional information of the Acquiring
Fund (collectively, as amended or supplemented from time to time, the
"Acquiring Fund Prospectus"), after deduction for the expenses of the
reorganization contemplated hereby to be paid by the Acquired Fund
pursuant to paragraph 9.2, and shall be certified by the Acquired
Fund.
2.2. For the purpose of paragraph 2.1, the net asset value of a Acquisition
Shares shall be the net asset value per share computed as of the close
of regular trading on the New York Stock Exchange on the Valuation
Date, using the valuation procedures set forth in the Declaration of
Trust of the Acquiring Fund and the Acquiring Fund Prospectus.
3. CLOSING AND CLOSING DATE.
3.1. The Closing Date shall be on [May 1, 2006], or on such other date as
the parties may agree. The Closing shall be held at [10:00a.m.] at
Columbia's offices, One Financial Center, Boston, Massachusetts 02111,
or at such other time and/or place as the parties may agree.
3.2. The portfolio securities of the Acquired Fund shall be made available
by the Acquired Fund to State Street Bank and Trust Company, as
custodian for the Acquiring Fund (the "Custodian"), for examination no
later than five business days preceding the Valuation Date. On the
Closing Date, such portfolio securities and all the Acquired Fund's
cash shall be delivered by the Acquired Fund to the Custodian for the
account of the Acquiring Fund, such portfolio securities to be duly
endorsed in proper form for transfer in such manner and condition as
to constitute good delivery thereof in accordance with the custom of
brokers or, in the case of portfolio securities held in the U.S.
Treasury Department's book-entry system or by the Depository Trust
Company, Participants Trust Company or other third party depositories,
by transfer to the account of the Custodian in accordance with Rule
17f-4, Rule 17f-5 or Rule 17f-7, as the case may be, under the
Investment Company Act of 1940, as amended (the "1940 Act") and
accompanied by all necessary federal and state stock transfer stamps
or a check for the appropriate purchase price thereof. The cash
delivered shall be in the form of currency or certified or official
bank checks, payable to the order of "State Street Bank and Trust
Company, custodian for Liberty Growth and Income Fund, Variable
Series."
3.3. In the event that on the Valuation Date (a) the New York Stock
Exchange shall be closed to trading or trading thereon shall be
restricted, or (b) trading or the reporting of trading on said
Exchange or elsewhere shall be disrupted so that accurate appraisal of
the value of the net assets of the Acquired Fund or the Acquiring Fund
is impracticable, the Closing Date shall be postponed until the first
business day after the day when trading shall have been fully resumed
and reporting shall have been restored; provided that if trading shall
not be fully resumed and reporting restored within three business days
of the Valuation Date, this Agreement may be terminated by the
Acquiring Fund upon the giving of written notice to the other party.
3.4. At the Closing, the Acquired Fund or its transfer agent shall deliver
to the Acquiring Fund or its designated agent a list of the names and
addresses of the Acquired Fund Shareholders and the number of
outstanding shares of beneficial interest of the Acquired Fund owned
by each Acquired Fund Shareholder, all as of the close of business on
the Valuation Date, certified by any Vice President, Secretary or
Assistant Secretary of the Acquired Fund. The Acquiring Fund will
provide to the Acquired Fund evidence satisfactory to the Acquired
Fund that the Acquisition Shares issuable pursuant to paragraph 1.1
have been credited to the Acquired Fund's account on the books of the
Acquiring Fund. On the Liquidation Date, the Acquiring Fund will
provide to the Acquired Fund evidence satisfactory to the Acquired
Fund that such Acquisition Shares have been credited pro rata to open
accounts in the names of the Acquired Fund Shareholders as provided in
paragraph 1.3.
3.5. At the Closing each party shall deliver to the other such bills of
sale, instruments of assumption of liabilities, checks, assignments,
stock certificates, receipts or other documents as such other party or
its counsel may reasonably request in connection with the transfer of
assets, assumption of liabilities and liquidation contemplated by
paragraph 1.
4. REPRESENTATIONS AND WARRANTIES.
4.1. Nations Trust, on behalf of the Acquired Fund, represents and warrants
the following to the Acquiring Fund as of the date hereof and agrees
to confirm the continuing accuracy and completeness in all material
respects of the following on the Closing Date:
a. Nations Trust is a statutory trust duly organized, validly
existing and in good standing under the laws of the State of
Delaware;
b. Nations Trust is a duly registered investment company classified
as a management company of the open-end type and its registration
with the Securities and Exchange Commission as an investment
company under the 1940 Act is in full force and effect, and the
Acquired Fund is a separate series thereof duly designated in
accordance with the applicable provisions of the Declaration of
Trust of Nations Trust and the 1940 Act;
c. The Acquired Fund is not in violation in any material respect of
any provision of its Declaration of Trust or Bylaws or of any
agreement, indenture, instrument, contract, lease or other
undertaking to which the Acquired Fund is a party or by which the
Acquired Fund is bound, and the execution, delivery and
performance of this Agreement will not result in any such
violation;
d. The Acquired Fund has no material contracts or other commitments
(other than this Agreement and such other contracts as may be
entered into in the ordinary course of its business) which if
terminated may result in material liability to the Acquired Fund
or under which (whether or not terminated) any material payments
for periods subsequent to the Closing Date will be due from the
Acquired Fund;
e. To the knowledge of the Acquired Fund, except as has been
disclosed in writing to the Acquiring Fund, no litigation or
administrative proceeding or investigation of or before any court
or governmental body is presently pending or threatened as to the
Acquired Fund or any of its properties or assets or any person
whom the Acquired Fund may be obligated to indemnify in
connection with such litigation, proceeding or investigation, and
the Acquired Fund is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental
body, which materially and adversely affects its business or its
ability to consummate the transactions contemplated hereby;
f. The statement of assets and liabilities, the statement of
operations, the statement of changes in net assets, and the
schedule of investments of the Acquired Fund at as of and for the
fiscal year ended December 31, 2004, audited by
PricewaterhouseCoopers LLP, and the statement of assets and
liabilities, the statement of operations, the statement of
changes in net assets and the schedule of investments at, as of
and for the six months ended June 30, 2005, copies of which have
been furnished to the Acquiring Fund, fairly reflect the
financial condition and results of operations of the Acquired
Fund as of such date and for the period then ended in accordance
with generally accepted accounting principles consistently
applied, and the Acquired Fund has no known liabilities of a
material amount, contingent or otherwise, other than those shown
on the statements of assets referred to above or those incurred
in the ordinary course of its business since June 30, 2005;
g. Since June 30, 2005, there has not been any material adverse
change in the Acquired Fund's financial condition, assets,
liabilities or business (other than changes occurring in the
ordinary course of business), or any incurrence by the Acquired
Fund of indebtedness, except as disclosed in writing to the
Acquiring Fund. For the purposes of this subparagraph (g),
distributions of net investment income and net realized capital
gains, changes in portfolio securities, changes in the market
value of portfolio securities or net redemptions shall be deemed
to be in the ordinary course of business;
h. As of the Closing Date, all federal and other tax returns and
reports of the Acquired Fund required by law to have been filed
by such date (giving effect to
extensions) shall have been filed, and all federal and other
taxes shown to be due on such returns and reports or on any
assessment received shall have been paid, or provisions shall
have been made for the payment thereof. All of the Acquired
Fund's tax liabilities will have been adequately provided for on
its books. To the best of the Acquired Fund's knowledge, it will
not have had any tax deficiency or liability asserted against it
or question with respect thereto raised, and it will not be under
audit by the Internal Revenue Service or by any state or local
tax authority for taxes in excess of those already paid;
i. For all taxable years and all applicable quarters of the Acquired
Fund from the date of its inception, the assets of the Acquired
Fund have been sufficiently diversified that each segregated
asset account investing all its assets in the Acquired Fund was
adequately diversified within the meaning of Section 817(h) of
the Code and applicable regulations thereunder.
j. The Acquired Fund has met the requirements of subchapter M of the
Code for treatment as a "regulated investment company" within the
meaning of Section 851 of the Code in respect of each taxable
year since the commencement of operations, and will continue to
meet such requirements at all times through the Closing Date. The
Acquired Fund has not at any time since its inception been liable
for nor is now liable for any material income or excise tax
pursuant to Section 852 or 4982 of the Code. The Acquired Fund is
in compliance in all material respects with applicable
regulations of the Internal Revenue Service pertaining to the
reporting of dividends and other distributions on and redemptions
of its capital stock and to withholding in respect of dividends
and other distributions to shareholders, and is not liable for
any material penalties which could be imposed thereunder;
k. The authorized capital of Nations Trust consists of an unlimited
number of shares of beneficial interest, no par value, of such
number of different series as the Board of Trustees may authorize
from time to time. The outstanding shares of beneficial interest
in the Acquired Fund have the characteristics described in the
Acquired Fund's then current prospectus or prospectuses or
statement or statements of additional information (collectively,
as amended from time to time, the "Acquired Fund Prospectus").
All issued and outstanding shares of the Acquired Fund are, and
at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable (except as set forth
in the Acquired Fund Prospectus) by the Acquired Fund, and will
have been issued in compliance with all applicable registration
or qualification requirements of federal and state securities
laws. No options, warrants or other rights to subscribe for or
purchase, or securities convertible into, any shares of
beneficial interest in the Acquired Fund of any class are
outstanding and none will be outstanding on the Closing Date;
l. The Acquired Fund's investment operations from inception to the
date hereof have been in compliance in all material respects with
the investment policies and investment restrictions set forth in
its prospectus or prospectuses and statement or statements of
additional information as in effect from time to time, except as
previously disclosed in writing to the Acquiring Fund;
m. The execution, delivery and performance of this Agreement has
been duly authorized by the Board of the Acquired Fund, and, upon
approval thereof by the required majority of the shareholders of
the Acquired Fund, this Agreement will constitute the valid and
binding obligation of the Acquired Fund enforceable in accordance
with its terms except as the same may be limited by
bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and
other equitable principles;
n. The Acquisition Shares to be issued to the Acquired Fund pursuant
to paragraph 1 will not be acquired for the purpose of making any
distribution thereof other than to the Acquired Fund Shareholders
as provided in paragraph 1.3;
o. The information provided by the Acquired Fund for use in the
Registration Statement and Prospectus/Proxy Statement referred to
in paragraph 5.3 shall be accurate and complete in all material
respects and shall comply with federal securities and other laws
and regulations as applicable thereto;
p. No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquired Fund of the transactions contemplated by this Agreement,
except such as may be required under the Securities Act of 1933,
as amended (the "1933 Act"), the Securities Exchange Act of 1934,
as amended (the "1934 Act"), the 1940 Act and state securities or
"Blue Sky" laws (which terms used herein shall include the laws
of the District of Columbia and of Puerto Rico);
q. At the Closing Date, the Acquired Fund will have good and
marketable title to its assets to be transferred to the Acquiring
Fund pursuant to paragraph 1.1 and will have full right, power
and authority to sell, assign, transfer and deliver the
Investments (as defined below) and any other assets and
liabilities of the Acquired Fund to be transferred to the
Acquiring Fund pursuant to this Agreement. At the Closing Date,
subject only to the delivery of the Investments and any such
other assets and liabilities and payment therefor as contemplated
by this Agreement, the Acquiring Fund will acquire good and
marketable title thereto and will acquire the Investments and any
such other assets and liabilities subject to no encumbrances,
liens or security interests whatsoever and without any
restrictions upon the transfer thereof, except as previously
disclosed to the Acquiring Fund. As used in this Agreement, the
term "Investments" shall mean the Acquired Fund's investments
shown on the schedule of its investments as of June 30, 2005,
referred to in subparagraph 4.1(f) hereof, as supplemented with
such changes in the portfolio as the Acquired Fund shall make,
and changes resulting from stock dividends, stock split-ups,
mergers and similar corporate actions through the Closing Date;
r. At the Closing Date, the Acquired Fund will have sold such of its
assets, if any, as are necessary to assure that, after giving
effect to the acquisition of the assets of the Acquired Fund
pursuant to this Agreement, the Acquiring Fund will remain a
"diversified company" within the meaning of Section 5(b)(1) of
the 1940 Act and in compliance with such other mandatory
investment restrictions as are set forth in the Acquiring Fund
Prospectus, as amended through the Closing Date; and
s. No registration of any of the Investments would be required if
they were, as of the time of such transfer, the subject of a
public distribution by either of the Acquiring Fund or the
Acquired Fund, except as previously disclosed by the Acquired
Fund to the Acquiring Fund.
4.2. The Acquiring Trust, on behalf of the Acquiring Fund, represents and
warrants the following to the Acquired Fund as of the date hereof and
agrees to confirm the continuing accuracy and completeness in all
material respects of the following on the Closing Date:
a. The Acquiring Trust is an unincorporated voluntary association
with transferable shares of beneficial interest (commonly
referred to as a business trust) duly organized, validly existing
and in good standing under the laws of The Commonwealth of
Massachusetts;
b. The Acquiring Trust is a duly registered investment company
classified as a management company of the open-end type and its
registration with the Securities and Exchange Commission as an
investment company under the 1940 Act is in full force and
effect, and the Acquiring Fund is a separate series thereof duly
designated in accordance with the applicable provisions of the
Declaration of Trust of the Acquiring Trust and the 1940 Act;
c. The Acquiring Fund Prospectus conforms in all material respects
to the applicable requirements of the 1933 Act and the rules and
regulations of the Securities and Exchange Commission thereunder
and does not include any untrue statement of a material fact or
omit to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and
there are no material contracts to which the Acquiring Fund is a
party that are not referred to in such Acquiring Fund Prospectus
or in the registration statement of which it is a part;
d. At the Closing Date, the Acquiring Fund will have good and
marketable title to its assets;
e. The Acquiring Fund is not in violation in any material respect of
any provisions of its Declaration of Trust or Bylaws or of any
agreement, indenture, instrument, contract, lease or other
undertaking to which the Acquiring Fund is a party or by which
the Acquiring Fund is bound, and the execution, delivery and
performance of this Agreement will not result in any such
violation;
f. To the knowledge of the Acquiring Fund, except as has been
disclosed in writing to the Acquired Fund, no litigation or
administrative proceeding or investigation of or before any court
or governmental body is presently pending or threatened as to the
Acquiring Fund or any of its properties or assets or any person
whom the Acquiring Fund may be obligated to indemnify in
connection with such litigation, proceeding or investigation, and
the Acquiring Fund is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental
body, which materially and adversely affects its business or its
ability to consummate the transactions contemplated hereby;
g. The statement of assets and liabilities, the statement of
operations, the statement of changes in net assets, and the
schedule of investments at, as of and for the fiscal year ended
December 31, 2004, of the Acquiring Fund, audited by
PricewaterhouseCoopers LLP, and the statement of assets and
liabilities, the statement of operations, the statement of
changes in net assets and the schedule of investments at, as of
and for the six months ended June 30, 2005, copies of which have
been furnished to the Acquired Fund, fairly reflect the financial
condition and results of operations of the Acquiring Fund as of
such date and for the period then ended in accordance with
generally accepted accounting principles consistently applied,
and the Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise, other than those shown on the
statements of assets referred to above or those incurred in the
ordinary course of its business since June 30, 2004;
h. Since June 30,2005, there has not been any material adverse
change in the Acquiring Fund's financial condition, assets,
liabilities or business (other than changes occurring in the
ordinary course of business), or any incurrence by the Acquiring
Fund of indebtedness. For the purposes of this subparagraph (h),
changes in portfolio securities, changes in the market value of
portfolio securities or net redemptions shall be deemed to be in
the ordinary course of business;
i. As of the Closing Date, all federal and other tax returns and
reports of the Acquiring Fund required by law to have been filed
by such date (giving effect to extensions) shall have been filed,
and all federal and other taxes shown to be due on such returns
and reports or any assessments received shall have been paid, or
provisions shall have been made for the payment thereof. All of
the Acquiring Fund's tax liabilities will have been adequately
provided for on its books. To the best of the Acquiring Fund's
knowledge, it will not have not have had any tax deficiency or
liability asserted against it or question with respect thereto
raised, and it will not be under audit by the Internal Revenue
Service or by any state or local tax authority for taxes in
excess of those already paid;
j. The Acquiring Fund has met the requirements of subchapter M of
the Code for treatment as a "regulated investment company" within
the meaning of Section 851 of the Code in respect of each taxable
year since the commencement of operations, and will continue to
meet such requirements at all times through the Closing Date. The
Acquiring Fund has not at any time since its inception been
liable for nor is now liable for any material income or excise
tax pursuant to Section 852 or 4982 of the Code. The Acquiring
Fund is in compliance in all material respects with applicable
regulations of the Internal Revenue Service pertaining to the
reporting of dividends and other distributions on and redemptions
of its capital stock and to withholding in respect of dividends
and other distributions to shareholders, and is not liable for
any material penalties which could be imposed thereunder;
k. For all taxable years and all applicable quarters of the
Acquiring Fund from the date of its inception, the assets of the
Acquiring Fund have been sufficiently diversified that each
segregated asset account investing all its assets in the Acquired
Fund was adequately diversified within the meaning of Section
817(h) of the Code and applicable regulations thereunder.
l. The authorized capital of the Acquiring Trust consists of an
unlimited number of shares of beneficial interest, no par value,
of such number of different series as the Board of Trustees may
authorize from time to time. The outstanding shares of beneficial
interest in the Acquiring Fund are, and at the Closing Date will
be, divided into Class A shares and Class A shares, each having
the characteristics described in the Acquiring Fund Prospectus.
All issued and outstanding shares of the Acquiring Fund are, and
at the Closing Date will be, duly and validly issued and
outstanding, fully paid and non-assessable (except as set forth
in the Acquiring Fund Prospectus) by the Acquiring Fund, and will
have been issued in compliance with all applicable registration
or qualification requirements of federal and state securities
laws. No options, warrants or other rights to subscribe for or
purchase, or securities convertible into, any shares of
beneficial interest in the Acquiring Fund of any class are
outstanding and none will be outstanding on the Closing Date;
m. The Acquiring Fund's investment operations from inception to the
date hereof have been in compliance in all material respects with
the investment policies and investment restrictions set forth in
the Acquiring Fund Prospectus;
n. The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the
Acquiring Fund, and this Agreement constitutes the valid and
binding obligation of the Acquiring Fund enforceable in
accordance with its terms, except as the same may be limited by
bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and
other equitable principles;
o. The Acquisition Shares to be issued and delivered to the Acquired
Fund pursuant to the terms of this Agreement will at the Closing
Date have been duly authorized and, when so issued and delivered,
will be duly and validly issued Class A shares of beneficial
interest in the Acquiring Fund, and will be fully paid and
non-assessable (except as set forth in the Acquiring Fund
Prospectus) by the Acquiring Fund, and no shareholder of the
Acquiring Fund will have any preemptive right of subscription or
purchase in respect thereof;
p. The information to be furnished by the Acquiring Fund for use in
the Registration Statement and Prospectus/Proxy Statement
referred to in paragraph 5.3 shall be accurate and complete in
all material respects and shall comply with federal securities
and other laws and regulations applicable thereto; and
q. No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions contemplated by this
Agreement, except such as may be required under the 1933 Act, the
1934 Act, the 1940 Act and state securities or "Blue Sky" laws
(which term as used herein shall include the laws of the District
of Columbia and of Puerto Rico).
5. COVENANTS OF THE ACQUIRED FUND AND THE ACQUIRING FUND.
The Acquired Fund and Acquiring Fund hereby covenant and agree as follows:
5.1. The Acquiring Fund and the Acquired Fund each will operate its
business in the ordinary course between the date hereof and the
Closing Date, it being understood that such ordinary course of
business will include regular and customary periodic dividends and
distributions.
5.2. The Acquired Fund will call a meeting of its shareholders to be held
prior to the Closing Date to consider and act upon this Agreement and
take all other reasonable action necessary to obtain the required
shareholder approval of the transactions contemplated hereby.
5.3. In connection with the Acquired Fund shareholders' meeting referred to
in paragraph 5.2, the Acquired Fund will prepare a Prospectus/Proxy
Statement for such meeting, to be included in a Registration Statement
on Form N-14 (the "Registration Statement") which the Acquiring Fund
will prepare and file for registration under the 1933 Act of the
Acquisition Shares to be distributed to the Acquired Fund shareholders
pursuant hereto, all in compliance with the applicable requirements of
the 1933 Act, the 1934 Act, and the 1940 Act.
5.4. The information to be furnished by the Acquired Fund for use in the
Registration Statement and the information to be furnished by the
Acquiring Fund for use in the Prospectus/Proxy Statement, each as
referred to in paragraph 5.3, shall be accurate and complete in all
material respects and shall comply with federal securities and other
laws and regulations thereunder applicable thereto.
5.5. The Acquiring Fund will advise the Acquired Fund promptly if at any
time prior to the Closing Date the assets of the Acquired Fund include
any securities which the Acquiring Fund is not permitted to acquire.
5.6. Subject to the provisions of this Agreement, the Acquired Fund and the
Acquiring Fund will each take, or cause to be taken, all action, and
do or cause to be done, all things reasonably necessary, proper or
advisable to cause the conditions to the other party's obligations to
consummate the transactions contemplated hereby to be met or fulfilled
and otherwise to consummate and make effective such transactions.
5.7. The Acquiring Fund will use all reasonable efforts to obtain the
approvals and authorizations required by the 1933 Act, the 1940 Act
and such of the state securities or "Blue Sky" laws as it may deem
appropriate in order to continue its operations after the Closing
Date.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND.
The obligations of the Acquired Fund to consummate the transactions
provided for herein shall be subject, at its election, to the performance by the
Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date and, in addition thereto, to the following further
conditions:
6.1. The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its President or Vice President
and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquired Fund and dated as of the Closing Date, to
the effect that the representations and warranties of the Acquiring
Fund made in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and that the Acquiring Fund has
complied with all the covenants and agreements and satisfied all of
the conditions on their parts to be performed or satisfied under this
Agreement at or prior to the Closing Date.
6.2. The Acquired Fund shall have received a favorable opinion of Ropes &
Gray LLP, counsel to the Acquiring Fund for the transactions
contemplated hereby, dated the Closing Date and, in a form
satisfactory to the Acquired Fund, to the following effect:
a. The Acquiring Trust is an unincorporated voluntary association
with transferable shares of beneficial interest (commonly
referred to as a business trust) duly organized and validly
existing under the laws of The Commonwealth of Massachusetts and
has power to own all of its properties and assets and to carry on
its business as presently conducted, and the Acquiring Fund is a
separate series thereof duly constituted in accordance with the
applicable provisions of the 1940 Act and the Declaration of
Trust and Bylaws of the Acquiring Trust;
b. This Agreement has been duly authorized, executed and delivered
on behalf of the Acquiring Fund and, assuming the Registration
Statement and the Prospectus/Proxy Statement referred to in
paragraph 5.3 comply with applicable federal securities laws and
assuming the due authorization, execution and
delivery of this Agreement by the Acquired Fund, is the valid and
binding obligation of the Acquiring Fund enforceable against the
Acquiring Fund in accordance with its terms, except as the same
may be limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights
generally and other equitable principles;
c. The Acquiring Fund has the power to assume the liabilities to be
assumed by it hereunder and upon consummation of the transactions
contemplated hereby the Acquiring Fund will have duly assumed
such liabilities;
d. The Acquisition Shares to be issued for transfer to the Acquired
Fund Shareholders as provided by this Agreement are duly
authorized and upon such transfer and delivery will be validly
issued and outstanding and fully paid and nonassessable Class A
shares of beneficial interest in the Acquiring Fund, and no
shareholder of the Acquiring Fund has any preemptive right of
subscription or purchase in respect thereof;
e. The execution and delivery of this Agreement did not, and the
performance by the Acquiring Fund of its obligations hereunder
will not, violate the Acquiring Fund's Declaration of Trust or
Bylaws, or any provision of any agreement known to such counsel
to which the Acquiring Fund is a party or by which it is bound
or, to the knowledge of such counsel, result in the acceleration
of any obligation or the imposition of any penalty under any
agreement, judgment, or decree to which the Acquiring Fund is a
party or by which it is bound;
f. To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority is
required for the consummation by the Acquiring Fund of the
transactions contemplated by this Agreement except such as may be
required under state securities or "Blue Sky" laws or such as
have been obtained;
g. Such counsel does not know of any legal or governmental
proceedings relating to the Acquiring Fund existing on or before
the date of mailing of the Prospectus/Proxy Statement referred to
in paragraph 5.3 or the Closing Date required to be described in
the Registration Statement which are not described as required;
h. Nations Trust is registered with the Securities and Exchange
Commission as an investment company under the 1940 Act; and
i. To the knowledge of such counsel, except as has been disclosed in
writing to the Acquired Fund, no litigation or administrative
proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the
Acquiring Fund or any of its properties or assets or any person
whom the Acquiring Fund may be obligated to indemnify in
connection with such litigation, proceeding or investigation, and
the Acquiring Fund is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental
body, which materially and adversely affects its business or its
ability to consummate the transactions contemplated hereby.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND.
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be subject, at its election, to the performance by the Acquired
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, to the following further conditions:
7.1. The Acquired Fund shall have delivered to the Acquiring Fund a
certificate executed in its name by its President or Vice President
and its Treasurer or Assistant Treasurer, in form and substance
satisfactory to the Acquiring Fund and dated as of the Closing Date,
to the effect that the representations and warranties of the Acquired
Fund made in this Agreement are true and correct at and as of the
Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and that the Acquired Fund have
complied with all the covenants and agreements and satisfied all of
the conditions on their parts to be performed or satisfied under this
Agreement at or prior to the Closing Date;
7.2. The Acquiring Fund shall have received a favorable opinion of Morrison
& Foerster LLP, counsel to the Acquired Fund for the transactions
contemplated hereby, dated the Closing Date and in a form satisfactory
to the Acquiring Fund, to the following effect:
a. Nations Trust is a statutory trust duly organized and validly
existing under the laws of the State of Delaware and has power to
own all of its properties and assets and to carry on its business
as presently conducted, and the Acquired Fund is a separate
series thereof duly constituted in accordance with the applicable
provisions of the 1940 Act and the Declaration of Trust and
Bylaws of Nations Trust;
b. This Agreement has been duly authorized, executed and delivered
on behalf of the Acquired Fund and, assuming the Registration
Statement and the Prospectus/Proxy Statement referred to in
paragraph 5.3 comply with applicable federal securities laws and
assuming the due authorization, execution and delivery of this
Agreement by the Acquiring Fund, is the valid and binding
obligation of the Acquired Fund enforceable against the Acquired
Fund in accordance with its terms, except as the same may be
limited by bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights
generally and other equitable principles;
c. The Acquired Fund has the power to sell, assign, transfer and
deliver the assets to be transferred by it hereunder, and, upon
consummation of the transactions contemplated hereby, the
Acquired Fund will have duly transferred such assets to the
Acquiring Fund;
d. The execution and delivery of this Agreement did not, and the
performance by the Acquired Fund of its obligations hereunder
will not, violate the Acquiring Fund's Declaration of Trust or
Bylaws, or any provision of any agreement known to such counsel
to which the Acquired Fund is a party or by which it is bound or,
to the knowledge of such counsel, result in the acceleration of
any obligation or the imposition of any penalty under any
agreement, judgment, or decree to which the Acquired Fund is a
party or by which it is bound;
e. To the knowledge of such counsel, no consent, approval,
authorization or order of any court or governmental authority is
required for the consummation by the Acquired Fund of the
transactions contemplated by this Agreement, except such as have
been obtained;
f. Such counsel does not know of any legal or governmental
proceedings relating to the Acquired Fund existing on or before
the date of mailing of the Prospectus/Proxy Statement referred to
in paragraph 5.3 or the Closing Date required to be described in
the Registration Statement which are not described as required;
g. Nations Trust is registered with the Securities and Exchange
Commission as an investment company under the 1940 Act; and
h. To the knowledge of such counsel, except as has been disclosed in
writing to the Acquiring Fund, no litigation or administrative
proceeding or investigation of or before any court or
governmental body is presently pending or threatened as to the
Acquired Fund or any of its properties or assets or any person
whom the Acquired Fund may be obligated to indemnify in
connection with such litigation, proceeding or investigation, and
the Acquired Fund is not a party to or subject to the provisions
of any order, decree or judgment of any court or governmental
body, which materially and adversely affects its business or its
ability to consummate the transactions contemplated hereby.
7.3. Prior to the Closing Date, the Acquired Fund shall have declared a
dividend or dividends which, together with all previous dividends,
shall have the effect of distributing all of the Acquired Fund's
investment company taxable income for its taxable years ending on or
after December 31, 2004, and on or prior to the Closing Date (computed
without regard to any deduction for dividends paid), and all of its
net capital gains realized in each of its taxable years ending on or
after December 31, 2004, and on or prior to the Closing Date.
7.4. The Acquired Fund shall have furnished to the Acquiring Fund a
certificate, signed by the President (or any Vice President) and the
Treasurer of the Acquired Fund, as to the adjusted tax basis in the
hands of the Acquired Fund of the securities delivered to the
Acquiring Fund pursuant to this Agreement.
7.5. The custodian of the Acquired Fund shall have delivered to the
Acquiring Fund a certificate identifying all of the assets of the
Acquired Fund held by such custodian as of the Valuation Date.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF EACH OF THE ACQUIRING FUND
AND THE ACQUIRED FUND.
The respective obligations of the Acquired Fund and the Acquiring Fund
hereunder are subject to the further conditions that on or before the Closing
Date:
8.1. This Agreement and the transactions contemplated herein shall have
received all necessary shareholder approvals at the meeting of
shareholders of the Acquired Fund referred to in paragraph 5.2.
8.2. On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought
to restrain or prohibit, or obtain damages or other relief in
connection with, this Agreement or the transactions contemplated
hereby.
8.3. All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including
those of the Securities and Exchange Commission and of state "Blue
Sky" and securities authorities) deemed necessary by the Acquired Fund
and the Acquiring Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been
obtained, except where failure to
obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of the Acquiring
Fund or the Acquired Fund.
8.4. The Registration Statement shall have become effective under the 1933
Act and no stop order suspending the effectiveness thereof shall have
been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been
instituted or be pending, threatened or contemplated under the 1933
Act.
8.5. The Acquired Fund and the Acquiring Fund shall have received a
favorable opinion of Ropes & Gray LLP dated on the Closing Date (which
opinion will be subject to certain qualifications) satisfactory to
both parties substantially to the effect that, on the basis of the
existing provisions of the Code, Treasury regulations promulgated
thereunder, current administrative rules and court decisions,
generally for federal income tax purposes:
a. The acquisition by the Acquiring Fund of the assets of the
Acquired Fund in exchange for the Acquiring Fund's assumption of
the liabilities and Obligations of the Acquired Fund and issuance
of the Acquisition Shares, followed by the distribution by the
Acquired Fund of such Acquisition Shares to the Separate Accounts
as shareholders of the Acquired Fund in exchange for their shares
of the Acquired Fund, all as provided in paragraph 1 hereof, will
constitute a reorganization within the meaning of Section 368(a)
of the Code, and the Acquired Fund and the Acquiring Fund will
each be "a party to a reorganization" within the meaning of
Section 368(b) of the Code;
b. No gain or loss will be recognized by the Acquired Fund (i) upon
the transfer of its assets to the Acquiring Fund in exchange for
the Acquisition Shares and the assumption by the Acquiring Fund
of the obligations of the Acquired Fund or (ii) upon the
distribution of the Acquisition Shares by the Acquired Fund to
its Separate Accounts as shareholders in liquidation, as
contemplated in paragraph 1 hereof;
c. No gain or loss will be recognized by the Acquiring Fund upon the
receipt of the assets of the Acquired Fund in exchange for the
assumption of the Obligations of the Acquired Fund and issuance
of the Acquisition Shares as contemplated in paragraph 1 hereof;
d. The tax basis of the assets of the Acquired Fund acquired by the
Acquiring Fund will be the same as the tax basis of such assets
in the hands of the Acquired Fund immediately prior to the
transfer;
e. The holding periods of the assets of the Acquired Fund in the
hands of the Acquiring Fund will include the periods during which
such assets were held by the Acquired Fund;
f. No gain or loss will be recognized by the Acquired Fund Separate
Accounts as shareholders upon the exchange of all of their
Acquired Fund shares for the Acquisition Shares;
g. The aggregate tax basis of the Acquisition Shares to be received
by each Separate Account as shareholder of the Acquired Fund will
be the same as the aggregate tax basis of the Acquired Fund
shares exchanged therefor;
h. An Acquired Fund Separate Account's holding period as shareholder
of the Acquiring Fund Shares to be received will include the
period during which the
Acquired Fund shares exchanged therefor were held, provided that
the Separate Account as shareholder held the Acquired Fund shares
as a capital asset on the date of the exchange; and
i. The Acquiring Fund will succeed to and take into account the
items of the Acquired Fund described in Section 381(c) of the
Code, subject to the conditions and limitations specified in
Sections 381, 382, 383 and 384 of the Code and the regulations
thereunder.
The opinion will be qualified to reflect that the Code requires that
certain contracts or securities (including, in particular, futures contracts,
certain foreign currency contracts, "nonequity" options and investments in
"passive foreign investment companies") be marked-to-market (treated as sold for
their fair market value) at the end of a taxable year (or upon their termination
or transfer).
The opinion will be based on certain factual certifications made by
officers of the Acquired Fund and Nations Trust and also will be based on
customary assumptions. The opinion is not a guarantee that the tax consequences
of the Acquisition will be as described above. The opinion will note and
distinguish certain published precedent. There is no assurance that the Internal
Revenue Service or a court would agree with the opinion.
8.6. At any time prior to the Closing, any of the foregoing conditions of
this Agreement may be waived by the Board of the Acquired Fund or the
Acquiring Fund, if, in its judgment, such waiver will not have a
material adverse effect on the interests of the shareholders of the
Acquired Fund or the Acquiring Fund.
9. BROKERAGE FEES AND EXPENSES.
9.1. The Acquired Fund and the Acquiring Fund each represents and warrants
to the other that there are no brokers or finders entitled to receive
any payments in connection with the transactions provided for herein.
9.2. All fees paid to governmental authorities for the registration or
qualification of the Acquisition Shares and all transfer agency costs
related to the Acquisition Shares shall be allocated to the Acquiring
Fund. All fees and expenses related to printing, mailing, solicitation
of proxies and tabulation of votes of Acquired Fund shareholders shall
be allocated to the Acquired Fund. All of the other expenses of the
transactions, including without limitation, accounting, legal and
custodial expenses, contemplated by this Agreement shall be allocated
equally between the Acquired Fund and the Acquiring Fund. The expenses
detailed above shall be borne as follows:
a. as to expenses allocable to the Acquired Fund, the Acquired Fund
shall bear the lesser of (i) 75% of such expenses and (ii) the
anticipated reduction in expenses borne by the Acquired Fund over
the first year following the merger; and
b. as to expenses allocable to the Acquiring Fund, the Acquiring
Fund shall bear the lesser of (i) 75% of such expenses and (ii)
the anticipated reduction in expenses borne by the Acquiring Fund
over the first year following the merger.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES.
10.1. The Acquired Fund and the Acquiring Fund agree that neither party has
made any representation, warranty or covenant not set forth herein and
that this Agreement constitutes the entire agreement between the
parties.
10.2. The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in
connection herewith shall not survive the consummation of the
transactions contemplated hereunder except paragraphs 1.1, 1.3, 1.5,
5.4, 9, 10, 13 and 14.
11. TERMINATION.
11.1. This Agreement may be terminated by the mutual agreement of the
Acquired Fund and the Acquiring Fund. In addition, either the Acquired
Fund or the Acquiring Fund may at its option terminate this Agreement
at or prior to the Closing Date because:
a. of a material breach by the other of any representation,
warranty, covenant or agreement contained herein to be performed
by the other party at or prior to the Closing Date;
b. a condition herein expressed to be precedent to the obligations
of the terminating party has not been met and it reasonably
appears that it will not or cannot be met; or
c. any governmental authority of competent jurisdiction shall have
issued any judgment, injunction, order, ruling or decree or taken
any other action restraining, enjoining or otherwise prohibiting
this Agreement or the consummation of any of the transactions
contemplated herein and such judgment, injunction, order, ruling,
decree or other action becomes final and non-appealable; provided
that the party seeking to terminate this Agreement pursuant to
this Section 11.1(c) shall have used its reasonable best efforts
to have such judgment, injunction, order, ruling, decree or other
action lifted, vacated or denied.
If the transactions contemplated by this Agreement have not been
substantially completed by [December 31, 2006], this Agreement shall
automatically terminate on that date unless a later date is agreed to
by both the Acquired Fund and the Acquiring Fund.
11.2. If for any reason the transactions contemplated by this Agreement are
not consummated, no party shall be liable to any other party for any
damages resulting therefrom, including without limitation
consequential damages.
12. AMENDMENTS.
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon in writing by the authorized officers of the
Acquired Fund and the Acquiring Fund; provided, however, that following the
shareholders' meeting called by the Acquired Fund pursuant to paragraph 5.2 no
such amendment may have the effect of changing the provisions for determining
the number of the Acquisition Shares to be issued to shareholders of the
Acquired Fund under this Agreement to the detriment of such shareholders without
their further approval.
13. NOTICES.
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to the Acquired Fund or the
Acquiring Fund at One Financial Center, Boston, Massachusetts 02111, Attention:
Secretary.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT; NON-RECOURSE.
14.1. The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement.
14.2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3. This Agreement shall be governed by and construed in accordance with
the domestic substantive laws of The Commonwealth of Massachusetts,
without giving effect to any choice or conflicts of law rule or
provision that would result in the application of the domestic
substantive laws of any other jurisdiction.
14.4. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment
or transfer hereof or of any rights or obligations hereunder shall be
made by any party without the written consent of the other party.
Nothing herein expressed or implied is intended or shall be construed
to confer upon or give any person, firm or corporation, other than the
parties hereto and their respective successors and assigns, any rights
or remedies under or by reason of this Agreement.
14.5. A copy of the Declaration of Trust of the Acquiring Fund is on file
with the Secretary of The Commonwealth of Massachusetts, and notice is
hereby given that no trustee, officer, agent or employee of the
Acquiring Fund shall have any personal liability under this Agreement,
and that this Agreement is binding only upon the assets and properties
of the Acquiring Fund.
[The rest of this page intentionally left blank.]
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as a sealed instrument by its President, a Vice President or
Treasurer and its corporate seal to be affixed thereto and attested by its
Secretary or Assistant Secretary.
NATIONS SEPARATE ACCOUNT TRUST
on behalf of Nations Value Portfolio
By:
-----------------------------------
Name:
Title:
ATTEST:
By:
-----------------------------------
Name:
Title:
LIBERTY VARIABLE INVESTMENT TRUST
on behalf of Liberty Growth and Income
Fund, Variable Series
By:
-----------------------------------
Name:
Title:
ATTEST:
By:
-----------------------------------
Name:
Title:
Solely for purposes of Paragraph 9.2
of the Agreement:
COLUMBIA MANAGEMENT ADVISORS, INC.
By:
-----------------------------------
Name:
Title:
ATTEST:
By:
-----------------------------------
Name:
Title:
39
Appendix B -- Fund Information
Shares of the Acquired Fund Outstanding and Entitled to Vote
For shares of the Acquired Fund that are entitled to vote at the Meeting,
the number of shares outstanding as of [January 3, 2006] was as follows:
Number of Shares
Fund Class Outstanding and Entitled to Vote
- ------------------------------ ----- --------------------------------
[ ]
--
Acquired Fund
Ownership of Shares
As of [January 3, 2006], Nations Separate Account Trust believes that, as a
group, the Trustees and officers, as the case may be, of the Acquired Fund owned
less than one percent of each class of shares of the Acquired Fund. As of
[January 3, 2006], the following shareholders of record each owned five percent
or more of the outstanding shares of the noted class of shares of the Acquired
Fund or the Acquiring Fund:
Nations Value Portfolio
(Acquired Fund )
Percentage of
Outstanding
Number of Percentage of Shares of Class
Outstanding Outstanding Owned Upon
Name and Shares of Shares of Consummation
Address of Shareholder Class Owned Class Owned Merger*
- ------------------------------ ----------- ------------- ---------------
Liberty Variable Investment Trust Fund
(Acquiring Fund)
Class A
Percentage of
Outstanding
Number of Percentage of Shares of Class
Outstanding Outstanding Owned Upon
Name and Shares of Shares of Consummation
Address of Shareholder Class Owned Class Owned Merger*
- ------------------------------ ----------- ------------- ---------------
Class B
40
Percentage of
Outstanding
Number of Percentage of Shares of Class
Outstanding Outstanding Owned Upon
Name and Shares of Shares of Consummation
Address of Shareholder Class Owned Class Owned Merger*
- ------------------------------ ----------- ------------- ---------------
* Percentage owned assuming completion of the Merger on [ ].
--
41
Appendix C -- Capitalization
The following table shows, on an unaudited basis, the capitalization of the
Nations Value Portfolio (the "Acquired Fund") and the Liberty Growth and Income
Fund, Variable Series (the "Acquiring Fund") as of October 31, 2005 and on a pro
forma combined basis, after giving effect to the acquisition of the assets and
liabilities of the Acquired Fund by the Acquiring Fund, the capitalization of
the Acquiring Fund at net asset value as of that date:
Liberty Growth
and Income
Liberty Growth Fund, Variable
Nations and Income Fund, Series
Value Portfolio Variable Series Pro Forma Pro Forma
(Acquired Fund) (Acquiring Fund) Adjustments Combined/(1)/
--------------- ---------------- ----------- --------------
Class A
Net asset value 80,411,486/(2)/ 171,300,507/(2)/ 0/(3)/ 251,711,993
Shares outstanding 6,582,944 10,614,462 (1,600,820) 15,596,586
Net asset value per share 12.22 16.14 16.14
Class B
Net asset value 41,597,296 41,597,296
Shares outstanding 2,585,258 2,585,258
Net asset value per share 16.09 16.09
- ----------
/(1)/ Assumes the Acquisition was consummated on October 31, 2005 and is for
information purposes only. No assurance can be given as to how many shares of
the Liberty Growth and Income Fund, Variable Series will be received by the
shareholders of the Nations Value Portfolio on the date the Acquisition takes
place, and the foregoing should not be relied upon to reflect the number of
shares of the Liberty Growth and Income Fund, Variable Series that actually will
be received on or after such date.
/(2)/ One time proxy, accounting, legal and other costs of the reorganization as
approved by the Board of Trustees of $20,250 and $0 have been borne by Nations
Value Portfolio and Liberty Growth and Income Fund, Variable Series,
respectively.
/(3)/ Shares of Nations Value Portfolio are exchanged for Class A shares of
Liberty Growth and Income Fund, Variable Series, based on the net asset value
per share of Liberty Growth and Income Fund, Variable Series' Class A shares at
the time of the merger.
42
Appendix D -- Information Applicable to the Acquiring Fund
Below is information regarding the Acquiring Fund (this information does
not reflect the modifications to the purchase, redemption and exchange
procedures of the Acquiring Fund that are expected to occur in connection with
the consolidation of certain service providers to the Columbia Funds and Nations
Funds prior to the Merger):
THE TRUST
Liberty Growth and Income Fund, Variable Series (the "Fund") is a mutual
fund series of the Liberty Variable Investment Trust (the "Trust"). The Trust
includes seven separate mutual funds ("Funds"), each with its own investment
goals and strategies. The Fund is an investment option under variable annuity
contracts (VA contracts) and variable life insurance policies (VLI policies)
issued by certain life insurance companies (Participating Insurance Companies).
Participating Insurance Companies invest in the Funds through separate accounts
that they set up for that purpose. Owners of VA contracts and VLI policies
invest in sub-accounts of those separate accounts through instructions they give
to their insurance company. The distributor (or principal underwriter) of the
Funds is Columbia Management Distributor, Inc. ("CMD"). CMD is a direct wholly
owned subsidiary of Columbia Management.
The prospectuses of the Participating Insurance Companies' separate
accounts describe which Funds are available to the purchasers of their VA
contracts and VLI policies. The Trust assumes no responsibility for the accuracy
or adequacy of those prospectuses.
PRINCIPAL INVESTMENT RISKS
The principal risks of investing in the Fund are described below. There are
many circumstances (including additional risks that are not described here)
which could prevent the Fund from achieving its investment goals. A shareholder
may lose money by investing in the Fund.
Management risk means that the advisor's investment decisions might produce
losses or cause the Fund to underperform when compared to other funds with
similar investment goals. Market risk means that security prices in a market,
sector or industry may fall, reducing the value of a shareholder's investment.
Because of management and market risk, there is no guarantee that the Fund will
achieve its investment goals or perform favorably among comparable funds.
Interest rate risk is the risk of a change in the price of a bond when
prevailing interest rates increase or decline. In general, if interest rates
rise, bond prices fall, and if interest rates fall, bond prices rise. Changes in
the values of bonds usually will not affect the amount of income the Fund
receives from them but will affect the value of the Fund's shares. Interest rate
risk is generally greater for bonds with longer maturities.
Issuer risk is the possibility that changes in the financial condition of
the issuer of a security, changes in general economic conditions, or changes in
economic conditions that affect the issuer may impact its actual or perceived
willingness or ability to make timely payments of interest or principal. Because
the Fund may invest in debt securities issued or supported by private entities,
including corporate bonds and mortgage-backed and asset-backed securities, the
Fund is subject to issuer risk. This could result in a decrease in the price of
the security and in some cases a decrease in income.
Equity Risk is the risk that stock prices will fall over short or extended
periods of time. Since the Fund purchases equity securities, it is subject to
equity risk. Although the stock market has historically outperformed other asset
classes over the long term, the stock market tends to move in cycles. Individual
stock prices may fluctuate drastically from day to day and may underperform
other asset classes over an extended period of time. Individual companies may
report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer a
decline in response. These price movements may result from factors affecting
individual companies, industries or the securities market as a whole.
Value stocks are stocks of companies that may have experienced adverse
business or industry developments or may be subject to special risks that have
caused the stocks to be out of favor and, in the advisor's opinion, undervalued.
If the advisor's assessment of a company's prospects is wrong, the price of the
company's stock may fall, or may not approach the value the advisor has placed
on it.
Convertible securities are securities that can be converted into common
stock, such as certain debt securities and preferred stock. Convertible
securities are subject to the usual risks associated with fixed income
investments, such as interest
43
rate risk and credit risk. In addition, because they react to changes in the
value of the equity securities into which they will convert, convertible
securities are also subject to market risk.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency
PURCHASES AND REDEMPTIONS
The Funds are investment options under variable annuity contracts (VA
contracts) and variable life insurance policies (VLI policies) issued by certain
life insurance companies (Participating Insurance Companies). The Participating
Insurance Companies place daily orders to purchase and redeem shares of the
Funds. These orders generally reflect the net effect of instructions they
receive from holders of their VA contracts and VLI policies and certain other
terms of those contracts and policies. The Funds issue and redeem shares at net
asset value without imposing any selling commissions, sales charge or redemption
charge. Shares generally are sold and redeemed at their net asset value next
determined after receipt of purchase or redemption requests from Participating
Insurance Companies. The right of redemption may be suspended or payment
postponed whenever permitted by applicable law and regulations.
FUND POLICY ON TRADING OF FUND SHARES
The interests of the Funds' long-term shareholders may be adversely
affected by certain short-term trading activity by Fund shareholders. Such
short-term trading activity, when excessive, has the potential to interfere with
efficient portfolio management, generate transaction and other costs, dilute the
value of Fund shares held by long-term shareholders and have other adverse
effects on the Funds. This type of excessive short-term trading activity is
referred to herein as "market timing". The Columbia Funds are not intended as
vehicles for market timing. The Board of Trustees of the Funds has adopted the
policies and procedures set forth below with respect to frequent trading of the
Funds' shares.
The Funds, directly and through their agents, take various steps designed
to deter and curtail market timing. For example, if a Fund detects that any
shareholder has conducted two "round trips" (as defined below) in the Fund in
any 28-day period, except as noted below with respect to orders received through
omnibus accounts, the Fund will reject the shareholder's future purchase orders,
including exchange purchase orders, involving any Columbia Fund (other than a
Money Market Fund). In addition, if a Fund determines that any person, group or
account has engaged in any type of market timing activity (independent of the
two-round-trip limit), the Fund may, in its discretion, reject future purchase
orders by the person, group or account, including exchange purchase orders,
involving the same or any other Columbia Fund, and also retains the right to
modify these market timing policies at any time without prior notice.
The rights of shareholders to redeem shares of a Fund are not affected by
any of the limits mentioned above. However, certain funds impose a redemption
fee on the proceeds of fund shares that are redeemed or exchanged within 60 days
of their purchase.
For these purposes, a "round trip" is a purchase by any means into a
Columbia Fund followed by a redemption, of any amount, by any means out of the
same Columbia Fund. Under this definition, an exchange into a Fund followed by
an exchange out of the Fund is treated as a single round trip. Also for these
purposes, where known, accounts under common ownership or control generally will
be counted together. Accounts maintained or managed by a common intermediary,
such as an adviser, selling agent or trust department, generally will not be
considered to be under common ownership or control.
Purchases, redemptions and exchanges made through the Columbia Funds'
Automatic Investment Plan, Systematic withdrawal Plan or similar automated plans
are not subject to the two-round-trip limit. The two-round-trip limit may be
modified for, or may not be applied to, accounts held by certain retirement
plans to conform to plan limits, considerations relating to the Employee
Retirement Income Security Act of 1974 or regulations of the Department of
Labor, and for certain asset allocation or wrap programs.
The practices and policies described above are intended to deter and
curtail market timing in the Funds. However, there can be no assurance that
these policies, individually or collectively, will be totally effective in this
regard because of various factors. In particular, a substantial portion of
purchase, redemption and exchange orders are received through omnibus accounts.
Omnibus accounts, in which shares are held in the name of an intermediary on
behalf of multiple
44
beneficial owners, are a common form of holding shares among financial
intermediaries, insurance product separate accounts and retirement plans. The
Funds typically are not able to identify trading by a particular beneficial
owner through an omnibus account, which may make it difficult or impossible to
determine if a particular account is engaged in market timing. Certain financial
intermediaries have different policies regarding monitoring and restricting
market timing in the underlying beneficial owner accounts that they maintain
through an omnibus account that may be more or less restrictive than the Funds'
practices discussed above.
Columbia Management Group, Inc. has designated a Market Timing Steering
Committee (the "Committee") composed of members of senior management designed to
ensure, among other things, that Participating Insurance Companies can either
enforce the Funds' market timing policy, or monitor for market timing pursuant
to a policy that is at least as restrictive as the Funds' policy. The Committee
oversees the due diligence process with respect to Participating Insurance
Companies. The due diligence process for Participating Insurance Companies
includes a review of an insurance company's market timing policies, and requests
that insurance companies certify that they can enforce the Funds' market timing
policy as disclosed in the prospectus. Alternatively, if the Participating
Insurance Company cannot certif. that it can enforce the Funds' market timing
policy, the Committee requests that the Participating Insurance Company certify
that it has an internal market timing policy that is as restrictive or more
restrictive than the Funds' market timing policy. If the insurance company
cannot provide either form of certification, the Committee requests that the
Participating Insurance Company provide the Funds' transfer agent with
shareholder level data transparency to enable the transfer agent to monitor
trading activity in accordance with the Funds' market timing policy. An
insurance company that agrees to provide data transparency is required to
restrict, upon the transfer agent's request, participants that violate the
Funds' market timing policy. If a current Participating Insurance Company is
unable to comply, CMG will take steps consistent with its contractual
obligations to place the Participating Insurance Company's accounts on
redemption only status. If a prospective Participating Insurance Company is
unable to comply with one of the alternatives, the Funds will not begin a
business relationship with that company.
The Funds seek to act in a manner that they believe is consistent with the
best interests of Fund shareholders in making any judgments regarding market
timing. Neither the Funds nor their agents shall be held liable for any loss
resulting from rejected purchase orders or exchanges.
DISTRIBUTION AND SERVICE FEES
Additional Intermediary Compensation
The Acquiring Fund's distributor, or its advisory affiliates, from their
own resources, may make cash payments to financial service firms that agree to
promote the sale of shares of funds that the distributor distributes. A number
of factors may be considered in determining the amount of those payments,
including the financial service firm's sales, client assets invested in the
funds and redemption rates, the quality of the financial service firm's
relationship with the distributor and/or its affiliates, and the nature of the
services provided by financial service firms to its clients. The payments may be
made in recognition of such factors as marketing support, access to sales
meetings and the financial service firm's representatives, and inclusion of the
Funds on focus, select or other similar lists.
Subject to applicable rules, the distributor may also pay non-cash
compensation to financial service firms and their representatives, including:
(i) occasional gifts (ii) occasional meals, or other entertainment; and/or (iii)
support for financial service firm educational or training events. In addition,
the distributor, and/or the Funds' investment advisor, transfer agent or their
affiliates, may pay service, administrative or other similar fees to
broker/dealers, banks, third-party administrators or other financial
institutions (each commonly referred to as an "intermediary"). Those fees are
generally for sub accounting, sub-transfer agency and other shareholder services
associated with shareholders whose shares are held of record in omnibus or other
group accounts. The rate of those fees may vary and is generally calculated on
the average daily net assets of a Fund attributable to a particular
intermediary.
In some circumstances, the payments discussed above may create an incentive
for an intermediary or its employees or associated persons to recommend or sell
shares of the Funds. For further information about payments made by the
distributor and its affiliates to financial service firms and intermediaries,
please see the Statement of Additional Information. Please also contact your
financial service firm or intermediary for details about payments it may
received.
45
OTHER INFORMATION ABOUT YOUR ACCOUNT
How The Funds Calculate Net Asset Value
Each share price is its net asset value next determined. Each Fund
determines its net asset value for each share class by dividing each class's
total net assets by the number of that class's outstanding shares. The net asset
value is determined at the close of regular trading on the New York Stock
Exchange (NYSE), usually 4:00 p.m. Eastern time, on each business day that the
NYSE is open (typically Monday through Friday). Shares are not priced the days
on which the NYSE is closed for trading.
To calculate the net asset value on a given day, the Funds value each stock
listed or traded on a stock exchange at its latest sale price on that day. If
there are no sales on that day, the Funds value the security at the most recent
quoted bid price. The Funds value each over-the-counter security or NASDAQ
National Market System security as of the last sales price (or closing price
reported by the NASDAQ National Market System, if different, as applicable) for
that day. The Funds value other over-the-counter securities that have reliable
quotes at the latest quoted bid price.
The Funds value long-term debt obligations and securities convertible into
common stock at fair value. Pricing services provide the Funds with the value of
the securities. When the price of a security is not available, including days
when the Funds determine that the sale or bid price of the security does not
reflect that security's market value, the Funds will value the security at a
fair value determined in good faith under procedures established by the Board of
Trustees.
The Funds may also value a security at fair value when events have occurred
after the last available market price and before the close of the NYSE that
materially affect the security's price. In the case of foreign securities, this
could include events occurring after the close of the foreign market and before
the close of the NYSE. A Fund's foreign securities may trade on days when the
NYSE is closed for trading, and therefore the net asset value of a Fund's shares
may change on days when Participating Insurance Companies may not purchase or
redeem shares.
The Funds have retained an independent fair value pricing service to assist
in the fair valuation process for securities principally traded in a foreign
market in order to adjust for possible changes in value that may occur between
the close of the foreign exchange and the time at which Fund shares are priced.
If a security is valued at a "fair value", that value may be different from the
last quoted market price for the security.
Dividends and Distributions
Each Fund intends to declare and distribute, as income dividends or capital
gains distributions, at least annually, substantially all of its net investment
income and net profits realized from the sale of portfolio securities, if any,
to its shareholders (Participating Insurance Companies' separate accounts). The
net investment income of each Fund consists of all dividends or interest
received by such Fund, less expenses (including investment advisory and
administrative fees). Income dividends will be declared and distributed no less
frequently than annually. All net short-term and long-term capital gains of each
Fund, net of carry-forward losses, if any, realized during the fiscal year, are
declared and distributed periodically, no less frequently than annually. All
dividends and distributions are reinvested in additional shares of the Fund at
net asset value, as of the record date for the distributions.
Tax Consequences
Each Fund is treated as a separate entity for federal income tax purposes
and has elected or intends to elect to be treated, and intends to qualify each
year, as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the Code). Each Fund must satisfy certain
requirements relating to the sources of its income, diversification of its
assets and distribution of its income to shareholders to qualify as a regulated
investment company. As a regulated investment company, a Fund will not be
subject to federal income tax on any net investment income and net realized
capital gains that are distributed to its shareholders as required under the
Code.
In addition, each Fund follows certain portfolio diversification
requirements imposed by the Code on separate accounts of insurance companies
relating to the tax-deferred status of VA contracts and VLI policies. More
specific information on these diversification requirements is contained in the
prospectus that describes a particular VA contract or VLI policy.
46
The Internal Revenue Service (IRS) has indicated that a degree of investor
control over the investment options underlying variable contracts may interfere
with their tax-deferred treatment by causing the contract owner, rather than the
insurance company, to be treated as the owner of the assets held by the separate
account. Based on the rulings and other guidance the IRS has issued to date,
Columbia Management believes that tax-deferred treatment for the Funds will be
respected. However, the IRS and the Treasury Department may in the future
provide further guidance as to what it deems to constitute an impermissible
level of "investor control," and such guidance could affect the treatment of the
Funds described herein, including retroactively.
MANAGING THE FUNDS
Investment Advisor
Columbia Management, located at 100 Federal Street, Boston, Massachusetts
02110, is the Funds' investment advisor. Columbia Management is responsible for
the Funds' management, subject to oversight by the Funds' Board of Trustees. In
its duties as investment advisor, Columbia Management runs the Funds' day-to-day
business, including placing all orders for the purchase and sale of each Fund's
portfolio securities. Columbia Management is a direct wholly owned subsidiary of
CMG, which is an indirect wholly owned subsidiary of Bank of America. Columbia
Management, a registered investment advisor, has been an investment advisor
since 1969.
Columbia Management determines which securities and other instruments are
purchased and sold for the Funds. Columbia Management may allocate orders for
the purchase and sale of portfolio securities to certain financial institutions,
including those that are affiliated with Columbia Management or that have sold
shares of the Funds, to the extent permitted by law or by order of the SEC.
Columbia Management will allocate orders to such institutions only if it
believes that the quality of the transaction and the commission are comparable
to what they would be with other qualified brokerage firms. Columbia Management
designates the S&P 500 Fund's Sub-Advisor, evaluates and monitors its
performance and investment program, and recommends to the Board of Trustees
whether their contract should be continued or modified and the addition or
deletion of Sub-Advisors. Columbia Management also has the responsibility of
administering the Trust's operations, which it may delegate, at its own expense,
to certain affiliates.
For the 2004 fiscal year, aggregate advisory fees paid to Columbia
Management by the Funds, not including pricing and bookkeeping, and other fees
paid to Columbia Management by the Fund, amounted to 0.80% of average daily net
assets of the Fund.
Portfolio Managers
Lori J. Ensinger, a senior portfolio manager of Columbia Management, is the
lead manager for the Growth & Income Fund and has managed the Growth & Income
Fund since June, 2005. Ms. Ensinger has been associated with Columbia Management
or its affiliates since 2001. Prior to 2001, Ms. Ensinger directed the
investment strategy for all institutional assets managed under the U.S.
large-cap value style at Zurich Scudder Investments from 1999 to 2001.
David I. Hoffman, a senior portfolio manager of Columbia Management, is a
co-manager for the Growth & Income Fund and has co-managed the Growth & Income
Fund since June, 2005. Mr. Hoffman has been associated with Columbia Management
or its affiliates since August, 2001. Prior to August, 2001, Mr. Hoffman was a
vice president with Zurich Scudder Investments from March, 1999 to July, 2001.
Noah J. Petrucci, a portfolio manager of Columbia Management, is a
co-manager for the Growth & Income Fund and has co-managed the Growth & Income
Fund since June, 2005. Mr. Petrucci has been associated with Columbia Management
or its affiliates since February, 2002. Prior to February, 2002, Mr. Petrucci
was employed by Zurich Scudder Investments from October, 1996, serving most
recently as a product specialist/portfolio manager from April, 2001 to February,
2002.
Diane L. Sobin, a senior portfolio manager of Columbia Management, is a
co-manager for the Growth & Income Fund and has co-managed the Growth & Income
Fund since June, 2005. Ms. Sobin has been associated with Columbia Management or
its affiliates since August, 2001. Prior to August, 2001, Ms. Sobin was a senior
vice president with Zurich Scudder Investments from February, 2000 to June,
2001.
47
The Statement of Additional Information provides additional information
about the portfolio managers' compensation, other accounts managed, and
ownership of securities of the Acquiring Fund.
Legal Proceedings
On March 15, 2004, Columbia Management and CMD the distributor of the
Fund's shares (collectively, "Columbia"), entered into agreements in principle
with the staff of the U.S. Securities and Exchange Commission ("SEC") and the
Office of the New York Attorney General ("NYAG") to resolve the proceedings
brought in connection with the SEC's and NYAG's investigations of frequent
trading and market timing in certain Columbia mutual funds.
On February 9, 2005, Columbia entered into an Assurance of Discontinuance
with the NYAG (the "NYAG Settlement") and consented to the entry of a
cease-and-desist order by the SEC (the "SEC Order" and together, the
"Settlements"). The Settlements contain substantially the same terms and
conditions as outlined in the agreements in principle.
Under the terms of the SEC Order, Columbia has agreed, among other things,
to: pay $70 million in disgorgement and $70 million in civil money penalties;
cease and desist from violations of the antifraud provisions and certain other
provisions of the federal securities laws; maintain certain compliance and
ethics oversight structures; retain an independent consultant to review
Columbia's applicable supervisory, compliance, control and other policies and
procedures; and retain an independent distribution consultant (see below). The
Funds have also voluntarily undertaken to implement certain governance measures
designed to maintain the independence of their boards of trustees. The NYAG
Settlement also, among other things, requires Columbia and its affiliates Banc
of America Capital Management, LLC and BACAP Distributors, LLC to reduce
Columbia Funds, Nations Funds and other mutual fund management fees collectively
by $32 million per year for five years, for a projected total of $160 million in
management fee reductions.
Pursuant to the procedures set forth in the SEC Order, the settlement
amounts will be distributed in accordance with a distribution plan to be
developed by an independent distribution consultant who is acceptable to the SEC
staff and the Columbia Funds' independent trustees. The distribution plan must
be based on a methodology developed in consultation with Columbia and the Fund's
independent trustees and not unacceptable to the staff of the SEC. More specific
information on the distribution plan will be communicated at a later date.
As a result of these matters or any adverse publicity or other developments
resulting from them, including lawsuits brought by shareholders of the affected
Columbia Funds, there may be increased redemptions or reduced sales of Fund
shares, which could increase transaction costs or operating expenses, or have
other adverse consequences for the Columbia Funds.
A copy of the SEC Order is available on the SEC's website at
http://www.sec.gov. A copy of the NYAG Settlement is available as part of the
Bank of America Corporation Form 8-K filing filed on February 10, 2005.
In connection with the events described in detail above, various parties
have filed suit against certain funds, the Trustees off the Columbia Funds,
FleetBoston Financial Corporation and its affiliated entities and/or Bank of
America and its affiliated entities. More than 300 cases including those filed
against entities unaffiliated with the funds, their Boards, FleetBoston
Financial Corporation and its affiliated entities and/or Bank of America and its
affiliated entities have been transferred to the Federal District Court in
Maryland and consolidated in a multi-district proceeding (the "MDL").
The derivative cases purportedly brought on behalf of the Columbia Funds in
the MDL have been consolidated under the lead case. The fund derivative
plaintiffs allege that the funds were harmed by market timing and late trading
activity and seek, among other things, the removal of the trustees of the
Columbia Funds, removal of the Columbia Group, disgorgement of all management
fees and monetary damages.
On March 21, 2005 purported class action plaintiffs filed suit in
Massachusetts state court alleging that the conduct, including market timing,
entitles Class B shareholders in certain Columbia funds to an exemption from
contingent deferred sales charges upon early redemption ("the CDSC Lawsuit").
The CDSC Lawsuit has been removed to federal court in Massachusetts and the
federal Judicial Panel has conditionally order its transfer to the MDL.
The MDL is ongoing. Accordingly, an estimate of the financial impact of
this litigation on any Fund, if any, cannot currently be made.
48
In 2004, certain Columbia funds, advisers and affiliated entities were
named as defendants in certain purported shareholder class and derivative
actions making claims, including claims under the Investment Company and the
Investment Advisers Acts of 1940 and state law. The suits allege, inter alia,
that the fees and expenses paid by the funds are excessive and that the advisers
and their affiliates inappropriately used fund assets to distribute the funds
and for other improper purpose. On March 2, 2005, the actions were consolidated
in the Massachusetts federal court as In re Columbia Entities Litigation. The
plaintiffs filed a consolidated amended complaint on June 9, 2005. On November
30, 2005, the judge dismissed all claims by plaintiffs and ordered that the case
be closed.
Disclosure of the Fund's Portfolio Holdings
The Statement of Additional Information includes a description of the
Funds' policies with respect to the disclosure of their portfolio holdings.
HYPOTHETICAL INVESTMENT AND EXPENSE INFORMATION
The following supplemental hypothetical investment information provides
additional information about the effect of the expenses of the Fund, including
investment advisory fees and other Fund costs, on the Fund's returns over a
10-year period. The charts show the estimated expenses that would be charged on
a hypothetical investment of $10,000 in the Fund assuming a 5% return each year,
the hypothetical year-end balance before expenses and the cumulative return
after fees and expenses. The chart also assumes that the annual expense ratios
stay the same throughout the 10-year period and that all dividends and
distributions are reinvested. The annual expense ratio used for the Fund, which
is the same as that stated in the Annual Fund Operating Expenses tables, is
reflected in the charts and is net of fee waivers or expense reimbursements.
Your actual costs may be higher or lower.
Liberty Growth and Income Fund, Variable Series- Class A Shares
Annual Expense Ratio Initial Hypothetical Investment Amount Assumed Rate of Return
- -------------------- -------------------------------------- ----------------------
0.84% $10,000.00 5%
Hypothetical
Cumulative Year-end Cumulative Hypothetical
Return Balance Return After Year-End Balance Annual
Before Fees Before Fees & Fees & After Fees and Fees and
Year & Expenses Expenses Expenses Expenses Expenses
- -------------------------------------------------------------------------------------------------------------
1 5.00% $10,500.00 4.16% $10,416.00 $ 85.75
2 10.25% $11,025.00 8.49% $10,849.31 $ 89.31
3 15.76% $11,576.25 13.01% $11,300.64 $ 93.03
4 21.55% $12,155.06 17.71% $11,770.74 $ 96.90
5 27.63% $12,762.82 22.60% $12,260.41 $100.93
6 34.01% $13,400.96 27.70% $12,770.44 $105.13
7 40.71% $14,071.00 33.02% $13,301.69 $109.50
8 47.75% $14,774.55 38.55% $13,855.04 $114.06
9 55.13% $15,513.28 44.31% $14,431.41 $118.80
10 62.89% $16,288.95 50.32% $15,031.76 $123.75
-------------------------------------------------------------------------
Total Gain Before Fees & Expenses $ 6,288.95
Total Gain After Fees & Expenses $ 5,031.76
49
Total Annual Fees and Expenses $1,037.16
50
Appendix E -- Financial Highlights for the Acquiring Fund
The financial highlights tables are intended to help you understand the
Acquiring Fund's financial performance. Information is shown for the last five
fiscal periods, which run from January 1 to December 31. Certain information
reflects financial results for a single Fund share. The total returns in the
tables represent the rate that a shareholder would have earned (or lost) on an
investment in the Acquiring Fund (assuming reinvestment of all dividends and
distributions) but do not reflect the cost of insurance and other company
separate account charges which vary with the variable annuity contracts or
variable life insurance policies. This information has been derived from the
Fund's financial statements which have been audited by PricewaterhouseCoopers
LLP, an independent registered public accounting firm, whose reports, along with
the Fund's financial statements, are included in the Fund's annual report. You
can request a free annual report containing those financial statements by
calling 1-800-426-3750 or writing the Participating Insurance Company which
issued your VA contract or VLI policy.
Selected data for a share outstanding throughout each period is as follows:
Liberty Growth and Income Fund, Variable Series
Year Ended December 31,
-------------------------------------------------------
Class A 2004 2003 2002 2001 2000
- ----------------------------------------------------- ------- ------- ------- ------- -------
Net asset value-- Beginning of period ($) ........... 14.15 11.97 15.55 18.27 19.85
Income from Investment Operations ($):
Net investment income/(a)/ ....................... 0.25 0.21 0.15 0.16 0.17
Net realized and unrealized gain (loss) on
investments and futures contracts ............. 1.70 2.16 (3.56) (0.35) 0.54
Total from Investment Operations .................... 1.95 2.37 (3.41) (0.19) 0.71
Less Distributions Declared to Shareholders ($):
From net investment income ....................... (0.28) (0.19) (0.17) (0.15) 0.17
In excess of net investment income ............... -- -- -- -- --/(b)/
From net realized gains .......................... -- -- -- (2.34) (2.12)
Return of Capital ................................ -- -- -- (0.04) --
Total Distributions Declared to Shareholders ........ (0.28) (0.19) (0.17) (2.53) (2.29)
Net asset value-- End of period ($) ................. 15.82 14.15 11.97 15.55 18.27
Total return (%)/(c)(d)/ ............................ 13.76/(e)/ 19.79/(e)/ (21.95) (0.60) 3.60
Ratios to Average Net Assets/Supplemental Data (%):
Expenses/(f)/ .................................... 0.76 0.80 0.88 0.96 0.88
Net investment income/(f)/ ....................... 1.68 1.66 1.08 0.92 0.85
51
Waiver/Reimbursement ................................ 0.11 0.09 -- -- --
Portfolio turnover rate (%) ......................... 37 73 69 53 120
Net assets, end of period (000's) ($) ............... 206,695 216,923 113,335 180,053 203,366
/(a)/ Per share data was calculated using average shares outstanding during the
period.
/(b)/ Rounds to less than $0.01 per share.
/(c)/ Total return at net asset value assuming all distributions reinvested.
/(d)/ Total return figure does not include any insurance company charges
associated with a variable annuity. If included, total return would be
reduced.
/(e)/ Had the investment advisor not waived or reimbursed a portion of expenses,
total return would have been reduced.
/(f)/ The benefits derived from custody credits and directed brokerage
arrangements, if applicable, had an impact of less than 0.01%.
52
Appendix F -- Comparison of Organizational Documents
As a series of Nations Separate Account Trust ("Nations Trust"), a Delaware
business trust, the Acquired Fund is subject to the provisions of Nations
Trust's Amended and Restated Declaration of Trust and By-laws. As a series of
Liberty Variable Investment Trust ("Liberty Trust"), a Massachusetts business
trust, the Acquiring Fund is subject to the provisions of Liberty Trust's
current Agreement and Declaration of Trust and Bylaws. For convenience,
declarations of trust and bylaws are referred to below generally as "Charter
Documents." The provisions of the Liberty Trust and Nations Trust Charter
Documents are generally similar, but differ in some respects.
The following are summaries of the significant differences between Nations
Trust's Charter Documents and Delaware law, on the one hand, and Liberty Trust's
Charter Documents and Massachusetts law, on the other. A comparison of the
Liberty Trust's Charter Documents with those under which the Acquiring Fund
would operate following the Trust Reorganization also appears below. Except as
noted, the Charter Documents of Nations Trust are substantially similar to the
Charter Documents of Liberty Trust, and the provisions of Delaware law are
substantially similar to the provisions of Massachusetts law, insofar as such
provisions affect the rights of shareholders of the Funds generally. For
additional information regarding all of the differences, shareholders should
refer directly to the Funds' organizational documents, copies of which may be
obtained by contacting the applicable Fund at its address listed on the cover of
this Prospectus/Proxy Statement or toll-free at 1-800-345-6611.
Comparison of Nations Trust Charter Documents and Delaware Law to Liberty Trust
Charter Documents and Massachusetts Law.
Shareholder Voting Rights, Interests, Meetings and Proxies. Liberty Trust's
Declaration of Trust provides that shareholders holding at least 10% of the
outstanding shares of the Trust may call meetings. Nations Trust's Declaration
of Trust also provides shareholders holding, in the aggregate, not less than 10%
of the Interests of the Trust the right to call meetings upon written request.
Liberty Trust's Declaration of Trust provides that shareholders have the
power to vote only (i) for the election or removal of Trustees, (ii) with
respect to any investment adviser, (iii) with respect to any termination (by the
shareholders) of the Trust or series or class thereof, (iv) with respect to any
amendment (by the Trustees) to the Declaration of Trust that requires
shareholder authorization, (v) with respect to derivative actions similar to a
Massachusetts corporation, and (vi) with respect to any other matters required
by law or deemed desirable by the Board of Trustees.
Nations Trust's Declaration of Trust provides that shareholders have the
power to vote only (i) for the election of Trustees, (ii) with respect to the
investment contract, (iii) with respect to termination of the Trust, (iv) with
respect to any amendment to the Declaration of Trust, (v) with the respect to
any merger, consolidation, conversion or sale of assets, (vi) with respect to
incorporation of the Trust, and (vii) with respect to such additional matters
required by law or deemed necessary or desirable by the Board of Trustees.
A Trustee of Liberty Trust may be removed, with or without cause (i) at any
meeting called for by such purpose by a vote of two-thirds the outstanding
shares, (ii) by the holders of two-thirds of the outstanding shares by
declaration in writing filed with the Custodian of the Securities of the Trust,
or (ii) by vote of a majority of the Trustees then in office. A Trustee of
Nations Trust may be removed by the affirmative vote of the shareholders of
two-thirds of the interest in the Trust or with cause by the action of
two-thirds of the remaining Trustees.
Neither Liberty Trust nor Nations Trust is required to hold annual
shareholder meetings. Pursuant to the 1940 Act, vacancies on the Board of
Trustees of both Liberty Trust and Nations Trust may be filled by the Trustees
unless, after filling such vacancy, less than two-thirds of the Trustees then
holding office would have been elected to such office by the shareholders. The
Board of Trustees of Liberty Trust or Nations Trust, as applicable, will call a
meeting of shareholders to elect trustees whenever less than a majority of the
trustees has been elected by shareholders.
Liberty Trust's Declaration of Trust provides that a quorum for a
shareholder meeting is 30% of the shares entitled to vote, except that if any
provision of law or the Declaration of Trust permits or requires that holders of
any series or class shall vote as a series or class, then 30% of the number of
shares of each series or class entitled to vote shall be necessary to constitute
a quorum for the transaction of business by that series or class. Nations
Trust's Declaration of Trust provides that a quorum for a shareholder meeting is
33 1/3% of the shares entitled to vote, except that if any holders of any series
or class shall vote as a class, then 33 1/3% of the shares of each series or
class entitled to vote shall be necessary to constitute a quorum at a
shareholders meeting of that series.
Liberty Trust's Declaration of Trust provides that written notice of a
shareholder meeting must be given to shareholders not less than seven days
before the date of such meeting. Nations Trust's Declaration of Trust allows for
notice
53
personally, leaving it at his or her residence or usual place of business
or by mailing to shareholders at least 20 business days and not more than 90
business days before the meeting.
A shareholder of Liberty Trust may put a voting proxy in place with no
specified duration, compared with a maximum of eleven months, unless otherwise
provided in the proxy, for shareholders of Nations Trust.
Shareholder Liability. Liberty Trust's Declaration of Trust provides that
any shareholder or former shareholder held to be personally liable solely by
reason of his or her being or having been a shareholder and not because of is or
her acts or omissions, his or her non-compliance with applicable federal tax
law, or for some other reason, the shareholder or former shareholder shall be
entitled to be held harmless from and indemnified against all loss and expense
arising from such liability. Likewise, Nations Trust's Declaration of Trust
provides that any shareholder or former shareholder who is exposed to liability
by reason of a claim relating solely to their status as a shareholder will be
held harmless from and indemnified against all loss and expense arising from
such claim. Liberty Trust's Declaration of Trust, unlike Nations Trust's
Declaration of Trust, requires that every note, bond, contract, instrument,
certificate or undertaking made or issued by any Trustees or Trustee or by any
officers or officer shall recite that the obligations of such instrument are not
binding on any of them or the shareholders individually.
As Delaware limits shareholder liability by statute, and the likelihood of
shareholder liability for obligations of Liberty Trust is considered remote, the
differences between the Declarations of Trust are likely to be immaterial.
Trustees' Plenary Powers and Powers with Respect to Amendments, Mergers and
Committees. Trustees of both Nations Trust and Liberty Trust are responsible for
managing the business of the Trust and have all powers necessary or convenient
to carry out that responsibility.
Liberty Trust's Declaration of Trust may be amended at any time by a
majority of the then Trustees provided notice of any amendment shall be mailed
promptly to shareholders or record at the close of business on the effective
date of the such amendment except that no notice must be made for amendments
which supply any omission, cure any ambiguity or cure, correct or supplement any
defective or inconsistent provision. Nations Trust's Declaration of Trust may be
amended by any instrument in writing, without a meeting, signed by a majority of
the Trustees and consented to by the vote of shareholders holding more than 50%
of the total interests entitled to vote. The Trustees of the Nations Trust may
also amend without vote or consent of the shareholders to change the name of the
Trust, to supply any omission, to cure, correct or supplement any ambiguous,
defective or inconsistent provision hereof, or to conform the Declaration of
Trust to the requirements of applicable Federal or Delaware law, but the
Trustees shall not be liable for failing to do so.
Nations Trust, or any series thereof, may merge or consolidate into one or
more business trusts or other business entities when and as authorized by no
less than a majority of the Trustees and, at any meeting of Holders called for
the purpose, by a Majority Interest Vote, or by an instrument or instruments in
writing without a meeting, consented to by a Majority Interest Vote. According
to the Nations Trust Declaration of Trust, a Majority Interests Vote shall mean
a vote, at a meeting of the shareholders of the Trust, or any series thereof, of
the lesser of (i) 67% or more of the interests present or represented at such
meeting, provided the shareholders of more than 50% of the interest in the
Trust, or the series thereof, are present or represented by proxy or (ii) more
than 50% of the interests in the Trust or series thereof. While the Declaration
of Trust of Liberty Trust does not expressly provide for Trust mergers or
consolidations, because shareholders have the power to vote only on specifically
enumerated matters in contrast to the Trustees' plenary powers, the Trustees of
Liberty Trust have the same powers as the Trustees of Nations Trust to cause the
transactions described above.
Trustee Liability and Indemnification. Pursuant to Liberty Trust's
Declaration of Trust, the Trustees are not personally liable for claims against
the Trust or for any neglect or wrongdoing of any officer, agent, employee,
investment adviser, or principal underwriter of the Trust. Each Trustee is not
responsible for the act or omission of any other Trustee and may be liable only
by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office.
Liberty Trust will indemnify each of its Trustees and officers against all
liabilities and expenses, including amounts paid in satisfaction of judgments,
in compromise, as fines and penalties, and as counsel fees, reasonably incurred
by such person while in office or thereafter, by reason of the indemnified
person's service as a Trustee or officer. Liberty Trust will not indemnify its
Trustees and officers against any liability to the Trust or to its shareholders
to which he would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office. In the absence of a final decision on the merits by an
adjudicating body that such person is liable by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of their office, no indemnification shall be permitted unless a
determination that such person was not so liable shall have been made on behalf
of the Trust by (i) the vote of a majority of the disinterested non-party
Trustees, or (ii) an independent legal counsel as expressed in a written
opinion.
54
Legal expenses may be paid from time to time by Liberty Trust in advance of
the final disposition of any such proceeding if Liberty Trust receives an
undertaking by the indemnified person to reimburse Liberty Trust in the event it
is ultimately determined that the indemnified person is not entitled to such
indemnification and (a) the indemnified person provides security for his
undertaking, or (b) the Trust shall be insured against losses arising by reason
of any lawful advances, or (c) a majority of the disinterested, non-party
Trustees or an independent legal counsel, as expressed in a written opinion,
determines, based on a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the indemnified person
ultimately will be found entitled to indemnification.
Nations Trust will indemnify Trustees against all liabilities and
expenses (including amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred by him or her in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which he or she may be involved or
with which he or she may be threatened, which in office or thereafter, by reason
of his or her being or having been such a Trustee, except with respect to any
matter as to which he or she shall have been adjudicated to have acted in bad
faith , willful misfeasance, bad faith, gross negligence or reckless disregard
of his or her duties; provided however that as to any matter disposed of by a
compromise payment by he indemnified person, pursuant to a consent decree or
otherwise, no indemnification wither for said payment or for any other expenses
shall be provided unless there has been a determination that such indemnified
person did not engage in willful misfeasance, bad faith, gross negligence or
reckless disregard o the duties involved in the conduct of his or her office by
the court or other body approving the settlement r other disposition or by a
reasonable determination, based upon a review of readily available facts, that
he or she did not engage in such conduct by written opinion from independent
legal counsel approved by the Trustees.
Trustees of Nations Trust may make advance payments n connection with
indemnification provided that the indemnified person shall have given a written
undertaking to reimburse the Trust in the event it is subsequently determined
that he or she is not entitled to such indemnification.
Changes to Charter Documents Resulting From Trust Reorganization.
It currently is expected that, following the Merger, the Acquiring Fund be
reorganized into a new series of SteinRoe Variable Investment Trust which is
then expected to be renamed Columbia Variable Insurance Trust (the "Combined
Trust"). The Combined Trust is organized as a Massachusetts business trust
governed by Massachusetts and federal law. If the Trust Reorganization is
effected, then the Acquiring Fund will be subject to new Charter Documents. The
following is a summary of the significant differences between Liberty Trust's
Charter Documents and the Combined Trust's Charter Documents.
Shareholder Voting Rights. Both Liberty Trust and Combined Trust Charter
Documents provide shareholders the power to vote (i) for the election or removal
of Trustees, (ii) with respect to any termination of the Trust other than by the
Trustees by written notice to shareholders, (iii) with respect to derivative
actions, and (iv) with respect to any other matters required by law or by the
organizational documents, or deemed desirable by the Board of Trustees. The
Liberty Trust Charter Documents also explicitly provide shareholders the power
to vote with respect to any investment adviser and with respect to any
amendment, by the shareholders, to the Declaration of Trust. Both sets of
Charter Documents state that shareholders have the power to vote only on these
matters.
The Combined Trust Charter Documents provide that no shareholder may bring
a derivative claim without first requesting the Trustees to bring or to maintain
such claim. They further state that such demand shall be excused only when the
shareholder plaintiff makes a specific showing that irreparable injury to the
Trust or series otherwise would result. The Liberty Trust Charter Documents do
not require such demand.
The Combined Trust Charter Documents provide that each whole share or
fractional share outstanding on the record date is entitled to a number of votes
on any matter on which it is entitled to vote equal to the net asset value of
the share or fractional share in U.S. dollars determined at the close of
business on the record date. For example, a share having a net asset value of
$10.50 would be entitled to 10.5 votes. The Liberty Trust Charter Documents
provide that on a record date, each outstanding share or fractional share is
entitled to one vote or a proportional fractional vote.
Both Liberty Trust and Combined Trust Charter Documents provide that
shareholders shall vote together as a single class without regard to series or
class of shares, except that (i) when required by the 1990 Act of other
applicable law or (ii) when the Trustees shall have determined that the matter
affects one or more series or classes materially differently, shares shall be
voted by individual series or classes, only shareholders of such series or
classes shall be entitled to vote thereon.
55
Notice to Shareholders. Both the Liberty Trust Charter Documents and
Combined Trust Charter Documents provide that notice of shareholder meetings
must be given not less than seven days in advance. The Combined Trust Charter
Documents state that this notice can be mailed, postage prepaid, or sent by
facsimile or other electronic submission, whereas the Liberty Trust Charter
Documents require only that the notice be written. Furthermore, Liberty Trust
Charter Documents provide that notice must include the purpose or purposes for
which a meeting is called whereas Combined Trust Chart states that notice is not
expressly required to include the purpose for which the meeting is called.
Trustee's Power to Amend Declaration of Trust. The Combined Charter
Documents provide that the Declaration of Trust may be amended at any time by an
instrument in writing signed by a majority of the then Trustees, provided that,
for non-ministerial amendments, notice is promptly mailed to shareholders as of
the day such amendment is effective. The Liberty Trust Charter Documents provide
that the Declaration of Trust may be amended by a majority vote of the Trustees,
provided that, for non-ministerial amendments, notice is mailed to the
shareholders upon the same day such amendment is made.
Trustee's Power to Amend By-Laws. The Combined Trust Charter Documents
provide that the Trustees may amend the By-laws at any time. Under the Liberty
Trust Charter Documents, the Trustees or shareholders may, by majority vote,
amend the by-laws, provided that shareholder approval is required to amend the
provisions regarding amendments, lending Liberty Trust assets to certain
interested persons, and transferability of shares and dealings with the Liberty
Trust by certain persons.
Termination of Trust, Series or Class of Trust. Both the Liberty Trust
Charter Documents and the Combined Trust Charter Documents provide that the
Trustees may terminate the Trust or any series of the Trust without shareholder
approval by written notice to the shareholders. The Combined Trust Charter
Documents also allow the Trustees to terminate a class without shareholder
approval by written notice to the shareholders. Furthermore, the Combined Trust
Charter Documents provide that shareholders have the right to terminate the
Trust, or series or class, upon approval of at least 66 2/3% of the outstanding
shares of the Trust or the affected series or class.
Merger or Consolidation of Trust or Series of Trust. The Combined Trust
Charter Documents provide that a consolidation, merger or transfer may be
authorized by vote of a majority of the Trustees then in office without
shareholder approval, unless otherwise required by law. Under the Liberty Trust
Charter Documents, the shareholders have no express right to vote on mergers or
consolidations.
Removal of Trustees. Both the Liberty Trust Charter Documents and the
Combined Trust Charter Documents provide that a Trustee may be removed, with or
without cause, by a majority of Trustees then in office. Under the Liberty Trust
Charter Documents, a Trustee may also be removed, with or without cause, by (i)
a vote of two-thirds of the holders of outstanding shares at a meeting called
for the purpose, or (ii) the holders of two-thirds of the outstanding shares by
declaration in writing filed with the custodian of the Trust.
Trustee and Officer Indemnification. The Combined Trust Charter Documents
provide that the Trust will indemnify each of its Trustees and officers who are
not employees or officers of any investment adviser to the Trust or any
affiliated person thereof and may indemnify each of its officers who are
employees or officers of any investment adviser to the Trust or any affiliated
person thereof against all liabilities and expenses, including amounts paid in
satisfaction of judgments, in compromise, as fines and penalties, and as counsel
fees, reasonably incurred by such person while in office or thereafter, by
reason of the indemnified person's service as a Trustee or officer. The Liberty
Trust Charter Documents provide for the same indemnification without limitation
for employment or officer status with an investment advisor or affiliate.
Neither Trust will indemnify its Trustees and officers against any liability to
the Trust or to its shareholders to which he otherwise would be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his office.
The Combined Trust Charter Documents provide that in the absence of a final
decision on the merits by an adjudicating body that (i) an indemnifiable person
has not acted in good faith in the reasonable belief that such person's action
was in the best interests of the Trust or (ii) such person is liable to the
Trust or its Shareholders by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office, indemnification will be provided if (a) approved, after notice of such
indemnification, by at least a majority of the disinterested Trustees acting on
the matter (provided that a majority of the disinterested Trustees then in
office act on the matter) upon a determination, based upon a review of readily
available facts, that such person has acted in good faith in the reasonable
belief that such person's action was in the best interests of the Trust and is
not liable to the Trust or its shareholders by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office or (b) there has been obtained an opinion in
writing of independent legal counsel, based upon a
56
review of readily available facts to the effect that such person appears to have
acted in good faith in the reasonable belief that such person's action was in
the best interests of the Trust and that such indemnification would not protect
such person against any liability to the Trust to which such person otherwise
would be subject by reason of willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office. The
Liberty Trust Charter Documents provide the same indemnification coverage in the
absence of a final decision on the merits, but do not employ the good faith
standard in addition to the liability standard.
Both the Combined Trust and the Liberty Trust Charter Documents provide
that Trustees are not personally liable for claims against the Trust or for any
neglect or wrongdoing of any officer, agent, employee, investment adviser or
principal underwriter of the Trust. Furthermore, each Trustee is not responsible
for the act of omission of any other only by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
The Combined Trust Charter Documents provide that the appointment,
designation or identification of a Trustee as the chairman of the Board, the
lead or assistant lead independent Trustee, a member or chairman of a committee
of the Board, an expert on any topic or in any area (including an audit
committee financial expert) or as having any other special appointment,
designation or identification shall not (a) impose on that person any duty,
obligation or liability that is greater than the duties, obligations and
liabilities imposed on that person as a Trustee in the absence of the
appointment, designation or identification or (b) affect in any way such
Trustee's rights or entitlement to indemnification, and no Trustee who has
special skills or expertise, or is appointed, designated or identified as
aforesaid, shall (x) be held to a higher standard of care by virtue thereof or
(y) be limited with respect to any indemnification to which such Trustee would
otherwise be entitled.
57
LIBERTY VARIABLE INVESTMENT TRUST
Form N-14
Part B
STATEMENT OF ADDITIONAL INFORMATION
January 23, 2006
This Statement of Additional Information (the "SAI") relates to the proposed
acquisition (the "Acquisition") of Nations Value Portfolio (the "Acquired
Fund"), a series of Nations Separate Accounts Trust, by Liberty Growth and
Income Fund, Variable Series (the "Acquiring Fund"), a series of Liberty
Variable Investment Trust. This SAI contains information which may be of
interest to shareholders but which is not included in the combined
Prospectus/Proxy Statement dated January 23, 2006 (the "Prospectus/Proxy
Statement") which relates to the Acquisition. As described in the
Prospectus/Proxy Statement, the Acquisition would involve the transfer of all
the assets of the Acquired Fund in exchange for shares of the Acquiring Fund and
the assumption of all the liabilities of the Acquired Fund by the Acquiring
Fund. The Acquired Fund would distribute the Acquiring Fund shares it receives
to its shareholders in complete liquidation of the Acquired Fund. The Acquiring
Fund will be the survivor for accounting purposes.
This SAI is not a prospectus and should be read in conjunction with the
Prospectus/Proxy Statement. The Prospectus/Proxy Statement has been filed with
the Securities and Exchange Commission and is available upon request and without
charge by writing to the Acquiring Fund at One Financial Center, Boston,
Massachusetts 02111-2621, or by calling 1-800-426-3750.
- 1 -
TABLE OF CONTENTS
Additional Information about the Acquiring Fund............................ 2
Independent Registered Public Accounting Firm.............................. 2
Financial Statements....................................................... 2
Appendix A - Statement of Additional Information of the Acquiring Fund .... A-1
Appendix B - Pro Forma Financial Statements .............................. B-1
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND
Attached hereto as Appendix A is the Statement of Additional Information of the
Acquiring Fund dated May 1, 2005, as supplemented.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, located at 125 High Street, Boston, MA 02110-1707,
is the independent registered public accounting firm for the Acquiring Fund,
providing audit and tax return review of various Securities and Exchange
Commission filings. The Report of Independent Registered Public Accounting Firm,
Financial Highlights and Financial Statements included in the Acquiring Fund's
Annual Report to Shareholders for the fiscal year ended December 31, 2004, are
incorporated by reference into this SAI. The audited financial statements for
the Acquiring Fund are incorporated by reference into this SAI and the audited
financial statements for the Acquired Fund are incorporated by reference into
the Prospectus/Proxy Statement and this SAI have been so included and
incorporated in reliance upon the report of PricewaterhouseCoopers LLP, given on
their authority as experts in auditing and accounting.
FINANCIAL STATEMENTS
Pro forma financial statements of the Acquiring Fund for the Acquisition are
attached hereto as Appendix B.
- 2 -
Appendix A - Statement of Additional Information of the Acquiring Fund
- A-1 -
LIBERTY VARIABLE INVESTMENT TRUST
One Financial Center
Boston, Massachusetts 02111
Columbia International Fund, Variable Series
Liberty Growth & Income Fund, Variable Series
Colonial Strategic Income Fund, Variable Series
Colonial Small Cap Value Fund, Variable Series
Columbia High Yield Fund, Variable Series
Liberty Select Value Fund, Variable Series
Liberty S&P 500 Index Fund, Variable Series
(Each a "Fund" and collectively, the "Funds.")
STATEMENT OF ADDITIONAL INFORMATION
Dated May 1, 2005
The Statement of Additional Information ("SAI") is not a Prospectus, but
should be read in conjunction with the Class A and Class B Prospectuses for
Liberty Variable Investment Trust (the "Trust"), dated May 1, 2005, and any
supplements thereto, which may be obtained at no charge by calling Columbia
Funds Distributor, Inc. ("CFD") at (800) 426-3750, or by contacting the
applicable Participating Insurance Company (as defined in the Prospectus), or
the broker-dealers offering certain variable annuity contracts ("VA contracts")
or variable life insurance policies ("VLI policies") issued by the Participating
Insurance Company. Each Fund's financial statements for the fiscal year ended
December 31, 2004 are incorporated into this SAI by reference. The most recent
annual report to shareholders is available by calling CFD at the number above or
by contacting the Participating Insurance Company which issued your VA contract
or VLI policy.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
ORGANIZATION AND HISTORY .................................................. 3
INVESTMENT MANAGEMENT AND OTHER SERVICES .................................. 4
General ................................................................. 4
Trust Charges and Expenses .............................................. 4
Principal Underwriter and Distribution Plan ............................. 11
Code of Ethics .......................................................... 14
Anti-Money Laundering Compliance ........................................ 15
Proxy Voting Policies and Fund Proxy Voting Record ...................... 15
Disclosure of Portfolio Information ..................................... 16
INVESTMENT RESTRICTIONS ................................................... 17
Columbia International Fund, Variable Series ............................ 18
Liberty Growth & Income Fund, Variable Series ........................... 19
Colonial Strategic Income Fund, Variable Series ......................... 19
Colonial Small Cap Value Fund, Variable Series .......................... 20
Columbia High Yield Fund, Variable Series ............................... 21
Liberty Select Value Fund, Variable Series .............................. 23
Liberty S&P 500 Index Fund, Variable Series ............................. 23
Proposed Fundamental Restrictions ....................................... 25
MORE FACTS ABOUT THE TRUST ................................................ 26
Organization ............................................................ 26
Trustees and Officers ................................................... 26
Trustee Positions ....................................................... 34
Approving the Investment Advisory Contract .............................. 34
Compensation of Trustees ................................................ 35
Portfolio Managers ...................................................... 41
Principal Holders of Securities ......................................... 43
Custodian ............................................................... 49
OTHER CONSIDERATIONS ...................................................... 49
Portfolio Turnover ...................................................... 49
Suspension of Redemptions ............................................... 49
Valuation of Securities ................................................. 50
Portfolio Transactions .................................................. 50
Information About the Standard & Poor's 500 Composite ................... 58
Stock Price Index ....................................................... 58
Taxes ................................................................... 58
DESCRIPTION OF CERTAIN INVESTMENTS ........................................ 59
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM AND
FINANCIAL STATEMENTS ...................................................... 80
APPENDIX I ................................................................ 81
2
ORGANIZATION AND HISTORY
Liberty Variable Investment Trust, a business trust organized under the
laws of Massachusetts in 1993, is registered with the Securities and Exchange
Commission ("SEC") as an open-end management investment company. The Trust is
permitted to offer separate series and different classes of shares. Each Fund
currently offers two separate classes of shares, Class A shares and Class B
shares. Class B shares differ from Class A shares solely in that Class B shares
have a fee pursuant to Rule 12b-1 of the Investment Company Act of 1940, as
amended ("1940 Act"), which is used for certain shareholder services and
distribution expenses. Sales of shares of each class are made without a sales
charge at each Fund's per share net asset value.
The Trust currently offers seven Funds: Columbia International Fund,
Variable Series ("International Fund"); Liberty Growth & Income Fund, Variable
Series ("Growth & Income Fund"); Colonial Strategic Income Fund, Variable Series
("Strategic Income Fund"); Colonial Small Cap Value Fund, Variable Series
("Small Cap Fund"); Columbia High Yield Fund, Variable Series ("High Yield
Fund"); Liberty Select Value Fund, Variable Series ("Select Value Fund") and
Liberty S&P 500 Index Fund, Variable Series ("500 Index Fund"). Other funds may
be added and some Funds eliminated from time to time. The Trust commenced
operations on July 1, 1993. Each Fund, except the International Fund, is a
diversified series of the Trust, each representing the entire interest in a
separate series of the Trust. The International Fund is a non-diversified series
of the Trust, representing the entire interest in a separate series of the
Trust.
Effective November 15, 1997, the Trust changed its name from "Keyport
Variable Investment Trust" to its current name. Effective November 15, 1997, the
International Fund changed its name from "Colonial-Keyport International Fund
for Growth" to "Colonial International Fund for Growth, Variable Series."
Effective April 7, 2003, the International Fund changed its name from "Colonial
International Fund for Growth, Variable Series" to its current name. Effective
May 1, 1997, the Growth & Income Fund changed its name from "Colonial-Keyport
U.S. Fund for Growth" to "Colonial-Keyport U.S. Stock Fund." Effective November
15, 1997, the Growth & Income Fund changed its name from "Colonial-Keyport U.S.
Stock Fund" to "Colonial U.S. Stock Fund, Variable Series." Effective June 1,
1999, the Growth & Income Fund changed its name from "Colonial U.S. Stock Fund,
Variable Series" to "Colonial U.S. Growth & Income Fund, Variable Series."
Effective April 7, 2003, the Growth & Income Fund changed its name from
"Colonial U.S. Growth & Income Fund, Variable Series" to its current name.
Effective November 15, 1997, the Strategic Income Fund changed its name from
"Colonial-Keyport Strategic Income Fund" to its current name.
The High Yield Fund is the successor to the Galaxy VIP Columbia High
Yield Fund II ("Predecessor Fund"), a series of The Galaxy VIP Fund (the
"Predecessor Trust"), a Massachusetts business trust organized on May 27, 1992.
On April 14, 2003, the Predecessor Fund was reorganized as a separate series of
the Trust. Class A shares of the Fund were issued in exchange for shares of the
Predecessor Fund. The Predecessor Fund commenced operations on March 3, 1998.
Class A and Class B shares of the High Yield Fund were first offered on April
14, 2003.
The Trustees of the Trust ("Board of Trustees") monitor events to
identify any material conflicts that may arise between the interests of the
Participating Insurance Companies or between the interests of owners of VA
contracts and VLI policies. The Trust currently does not foresee any
disadvantages to the owners of VA contracts and VLI policies arising from the
fact that certain interests of owners may differ. Additional information
regarding such differing interests and related risks are described in the
Prospectus under "Mixed and Shared Funding."
3
INVESTMENT MANAGEMENT AND OTHER SERVICES
General
Columbia Management Advisors, Inc. ("Columbia Management") serves as
investment advisor pursuant to investment advisory agreements between the Trust,
on behalf of the Funds, and Columbia Management (the "Management Agreements").
Columbia Management is a direct wholly owned subsidiary of Columbia Management
Group, Inc. ("CMG"), which is an indirect wholly owned subsidiary of Bank of
America Corporation ("Bank of America"). Columbia Management's address is 100
Federal Street, Boston, Massachusetts 02110. The directors and the principal
executive officer of Columbia Management are Keith T. Banks (principal executive
officer and director), and Roger Sayler.
On April 1, 2004, FleetBoston Financial Corporation was acquired by Bank
of America. As a result of this acquisition, Columbia Management and CFD are now
indirect wholly owned subsidiaries of Bank of America.
SSgA Funds Management, Inc. ("SSgA FM") sub-advises the 500 Index Fund
pursuant to a Portfolio Management Agreement among the Trust, on behalf of the
500 Index Fund, Columbia Management and SSgA FM. SSgA FM, located at State
Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111, is one
of the State Street Global Advisors companies which constitute the investment
management business of State Street Corporation. State Street Global Advisors
has been in the business of providing investment advisory services since 1978.
SSgA FM succeeded to most or all of the registered investment company business
of State Street Global Advisors as of May, 2001. Agustin Fleites and Mitchell H.
Shames are Directors of SSgA FM and may therefore be considered controlling
persons of SSgA FM. SSgA FM is a subsidiary of State Street Corporation.
The Management Agreements and the Portfolio Management Agreement provide
that neither Columbia Management nor SSgA FM (each an "Advisor" and together,
the "Advisors"), nor any of their respective directors, officers, stockholders
(or partners of stockholders), agents, or employees, shall have any liability to
the Trust or any shareholder of the Trust (or for SSgA FM any shareholder of the
S&P 500 Fund) 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 either
Advisor of its respective duties under such agreements, except for liability
resulting from willful misfeasance, bad faith or gross negligence on the part of
either Advisor, in the performance of its respective duties or from reckless
disregard by such Advisor of its respective obligations and duties thereunder.
Trust Charges and Expenses
Management Fees. Each Fund listed below paid management fees to Columbia
Management (or an affiliate thereof) as follows during each year in the
three-year period ended December 31, 2004, pursuant to the Management Agreements
described in the Prospectus:
2004 2003 2002
---------- ---------- ----------
International Fund: $ 694,542 $ 564,108 $ 311,181
Growth & Income Fund: 2,030,029 1,716,268 1,398,399
Strategic Income Fund: 1,042,328 1,003,522 904,382
Small Cap Fund: 1,306,990 243,991 167,427
High Yield Fund: 331,369 161,189 14,229*
Select Value Fund: 279,887 211,079 152,363
500 Index Fund: 205,138 145,520 112,281
* The Predecessor Fund to this Fund paid these fees.
4
The Trust's Investment Advisory Agreement with Columbia Management has
been amended with respect to the Funds listed below so that, effective February
9, 2005, the fees payable thereunder will be paid at the following reduced
rates:
International Fund
Average Daily Net Assets Rate
Net assets under $500 million 0.870%
Net assets of $500 million but less than $1 billion 0.820%
Net assets of $1 billion but less than $1.5 billion 0.770%
Net assets of $1.5 billion but less than $3 billion 0.720%
Net assets of $3 billion but less than $6 billion 0.700%
Net assets in excess of $6 billion 0.680%
Strategic Income Fund
Average Daily Net Assets Rate
Net assets under $500 million 0.600%
Net assets of $500 million but less than $1 billion 0.550%
Net assets of $1 billion but less than $1.5 billion 0.520%
Net assets in excess of $1.5 billion 0.490%
Growth & Income Fund
Average Daily Net Assets Rate
Net assets under $500 million 0.770%
Net assets of $500 million but less than $1 billion 0.720%
Net assets of $1 billion but less than $1.5 billion 0.670%
Net assets of $1.5 billion but less than $3 billion 0.620%
Net assets of $3 billion but less than $6 billion 0.600%
Net assets in excess of $6 billion 0.580%
Columbia Management receives from the 500 Index Fund a monthly fee consisting of
a flat rate of 0.200%.
Previously, Columbia Management had, with respect to the period from
November 1, 2004 to February 9, 2005, waived a portion of its fees, so that it
retained fees at the rates shown above.
Certain Administrative Expenses.
All Funds except High Yield Fund.
Columbia Management is responsible for providing accounting and
bookkeeping services to the Funds pursuant to a pricing and bookkeeping
agreement. Under a separate agreement ("Outsourcing Agreement"), Columbia
Management has delegated those functions to State Street Corporation ("State
Street"). Columbia Management pays fees to State Street under the Outsourcing
Agreement.
5
Under its pricing and bookkeeping agreement with each Fund, Columbia
Management receives from each Fund a monthly fee consisting of a flat fee plus
an asset-based fee, as follows:
.. An annual flat fee of $10,000, paid monthly; and
.. In any month that a Fund has average net assets of more than $50 million, a
monthly fee equal to the average daily net assets of the Fund for that
month multiplied by a fee rate that is calculated by taking into account
the fees payable to State Street under the Outsourcing Agreement.
Each Fund reimburses Columbia Management for all out-of-pocket expenses
and charges, including fees payable to third parties (other than State Street)
for providing pricing data.
During each year in the three-year period ended December 31, 2004, each
Fund listed below made payments as follows to Columbia Management or an
affiliate thereof for pricing and bookkeeping services:
2004 2003 2002
-------- -------- --------
International Fund: $ 35,986 $ 27,631 $ 11,226
Growth & Income Fund: 72,344 70,470 75,063
Strategic Income Fund: 106,577 85,593 66,564
Small Cap Fund: 54,220 16,947 10,968
Select Value Fund: 11,606 12,441 10,953
500 Index Fund: 42,965 33,264 10,967
In addition, each Fund, pays Columbia Management or an affiliate thereof
an additional fee for transfer agent services in the amount of $7,500 per year,
payable in monthly installments of $625. The foregoing fee shall be pro-rated
for any month during which this Agreement is in effect for only a portion of the
month. During each year in the three-year period ended December 31, 2004, each
Fund listed below made payments as follows to Columbia Management or an
affiliate thereof for transfer agent services:
2004 2003 2002
-------- -------- --------
International Fund: $ 7,500 $ 7,500 $ 7,500
Growth & Income Fund: 7,500 7,500 7,500
Strategic Income Fund: 7,500 7,500 7,500
Small Cap Fund: 7,500 7,500 7,500
Select Value Fund: 7,500 7,500 7,500
500 Index Fund: 7,500 7,500 7,500
High Yield Fund only.
Prior to July 22, 2002, the Predecessor Trust paid PFPC Inc. ("PFPC") or
an affiliate thereof a fee for statistical and research data, clerical,
accounting and bookkeeping services, internal auditing services, computation of
net asset value and net income, preparation of annual and semi-annual reports,
federal and state tax returns, filings with state securities commissions, and
transfer agency services. The Predecessor Trust paid PFPC a monthly fee at the
annual rate of 0.085% of the first $1 billion of the combined average daily net
assets of all funds that were series of the Predecessor Trust, plus 0.078% of
the next $1.5 billion of the combined average daily net assets, plus 0.073% of
the combined average daily net assets in excess of $2.5 billion. For the fiscal
year ended December 31, 2002, the Predecessor Fund paid PFPC fees at the annual
rate of 0.085% of the Predecessor Fund's average daily net assets. The minimum
aggregate annual fee payable to PFPC for administration services was $100,000.
In addition, PFPC received a separate monthly fee from the Predecessor Fund for
certain fund accounting services and was paid by the Predecessor Fund for
certain custody administration services.
6
During the year ended December 31, 2002, PFPC received the following
administrative fees (including pricing and bookkeeping fees, but excluding
custody and transfer agency services) from the Predecessor Fund to the High
Yield Fund :
2002(*)
-------
High Yield Fund: $18,563
(*) Represents payments to PFPC until July 22, 2002.
For the period from July 22, 2002 until April 14, 2003, Fleet Investment
Advisors Inc. ("FIA") served as the administrator for the Predecessor Fund.
Pursuant to its Agreement with the Predecessor Trust, FIA (i) provided
substantially the same types of administrative services (other than certain
pricing and bookkeeping services) as those that were required to be provided by
PFPC, and (ii) received the same fees for providing such services as those that
PFPC was entitled to receive. Effective July 22, 2002, PFPC served as
sub-administrator to the Predecessor Fund pursuant to an Agreement with FIA.
For the period July 22, 2002 to December 31, 2002, FIA received $849 for
administrative services from the Predecessor Fund to the High Yield Fund.
Effective April 14, 2003, Columbia Management began serving as the
administrator for the High Yield Fund pursuant to an Agreement between Columbia
Management and the Trust, on behalf of this Fund. For the period April 14, 2003
to October 31, 2003, Columbia Management fees at the annual rate of 0.85% of the
High Yield Fund's average daily assets.
Effective November 1, 2003, Columbia Management discontinued the
administration fee for the High Yield Fund.
For the period January 1, 2003 to December 31, 2003, the High Yield Fund
paid $17,244 to Columbia Management for administrative services.
For the period from July 22, 2002 until April 14, 2003, Colonial
Management Associates, Inc. ("Colonial") provided the Predecessor Fund with
certain pricing and bookkeeping services. Pursuant to its Pricing and
Bookkeeping Agreement, Colonial was responsible for providing substantially the
same types of pricing and bookkeeping services as those that were required to be
provided by PFPC pursuant to its Administration Agreement with the Predecessor
Trust. PFPC agreed to continue to provide certain of these pricing and
bookkeeping services pursuant to an agreement with Colonial.
Under its pricing and bookkeeping agreement with the Predecessor Fund,
Colonial received from the Predecessor Fund an annual fee based on the average
net assets of the Predecessor Fund as follows:
Average Net Assets Fee
------------------ --------
Under $50 million $ 25,000
$50 million but less
than $200 million $ 35,000
$200 million but less
than $500 million $ 50,000
$500 million but less
than $1 billion $ 85,000
In excess of $1 billion $125,000
7
The annual fees for the Predecessor Fund with more than 25% in
non-domestic assets was 150% of the annual fees described above.
For the period July 22, 2002 to December 31, 2002, Colonial received
$14,297 for pricing and bookkeeping services from the Predecessor Fund to the
High Yield Fund.
Effective April 14, 2003, Columbia Management became responsible for
providing pricing and bookkeeping services to the High Yield Fund for the same
fees that Colonial received from the Predecessor Fund. Also on April 14, 2003,
Columbia Management entered into the Outsourcing Agreement, whereby Columbia
Management has delegated to State Street certain pricing and bookkeeping
functions for the High Yield Fund.
For the period January 1, 2003 to December 31, 2003, the High Yield Fund
made payments of $29,652 to Columbia Management for pricing and bookkeeping
services.
Prior to July 22, 2002, PFPC served as the Predecessor Fund's transfer
agent and dividend disbursing agent. Effective July 22, 2002, Columbia
Management Services, Inc. ("CMS"), an affiliate of Columbia Management, located
at One Financial Center, Boston, MA 02111, began serving as the Predecessor
Fund's, and now serves as the High Yield Fund's transfer agent and dividend
disbursing agent. Pursuant to its Shareholders' Servicing and Transfer Agent
Agreement with the Trust, CFS is responsible for providing substantially the
same types of services as those that were previously provided by PFPC to the
Predecessor Fund. The High Yield Fund pays CFS according to the following fee
schedule: (i) $14.00 annual per open account fee; (ii) $14.00 annual per closed
account fee; and (iii) $ 5.00 new account set-up fee. The annual minimum charge
for the Fund shall be $5,000.
During the year ended December 31, 2002, PFPC received the following
fees for transfer agency services from the Predecessor Fund to the High Yield
Fund:
2002(*)
-------
High Yield Fund: $ 2,755
(*) Represents payments to PFPC until July 22, 2002.
For the period July 22, 2002 to December 31, 2002, CFS received $2,245
from the Predecessor Fund to the High Yield Fund.
For the period January 1, 2003 to December 31, 2003, the High Yield Fund
made payments of $5,000 to CFS for transfer agency services.
12b-1 Fees. During each year in the three-year period ended December 31, 2004,
each Fund listed below paid CFD distribution fees as follows, as described in
the Prospectus:
2004 2003 2002
-------- -------- --------
International Fund: $ 16,418 $ 11,521 $ 2
Growth & Income Fund: 112,316 90,508 71,044
Strategic Income Fund: 141,240 115,511 64,933
Small Cap Fund: 378,114 54,357 28,611
High Yield Fund: 111,205 42,008 --(*)
Select Value Fund: 96,410 72,709 53,882
500 Index Fund: 128,000 90,677 69,993
(*) The Predecessor Fund did not incur 12b-1 fees.
8
Expense Limitations. Columbia Management and CFD have voluntarily agreed to
reimburse all expenses, including management fees and distribution fees, but
excluding interest, taxes, brokerage and extraordinary expenses, incurred by
each of the following Funds in excess of the following percentages of each of
Class A and Class B share average daily net asset value per annum:
Strategic Income Fund: 1.00%
Small Cap Fund: 1.10%
Select Value Fund: 1.10%
500 Index Fund: 0.75%
CFD will first reimburse the Class B distribution fee of up to 0.25% to
reach the above stated limits on Class B expenses. If, after reimbursing the
distribution fee, Class B expenses are above the expense limit, Columbia
Management will then reimburse other Fund expenses for both Class A and Class B
to the extent necessary to reach the expense limit. If additional reimbursement
is still needed to reach the expense limits, Columbia Management will then waive
a portion of its management fee to reach the above stated limits.
These arrangements may be modified or terminated by Columbia Management or CFD
at any time.
Columbia Management has voluntarily agreed to waive advisory fees and
reimburse the following Funds for certain expenses so that the total annual fund
operating expenses (exclusive of distribution and service fees, brokerage
commissions, interest, taxes and extraordinary expenses, if any) will not exceed
the following percentages:
International Fund: 0.95%
Growth & Income Fund: 0.80%
High Yield Fund: 0.60%
These arrangements may be modified or terminated by Columbia Management at any
time.
CFD has voluntarily agreed to waive the following percentage of the
12b-1 fee for Class B shares of the following Funds:
Growth & Income Fund: 0.02%
High Yield Fund: 0.19%
These arrangements may be terminated or modified by CFD at any time.
Fees or Expenses Waived or Borne by Columbia Management
2004 2003 2002
-------- -------- --------
International Fund: $162,060 $115,632 $ 0
Growth & Income Fund: 279,266 209,396 0
Small Cap Fund: 0 33,956 9,011
High Yield Fund: 91,694 82,476 --
500 Index Fund: 0 9,478 0
9
Fees or Expenses Waived or Borne by CFD
2004 2003 2002
-------- -------- --------
Growth & Income Fund: $ 8,985 $ 5,806 $ 36,414
Strategic Income Fund: 26,709 22,294 2,715
Small Cap Fund: 183,342 54,357 28,611
High Yield Fund: 84,515 31,926 --
Select Value Fund: 3,786 28,337 16,369
500 Index Fund: 69,352 69,991 39,037
Fees or Expenses Reimbursed by Columbia Management with respect to the
Predecessor Fund to the High Yield Fund
2002
-------
High Yield Fund: $39,765
Sales-Related Expenses
Sales-related expenses of CFD relating to each Fund's Class B shares for
the year ended December 31, 2004 were as follows:
International Growth & Strategic
Fund Income Fund Income Fund
------------- ------------- --------------
Fees to Financial Service Firms $ 16,419 $ 112,329 $ 141,275
Cost of sales material relating to the Fund
(including printing and mailing expenses) 29 417 1,522
Allocated travel, entertainment and other
promotional expenses (including advertising) 32 452 1,649
Small Cap Select Value 500 Index
Fund Fund Fund
-------------- ------------- -------------
Fees to Financial Service Firms $ 378,297 $ 96,445 $ 128,041
Cost of sales material relating to the Fund
(including printing and mailing expenses) 438 1,182 2,923
Allocated travel, entertainment and other
promotional expenses (including advertising) 475 1,281 3,167
High Yield
Fund
-------------
Fees to Financial Service Firms $ 111,519
Cost of sales material relating to the Fund
(including printing and mailing expenses) 15
Allocated travel, entertainment and other
promotional expenses (including advertising) 16
10
Principal Underwriter and Distribution Plan
CFD, located at One Financial Center, Boston, MA 02111, serves as the
principal underwriter to the Funds. CFD is a direct wholly owned subsidiary of
Columbia Management. CFD conducts a continuous offering and is not obligated to
sell a specific number of shares of any Fund.
The Trustees have approved a Distribution Plan and Agreement ("Plan")
pursuant to Rule 12b-1 under the 1940 Act for the Class B shares of the Funds.
Under the Plan, the Funds pay CFD a monthly distribution fee at the aggregate
annual rate of up to 0.25% of each Fund's Class B share's average daily net
assets. CFD has agreed to waive the fee for some of the Funds to an amount so
that the Class B share expenses (including the distribution fee) of these Funds
do not exceed the limits as described above under Expense Limitations. CFD may
use the entire amount of such fees to defray the cost of commissions and service
fees paid to financial service firms ("FSFs") and for certain other purposes.
Since the distribution fees are payable regardless of the amount of CFD's
expenses, CFD may realize a profit from the fees.
The Plan authorizes any other payments by the Funds to CFD and its
affiliates (including Columbia Management) to the extent that such payments
might be construed to be indirect financing of the distribution of fund shares.
No interested person of the Funds, nor any Trustee, has any direct or
indirect financial interest in the operation of the Plan except to the extent
that CFD and certain of its employees may be deemed to have such an interest as
a result of receiving a portion of the amounts paid to CFD under the Plan. The
Trustees believe the Plan could be a contributing factor to the growth and
retention of Fund assets resulting in a more advantageous expense ratio and
increased investment flexibility which could benefit each Fund's shareholders.
The Plan will continue in effect from year to year so long as continuance is
specifically approved at least annually by a vote of the Trustees, including the
Trustees who are not interested persons of the Trust and have no direct or
indirect financial interest in the operation of the Plan or in any agreements
related to the Plan ("Independent Trustees"), cast in person at a meeting called
for the purpose of voting on the Plan. The Plan may not be amended to increase
the fee materially without approval by vote of a majority of the outstanding
voting securities of the relevant class of shares, and all material amendments
of the Plan must be approved by the Trustees in the manner provided in the
foregoing sentence. The Plan may be terminated at any time by vote of a majority
of the Independent Trustees or by vote of a majority of the outstanding voting
securities of the relevant Fund's shares, on 60 days' written notice to CFD. The
continuance of the Plan will only be effective if the selection and nomination
of the Trustees who are not interested persons of the Trust is effected by such
disinterested Trustees.
In addition to the commissions specified in a Fund's prospectus and this
SAI, CFD, or its advisory affiliates, from their own resources, may make cash
payments to FSFs that agree to promote the sale of shares of funds that CFD
distributes. A number of factors may be considered in determining the amount of
those payments, including the FSF's sales, client assets invested in the funds
and redemption rates, the quality of the FSF's relationship with CFD and/or its
affiliates, and the nature of the services provided by FSFs to its clients. The
payments may be made in recognition of such factors as marketing support, access
to sales meetings and the FSF's representatives, and inclusion of the Fund on
focus, select or other similar lists.
Subject to applicable rules, CFD may also pay non-cash compensation to
FSFs and their representatives, including: (i) occasional gifts (ii) occasional
meals, or other entertainment; and/or (iii) support for FSF educational or
training events.
11
In addition, CFD, and/or the Fund's investment advisor, transfer agent
or their affiliates, may pay service, administrative or other similar fees to
broker/dealers, banks, third-party administrators or other financial
institutions (each commonly referred to as an "intermediary"). Those fees are
generally for subaccounting, sub transfer agency and other shareholder services
associated with shareholders whose shares are held of record in omnibus or other
group accounts. The rate of those fees may vary and is generally calculated on
the average daily net assets of a Fund attributable to a particular
intermediary.
In some circumstances, the payments discussed above may create an
incentive for an intermediary or its employees or associated persons to
recommend or sell shares of a Fund.
As of the date of this SAI, CFD and its affiliates anticipate that the
FSFs and intermediaries that will receive the additional compensation described
above include:
1st Global Capital Corp
401 Company
ABN AMRO Trust Services
ADP Retirement Services
Advest
AEGON/Transamerica
AG Edwards
American Century Services
American Express
AMG
AON Consulting
AST Trust Company
Banc of America Investment Services
BancOne
Bear Stearns
Benefit Plan Administrators
Bidwell & Company
BNY Clearing
C N A Trust
Charles Schwab
CIBC Oppenheimer
Citigroup Global Markets
CitiStreet Associates LLC
City National Bank
City of Milwaukee
Columbia Trust Company
Commonwealth Financial
Compensation & Capital
CPI Qualified Plan Consultants
Daily Access Concepts
Davenport & Company
Delaware Investments
Digital Retirement Solutions
Discover Brokerage
Dreyfus/Mellon
Edgewood Services
Edward Jones
E-Trade,
ExpertPlan
12
FAS Liberty Life Spectrum
Ferris Baker Watts
Fidelity
Financial Data Services
Franklin Templeton
Freeman Welwood
Gem Group
Great West Life
Hewitt Associates LLC
Huntington Bank
ING
Intermountain Health Care
Investmart, Inc.
Investment Manager Services ("IMS")
Janney Montgomery Scott
JJB Hilliard Lyons
JP Morgan/American Century
Kenney Investments
Kirkpatrick Pettis Smith Polian Inc
Legg Mason Wood Walker
Liberty Life
Lincoln Financial
Lincoln Life
Linsco Private Ledger
M & T Securities
Marquette Trust Company
Mass Mutual Life
Matrix Settlement & Clearance Services ("MSCS")
McDonald Investments
Merrill Lynch
MetLife
MFS
Mfund Trax
MidAtlantic Capital
Milliman USA
Morgan Keegan
Morgan Stanley Dean Witter
PFPC
Nationwide Investment Services
Neuberger Berman Mgmt
NFP Securities
NSD -NetStock Sharebuilder
NYLife Distributors
Optimum Investment Advisors
Orbitex
Pershing LLC
Phoenix Home Life
Piper Jaffray
PNC
PPI Employee Benefits
Private Bank & Trust
Prudential
13
Putnam Investments
Raymond James
RBC Dain Rausher
Robert W Baird
Royal Alliance
RSM McGladrey Inc.
Safeco
Scott & Stringfellow
Scudder Investments
Security Benefit
Segall Bryant Hamill
South Trust Securities
Southwest Securities
Standard Insurance
Stanton Group
State of NY Deferred Compensation Plan
Stephens, Inc.
Stifel Nicolaus & Co
Strong Capital
Sungard T Rowe Price
Trustar Retirement Services
Trustlynx/Datalynx
UBS Financial Services
USAA Investment Management
Vanguard
Wachovia
TD Waterhouse
Webster Investment Services
Wells Fargo
Wilmington Trust
Please contact your FSF or intermediary for details about payments it may
receive.
Code of Ethics
The Funds, Columbia Management, SSgA FM and CFD have each adopted a Code
of Ethics pursuant to the requirements of the 1940 Act. This Code of Ethics
permits personnel subject to the Code to invest in securities, including
securities that may be purchased or held by the Funds. This Code of Ethics can
be reviewed and copied at the SEC's Public Reference Room and may be obtained by
calling the SEC at 1-202-942-8090. This Code is also available on the EDGAR
Database on the SEC's internet web site at http://www.sec.gov, and may also be
obtained, after paying a duplicating fee, by electronic request to
publicinfo@sec.gov or by writing to the SEC's Public Reference Section,
Washington, DC 20549-0102.
14
Anti-Money Laundering Compliance
The Funds are required to comply with various anti-money laundering laws
and regulations. Consequently, the Funds may request additional information from
you to verify your identity. If at any time the Funds believe a shareholder may
be involved in suspicious activity or if certain account information matches
information on government lists of suspicious persons, the Funds may choose not
to establish a new account or may be required to "freeze" a shareholder's
account. The Funds also may be required to provide a governmental agency with
information about transactions that have occurred in a shareholder's account or
to transfer monies received to establish a new account, transfer an existing
account or transfer the proceeds of an existing account to a governmental
agency. In some circumstances, the law may not permit a Fund to inform the
shareholder that it has taken the actions described above.
Proxy Voting Policies and Fund Proxy Voting Record (In this section the
"Advisor" refers to Columbia Management only.)
Each Fund has delegated to the Advisor the responsibility to vote
proxies relating to portfolio securities held by the Funds. In deciding to
delegate this responsibility to the Advisor, the Board of Trustees of the Trust
reviewed and approved the policies and procedures adopted by the Advisor. These
included the procedures that the Advisor follows when a vote presents a conflict
between the interests of a Fund and its shareholders and the Advisor, its
affiliates, its other clients or other persons.
The Advisor's policy is to vote all proxies for Fund securities in a
manner considered by the Advisor to be in the best interest of a Fund and its
shareholders without regard to any benefit to the Advisor, its affiliates, its
other clients or other persons. The Advisor examines each proposal and votes
against the proposal, if, in its judgment, approval or adoption of the proposal
would be expected to impact adversely the current or potential market value of
the issuer's securities. The Advisor also examines each proposal and votes the
proxies against the proposal, if, in its judgment, the proposal would be
expected to affect adversely the best interest of the Fund. The Advisor
determines the best interest of the Fund in light of the potential economic
return on the Fund's investment.
The Advisor addresses potential material conflicts of interest by having
predetermined voting guidelines. For those proposals that require special
consideration or in instances where special circumstances may require varying
from the predetermined guideline, the Advisor's Proxy Committee determines the
vote in the best interest of a Fund, without consideration of any benefit to the
Advisor, its affiliates, its other clients or other persons. The Advisor's Proxy
Committee is composed of representatives of the Advisor's equity investments,
equity research, compliance, legal and fund administration functions. In
addition to the responsibilities described above, the Proxy Committee has the
responsibility to review, on a semi-annual basis, the Advisor's proxy voting
policies to ensure consistency with internal and regulatory agency policies and
to develop additional predetermined voting guidelines to assist in the review of
proxy proposals.
The Proxy Committee may vary from a predetermined guideline if it
determines that voting on the proposal according to the predetermined guideline
would be expected to impact adversely the current or potential market value of
the issuer's securities or to affect adversely the best interest of the client.
References to the best interest of a client refer to the interest of the client
in terms of the potential economic return on the client's investment. In
determining the vote on any proposal, the Proxy Committee does not consider any
benefit other than benefits to the owner of the securities to be voted. A member
of the Proxy Committee is prohibited from voting on any proposal for which he or
she has a conflict of interest by reason of a direct relationship with the
issuer or other party affected by a given proposal. Persons making
recommendations to the Proxy Committee or its members are required to disclose
to the Committee any relationship with a party making a proposal or other matter
known to the person that would create a potential conflict of interest.
The Advisor has retained Institutional Shareholder Services ("ISS"), a
third party vendor, to implement its proxy voting process. ISS provides proxy
analysis, record keeping services and vote disclosure services.
15
The Advisor's proxy voting guidelines and procedures are included in
this SAI as Appendix I. In accordance with SEC regulations, the fund's proxy
voting record for the last twelve-month period ended June 30 has been filed with
the SEC. You may obtain a copy of a Fund's proxy voting record (i) at
www.columbiamanagement.com; (ii) on the Securities and Exchange Commission's
website at www.sec.gov and (iii) without charge, upon request, by calling
800-368-0346.
Disclosure of Portfolio Information
The Trustees of the Columbia Funds have adopted policies with respect to
the disclosure of the Funds' portfolio holdings by the Funds, Columbia
Management, or their affiliates. These policies provide that Fund portfolio
holdings information generally may not be disclosed to any party prior to (1)
the day next following the posting of such information on the Funds' website at
www.columbiafunds.com, (2) the day next following the filing of the information
with the SEC in a required filing, or (3) for money market funds, such
information is publicly available to all shareholders upon request on the fifth
business day after each calendar month-end. Certain limited exceptions pursuant
to the Funds' policies are described below. The Trustees shall be updated as
needed regarding the Funds' compliance with the policies, including information
relating to any potential conflicts of interest between the interests of Fund
shareholders and those of Columbia Management and its affiliates. The Funds'
policies prohibit Columbia Management and the Funds' other service providers
from entering into any agreement to disclose Fund portfolio holdings information
in exchange for any form of consideration. These policies apply to disclosures
to all categories of persons, including, without limitation, individual
investors, institutional investors, intermediaries that distribute the Funds'
shares, third-party service providers, rating and ranking organizations and
affiliated persons of the Funds.
Public Disclosures. The Funds' portfolio holdings are currently
disclosed to the public through required filings with the SEC and, for equity
and fixed income funds, on the Funds' website at www.columbiafunds.com. The
Funds file their portfolio holdings with the SEC for each fiscal quarter on Form
N-CSR (with respect to each annual period and semi-annual period) and Form N-Q
(with respect to the first and third quarters of the Funds' fiscal year).
Shareholders may obtain the Funds' Forms N-CSR and N-Q filings on the SEC's
website at www.sec.gov. In addition, the Funds' Forms N-CSR and N-Q filings may
be reviewed and copied at the SEC's public reference room in Washington, D.C.
You may call the SEC at 1-800-SEC-0330 for information about the SEC's website
or the operation of the public reference room.
The equity and fixed income Columbia Funds also currently make portfolio
information publicly available at www.columbiafunds.com, as disclosed in the
following table:
Type of Fund Information Provided Frequency of Disclosure Date of Web Posting
- -------------------- ----------------------- ----------------------- ----------------------
Equity Funds Full portfolio holdings Monthly 30 calendar days after
information month-end.
Fixed Income Funds Full portfolio holdings Quarterly 60 calendar days after
information quarter-end
The scope of the information provided relating to the Funds' portfolios
that is made available on the website may change from time to time without prior
notice.
For Columbia's money market funds, a complete list of a Fund's portfolio
holdings shall be publicly available on a monthly basis on the fifth business
date after month-end. Shareholders may request such information by writing or
calling the Fund's distributor, Columbia Funds Distributor, Inc. at the address
listed on the cover of this SAI.
16
A Fund, Columbia Management or their affiliates may include portfolio
holdings information that has already been made public through a web posting or
SEC filing in marketing literature and other communications to shareholders,
advisors or other parties, provided that the information is disclosed no earlier
than the day after the date the information is disclosed publicly.
Other Disclosures. The Funds' policies provide that non-public
disclosures of the Funds' portfolio holdings may be made if (1) a Fund has a
legitimate business purpose for making such disclosure, (2) a Fund's chief
executive officer authorizes such non-public disclosure of information, and (3)
the party receiving the non-public information enters into a confidentiality
agreement, which includes a duty not to trade on the non-public information.
The Funds periodically disclose their portfolio information on a
confidential basis to various service providers that require such information in
order to assist the Funds with their day-to-day business affairs. In addition to
Columbia Management and its affiliates, these service providers include the
Funds' custodian and sub-custodians, the Funds' independent registered public
accounting firm, legal counsel, financial printers (R.R. Donnelly & Sons and
Bowne & Co., Inc.), the Funds' proxy voting service provider (Alamo Direct Mail
Services, Inc.), the Funds' proxy solicitor (Georgeson Shareholder
Communications Inc.), rating agencies that maintain ratings on certain Columbia
Funds (Fitch, Inc.) and service providers that support Columbia Management's
trading systems (InvestorTool, Inc. and Thomson Financial). These service
providers are required to keep such information confidential, and are prohibited
from trading based on the information or otherwise using the information except
as necessary in providing services to the Funds. The Funds may also disclose
portfolio holdings information to broker/dealers and certain other entities
related to potential transactions and management of the Funds, provided that
reasonable precautions, including limitations on the scope of the portfolio
holdings information disclosed, are taken to avoid any potential misuse of the
disclosed information.
Certain clients of the Funds' investment advisor(s) may follow a
strategy similar to that of the Funds, and have access to portfolio holdings
information for their account. It is possible that such information could be
used to infer portfolio holdings information relating to the Funds.
INVESTMENT RESTRICTIONS
The investment restrictions specified below with respect to each Fund as
"Fundamental Investment Policies" have been adopted as fundamental investment
policies of each Fund. Such fundamental investment policies may be changed only
with the consent of a "majority of the outstanding voting securities" of the
particular Fund. As used in the Prospectuses and in this SAI, the term "majority
of the outstanding voting securities" means the lesser of a vote of (i) 67% of
the voting securities of a Fund present at a meeting where the holders of more
than 50% of the outstanding voting securities of a Fund are present in person or
by proxy, or (ii) more than 50% of the outstanding voting securities of a Fund.
Shares of each Fund will be voted separately on matters affecting only that
Fund, including approval of changes in the fundamental goals, policies, or
restrictions of that Fund.
Total assets and net assets are determined at current value for purposes
of compliance with investment restrictions and policies. All percentage
limitations will apply at the time of investment and are not violated unless an
excess or deficiency occurs as a result of such investment. For purposes of the
diversification requirement of the 1940 Act, the issuer with respect to a
security is the entity whose revenues support the security.
17
International Fund
Fundamental Investment Policies. International Fund may:
1. Issue senior securities only through borrowing money from banks
for temporary or emergency purposes up to 10% of its net assets;
however, the Fund will not purchase additional portfolio
securities while borrowings exceed 5% of net assets;
2. Underwrite securities issued by others only when disposing of
portfolio securities;
3. Make loans through lending of securities not exceeding 30% of
total assets, through the purchase of debt instruments and
similar evidences of indebtedness typically sold privately to
financial institutions and through repurchase agreements;
4. Not concentrate more than 25% of its total assets in any one
industry;
5. Only own real estate acquired as the result of owning securities
and not more than 5% of total assets; and
6. Purchase and sell futures contracts and related options so long
as the total initial margin and premiums on the contracts do not
exceed 5% of its total assets.
Other Investment Policies. As non-fundamental investment policies of
International Fund, which may be changed without a shareholder vote, the Fund
may not:
1. Purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;
2. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities;
3. Invest more than 15% of its net assets in illiquid assets;
4. With respect to 75% of total assets, purchase any voting
security of an issuer if, as a result of such purchase, the Fund
would own more than 10% of the outstanding voting securities of
such issuer;
5. Purchase puts, calls, straddles, spreads, or any combination
thereof if, as a result of such purchase, the Fund's aggregate
investment in such securities would exceed 5% of total assets;
6. Purchase or sell commodities contracts if the total initial
margin and premiums on the contracts would exceed 5% of its
total assets;
7. Acquire any security issued by a person that, in its most recent
fiscal year, derived 15% or less of its gross revenues from
securities related activities (within the meaning of Rule 12d3-1
under the 1940 Act) if the Fund would control such person after
such acquisition; or
8. Acquire any security issued by a person that, in its most recent
fiscal year, derived more than 15% of its gross revenues from
securities related activities (as so defined) unless (i)
immediately after such acquisition of any equity security, the
Fund owns 5% or less of the outstanding securities of that class
of the issuer's equity securities, (ii) immediately after such
acquisition of a debt security, the Fund owns 10% or less of the
outstanding principal amount of the issuer's debt securities,
and (iii) immediately after such acquisition, the Fund has
invested not more than 5% of its total assets in the securities
of the issuer.
18
Growth & Income Fund
Fundamental Investment Policies. Growth & Income Fund may:
1. Issue senior securities only through borrowing money from banks
for temporary or emergency purposes up to 10% of its net assets;
however, the Fund will not purchase additional portfolio
securities while borrowings exceed 5% of net assets;
2. Underwrite securities issued by others only when disposing of
portfolio securities;
3. Make loans through lending of securities not exceeding 30% of
total assets, through the purchase of debt instruments and
similar evidences of indebtedness typically sold privately to
financial institutions and through repurchase agreements;
4. Not concentrate more than 25% of its total assets in any one
industry;
5. With respect to 75% of total assets not purchase any security
(other than obligations of the U.S. Government and cash items
including receivables) if as a result more than 5% of its total
assets would then be invested in securities of a single issuer
or purchase the voting securities of an issuer if, as a result
of such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer;
6. Only own real estate acquired as the result of owning securities
and not more than 5% of total assets; and
7. Purchase and sell futures contracts and related options so long
as the total initial margin and premiums on the contracts do not
exceed 5% of its total assets.
Other Investment Policies. As non-fundamental investment policies of
Growth & Income Fund, which may be changed without a shareholder vote, the Fund
may not:
1. Purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;
2. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities;
3. Invest more than 15% of its net assets in illiquid assets; or
4. Purchase or sell commodity contracts if the total initial margin
and premiums on the contracts would exceed 5% of its total
assets.
Strategic Income Fund
Fundamental Investment Policies. Strategic Income Fund may:
1. Issue senior securities only through borrowing money from banks
for temporary or emergency purposes up to 10% of its net assets;
however, the Fund will not purchase additional portfolio
securities while borrowings exceed 5% of net assets;
2. Underwrite securities issued by others only when disposing of
portfolio securities;
19
3. Make loans through lending of securities not exceeding 30% of
total assets, through the purchase of debt instruments and
similar evidences of indebtedness typically sold privately to
financial institutions and through repurchase agreements;
4. Not concentrate more than 25% of its total assets in any one
industry;
5. With respect to 75% of total assets not purchase any security
(other than obligations of the U.S. Government and cash items
including receivables) if as a result more than 5% of its total
assets would then be invested in securities of a single issuer
or purchase the voting securities of an issuer if, as a result
of such purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer;
6. Only own real estate acquired as the result of owning securities
and not more than 5% of total assets; and
7. Purchase and sell futures contracts and related options so long
as the total initial margin and premiums on the contracts do not
exceed 5% of its total assets.
Other Investment Policies. As non-fundamental investment policies of
Strategic Income Fund, which may be changed without a shareholder vote, the Fund
may not:
1. Purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;
2. Purchase or sell commodities contracts if the total initial
margin and premiums on the contracts would exceed 5% of its
total assets;
3. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities; or
4. Invest more than 15% of its net assets in illiquid assets.
Small Cap Fund
Fundamental Investment Policies. Small Cap Fund may:
1. Issue senior securities only through borrowing money from banks
for temporary or emergency purposes up to 10% of its net assets;
however, it will not purchase additional portfolio securities
while borrowings exceed 5% of net assets;
2. Only own real estate acquired as the result of owning securities
and not more than 5% of total assets;
3. Purchase and sell futures contracts and related options so long
as the total initial margin and premiums on the contracts do not
exceed 5% of its total assets;
4. Underwrite securities issued by others only when disposing of
portfolio securities;
5. Make loans through lending of securities not exceeding 30% of
total assets, through the purchase of debt instruments or
similar evidences of indebtedness typically sold privately to
financial institutions and through repurchase agreements; and
20
6. Not concentrate more than 25% of its total assets in any one
industry or with respect to 75% of total assets purchase any
security (other than obligations of the U.S. government and cash
items including receivables) if as a result more than 5% of its
total assets would then be invested in securities of a single
issuer, or purchase voting securities of an issuer if, as a
result of purchase, the Fund would own more than 10% of the
outstanding voting shares of such issuer.
Other Investment Policies. As non-fundamental investment policies of
Small Cap Fund, which may be changed without a shareholder vote, the Fund may
not:
1. Purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;
2. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities;
3. Purchase or sell commodity contracts if the total initial margin
and premiums on the contracts would exceed 5% of its total
assets; and
4. Invest more than 15% of its net assets in illiquid assets.
High Yield Fund
Fundamental Investment Policies. High Yield Fund may not:
1. Make loans, except that (i) the Fund may purchase or hold debt
instruments in accordance with its investment objective and
policies, and may enter into repurchase agreements with respect
to portfolio securities, and (ii) the Fund may lend portfolio
securities against collateral consisting of cash or securities
which are consistent with the Fund's permitted investments,
where the value of the collateral is equal at all times to at
least 100% of the value of the securities loaned.
2. Borrow money or issue senior securities, except that the Fund
may borrow from domestic banks for temporary purposes (such as
to obtain cash to meet redemption requests when the liquidation
of portfolio securities is deemed disadvantageous by the
Advisor) and then in amounts not in excess of 33% of the value
of its total assets at the time of such borrowing (provided that
the Fund may borrow pursuant to reverse repurchase agreements in
accordance with its investment policies and in amounts not in
excess of 33% of the value of its total assets at the time of
such borrowing); or mortgage, pledge, or hypothecate any assets
except in connection with any such borrowing and in amounts not
in excess of the lesser of the dollar amounts borrowed or 33% of
the value of the Fund's total assets at the time of such
borrowing; provided, however, that mortgage dollar rolls entered
into by the Fund that are not accounted for as financings shall
not constitute borrowings. The Fund will not purchase securities
while borrowings (including reverse repurchase agreements) in
excess of 5% of its total assets are outstanding. If the
securities held by the Fund should decline in value while
borrowings are outstanding, the net asset value of the Fund's
outstanding shares will decline in value by more than the
proportionate decline in value suffered by the Fund's
securities.
3. Invest more than 15% of the value of its net assets in illiquid
securities, including repurchase agreements with remaining
maturities in excess of seven days, time deposits with
maturities in excess of seven days, restricted securities,
non-negotiable time deposits and other securities which are not
readily marketable.
21
4. Purchase securities of any one issuer, other than obligations
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, if immediately after such purchase more than
5% of the value of its total assets would be invested in such
issuer (the "5% Limitation"), except that up to 25% of the value
of the total assets of the Fund may be invested without regard
to such 5% Limitation. With respect to the above: (a) a security
is considered to be issued by the governmental entity or
entities whose assets and revenues back the security, or, with
respect to a private activity bond that is backed only by the
assets and revenues of a non-governmental user, such
non-governmental user; (b) in certain circumstances, the
guarantor of a guaranteed security may also be considered to be
an issuer in connection with such guarantee; and (c) securities
issued or guaranteed by the U.S. Government, its agencies or
instrumentalities (including securities backed by the full faith
and credit of the United States) are deemed to be U.S.
Government obligations.
5. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of purchase to be invested
in the securities of one or more issuers conducting their
principal business activities in the same industry; provided,
however, that (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, (b) wholly-owned finance
companies will be considered to be in the industries of their
parents if their activities are primarily related to financing
the activities of the parents, and (c) utilities will be
classified according to their services (for example, gas, gas
transmission, electric and gas, electric and telephone each will
be considered a separate industry).
6. Purchase securities on margin (except such short-term credits as
may be necessary for the clearance of purchases), make short
sales of securities, or maintain a short position.
7. Act as an underwriter within the meaning of the 1933 Act, except
insofar as the Fund might be deemed to be an underwriter upon
disposition of restricted portfolio securities, and except to
the extent that the purchase of securities directly from the
issuer thereof in accordance with the Fund's investment
objective, policies and limitations may be deemed to be
underwriting.
8. Purchase or sell real estate, except that the Fund may purchase
securities which are secured by real estate and securities of
issuers which deal in real estate or interests therein, and may
purchase or sell interests in real estate limited partnerships.
9. Purchase or sell commodities or commodity contracts, or invest
in oil, gas or other mineral exploration or development programs
or mineral leases; provided, however, that the Fund may enter
into futures contracts and options on futures contracts.
10. Invest in or sell put options, call options, straddles, spreads,
or any combination thereof; provided, however, that (i) the Fund
may write covered call options with respect to their portfolio
securities that are traded on a national securities exchange,
and may enter into closing purchase transactions with respect to
such options if, at the time of the writing of such options, the
aggregate value of the securities subject to the options written
by the Fund does not exceed 25% of the value of its total
assets; and (ii) the Fund may purchase put and call options and
sell or write secured put options to the extent permitted by its
investment objectives and policies.
11. Invest in companies for the purpose of exercising management or
control.
12. Purchase securities of other investment companies except in
connection with a merger, consolidation, reorganization, or
acquisition of assets; provided, however, that the Fund may
acquire such securities in accordance with the 1940 Act.
22
Select Value Fund
Fundamental Investment Policies. Select Value Fund may:
1. Borrow from banks, other affiliated funds and other entities to
the extent permitted by applicable law, provided that the Fund's
borrowings 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;
2. Only own real estate acquired as the result of owning securities
and not more than 5% of total assets;
3. Purchase and sell futures contracts and related options as long
as the total initial margin and premiums on contracts do not
exceed 5% of total assets;
4. Not issue senior securities except as provided in paragraph 1.
above and to the extent permitted by the 1940 Act;
5. Underwrite securities issued by others only when disposing of
portfolio securities;
6. Make loans (a) through lending of securities, (b) through the
purchase of debt instruments or similar evidences of
indebtedness typically sold privately to financial institutions,
(c) through an interfund lending program with other affiliated
registered open-end investment companies 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) and (d) through
repurchase agreements;
7. Not concentrate more than 25% of its total assets in any one
industry or, with respect to 75% of total assets, purchase any
security (other than obligations of the U.S. government and cash
items including receivables) if as a result more than 5% of its
total assets would then be invested in securities of a single
issuer or purchase the voting securities of an issuer if, as a
result of such purchases, the Fund would own more than 10% of
the outstanding voting shares of such issuer.
Other Investment Policies. As non-fundamental investment policies of the
Select Value Fund, which may be changed without a shareholder vote, the Fund may
not:
1. Purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;
2. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities; and
3. Invest more than 15% of its net assets in illiquid assets.
500 Index Fund
Fundamental Investment Policies. 500 Index Fund may:
1. Borrow from banks, other affiliated funds and other entities to
the extent permitted by applicable law, provided that the Fund's
borrowings 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;
2. Only own real estate acquired as the result of owning securities
and not more than 5% of total assets;
23
3. Purchase and sell futures contracts and related options as long
as the total initial margin and premiums on contracts do not
exceed 5% of total assets;
4. Not issue senior securities except as provided in paragraph 1.
above and to the extent permitted by the 1940 Act;
5. Underwrite securities issued by others only when disposing of
portfolio securities;
6. Make loans (a) through lending of securities, (b) through the
purchase of debt instruments or similar evidences of
indebtedness typically sold privately to financial institutions,
(c) through an interfund lending program with other affiliated
registered open-end investment companies 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) and (d) through
repurchase agreements;
7. Not concentrate more than 25% of its total assets in any one
industry or, with respect to 75% of total assets, purchase any
security (other than obligations of the U.S. government and cash
items including receivables) if as a result more than 5% of its
total assets would then be invested in securities of a single
issuer or purchase the voting securities of an issuer if, as a
result of such purchases, the Fund would own more than 10% of
the outstanding voting shares of such issuer.
Other Investment Policies. As non-fundamental investment policies of the
500 Index Fund, which may be changed without a shareholder vote, the Fund may
not:
1. Purchase securities on margin, but it may receive short-term
credit to clear securities transactions and may make initial or
maintenance margin deposits in connection with futures
transactions;
2. Have a short securities position, unless the Fund owns, or owns
rights (exercisable without payment) to acquire, an equal amount
of such securities; and
3. Invest more than 15% of its net assets in illiquid assets.
In addition to the restrictions set forth above, each Fund may be
subject to investment restrictions imposed under state insurance laws and
regulations. These restrictions are non-fundamental and, in the event of
amendments to the applicable statutes or regulations, each Fund will comply,
without the approval of its shareholders, with the requirements as so modified.
If a percentage limitation is satisfied at the time of investment, a
later increase in such percentage resulting from a change in the value of a
Fund's portfolio securities will not constitute a violation of the limitation.
Rule 144A under the 1933 Act allows for a broader institutional trading
market for securities otherwise subject to restrictions on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the 1933 Act for resales of certain securities to qualified institutional
buyers. A Fund's investment in Rule 144A securities could have the effect of
increasing the level of illiquidity of the Fund during any period that qualified
institutional buyers were no longer interested in purchasing these securities.
For purposes of the limitations on purchases of illiquid instruments described
above, Rule 144A securities will not be considered to be illiquid if the Advisor
(or for the S&P 500 Fund SSgA FM) has determined, in accordance with guidelines
established by the Board of Trustees, that an adequate trading market exists for
such securities.
24
The Funds' Trustees have approved, subject to shareholder approval at a
shareholder meeting expected to be held in 2005, the replacement of the Funds'
current fundamental investment restrictions with the following standardized
fundamental investment restrictions:
Proposed Fundamental Restrictions.
Each Fund may not, as a matter of fundamental policy:
1. Underwrite any issue of securities issued by other persons
within the meaning of the 1933 Act except when it might be
deemed to be an underwriter either: (a) in connection with the
disposition of a portfolio security; or (b) in connection with
the purchase of securities directly from the issuer thereof in
accordance with its investment objective. This restriction shall
not limit the Portfolio's ability to invest in securities issued
by other registered investment companies.
2. Purchase or sell real estate, except a Fund may purchase
securities of issuers which deal or invest in real estate and
may purchase securities which are secured by real estate or
interests in real estate and it may hold and dispose of real
estate or interests in real estate acquired through the exercise
of its rights as a holder of securities which are secured by
real estate or interests therein.
3. Purchase or sell commodities, except that a Fund may to the
extent consistent with its investment objective, invest in
securities of companies that purchase or sell commodities or
which invest in such programs, and purchase and sell options,
forward contracts, futures contracts, and options on futures
contracts and enter into swap contracts and other financial
transactions relating to commodities. This limitation does not
apply to foreign currency transactions including without
limitation forward currency contracts.
4. [Except for Funds that are "concentrated" in an industry or
group of related industries.] Purchase any securities which
would cause 25% or more of the value of its total assets at the
time of purchase to be invested in the securities of one or more
issuers conducting their principal business activities in the
same industry, provided that: (a) there is no limitation with
respect to obligations issued or guaranteed by the U.S.
Government, any state or territory of the United States, or any
of their agencies, instrumentalities or political subdivisions;
and (b) notwithstanding this limitation or any other fundamental
investment limitation, assets may be invested in the securities
of one or more management investment companies to the extent
permitted by the 1940 Act, the rules and regulations thereunder
and any applicable exemptive relief.
5. Make loans, except to the extent permitted by the 1940 Act, the
rules and regulations thereunder and any applicable exemptive
relief.
6. Borrow money or issue senior securities except to the extent
permitted by the 1940 Act, the rules and regulations thereunder
and any applicable exemptive relief.
7. [Except for the International Fund, which is classified as
"non-diversified" under Section 5 of the 1940 Act.] Purchase
securities (except securities issued or guaranteed by the U.S.
Government, its agencies or instrumentalities) of any one issuer
if, as a result, more than 5% of its total assets will be
invested in the securities of such issuer or it would own more
than 10% of the voting securities of such issuer, except that:
(a) up to 25% of its total assets may be invested without regard
to these limitations and (b) a Fund's assets may be invested in
the securities of one or more management investment companies to
the extent permitted by the 1940 Act, the rules and regulations
thereunder, or any applicable exemptive relief.
25
MORE FACTS ABOUT THE TRUST
Organization
The Trust is required to hold a shareholders' meeting to elect Trustees
to fill vacancies in the event that less than a majority of Trustees were
elected by shareholders. Trustees may also be removed by the vote of two-thirds
of the outstanding shares at a meeting called at the request of shareholders
whose interests represent 10% or more of the outstanding shares.
The shares do not have cumulative voting rights, which means that the
holders of more than 50% of the shares of the Funds voting for the election of
Trustees can elect all of the Trustees, and, in such event, the holders of the
remaining shares will not be able to elect any Trustees.
The Funds are not required by law to hold regular annual meetings of
their shareholders and do not intend to do so. However, special meetings may be
called for purposes such as electing or removing Trustees or changing
fundamental investment policies.
Under Massachusetts law, shareholders of a business trust may, under
certain circumstances, be held personally liable for the obligations of the
Trust. The Trust's shareholders are the separate accounts of Participating
Insurance Companies, Columbia Management and, in certain cases, the general
account of Sun Life Insurance Company ("Sun Life"). However, the Trust's
Declaration of Trust disclaims liability of the shareholders, the Trustees, or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust (or the applicable Fund thereof)
and requires that notice of such disclaimer be given in each agreement,
obligation, or contract entered into or executed by the Trust or the Board of
Trustees. The Declaration of Trust provides for indemnification out of the
Trust's assets (or the applicable Fund) for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is believed to be remote because it is limited to circumstances in
which the disclaimer is inoperative and the Trust itself is unable to meet its
obligations. The risk to any one Fund of sustaining a loss on account of
liabilities incurred by another Fund is also believed to be remote.
Trustees and Officers
Fund Complex consists of the following funds:
The series of Columbia Funds Trust I, the series of Columbia Funds Trust
II, the series of Columbia Funds Trust III, the series of Columbia Funds Trust
IV, the series of Columbia Funds Trust V, the series of Columbia Funds Trust VI,
the series of Columbia Funds Trust VII, the series of Liberty Variable
Investment Trust and 8 closed-end investment company portfolios (the "Liberty
Funds").
The series of Columbia Funds Trust VIII, the series of Columbia Funds Trust IX,
the series of Columbia Funds Trust XI and the series of SteinRoe Variable
Investment Trust (the "Stein Roe Funds").
Two closed-end management investment company portfolios named Liberty All-Star
Equity Fund and Liberty All-Star Growth Fund, Inc. (the "All-Star Funds").
Columbia Management Multi-Strategy Hedge Fund, LLC.
Columbia Balanced Fund, Inc., Columbia Daily Income Company, Columbia Fixed
Income Securities Fund, Inc., Columbia High Yield Fund, Inc., Columbia
International Stock Fund, Inc., Columbia National Municipal Bond Fund, Inc.,
Columbia Oregon Municipal Bond Fund, Inc., Columbia Real Estate Equity Fund,
Inc., Columbia Short Term Bond Fund, Inc., Columbia Small Cap Growth Fund, Inc.,
Columbia Mid Cap Growth Fund, Inc., Columbia Strategic Investor Fund, Inc.,
Columbia Technology Fund, Inc. and the series of CMG Fund Trust (the "Columbia
Funds").
26
The series of The Galaxy Funds (the "Galaxy Funds").
The series of Columbia Acorn Trust and the series of Wanger Advisors Trust (the
"Acorn Funds" and "WAT Funds," respectively).
The Trustees and officers serve terms of indefinite duration. The names,
addresses and ages of the Trustees and officers of the Fund Complex, the year
each was first elected or appointed to office, their principal business
occupations during at least the last five years, the number of portfolios
overseen by each Trustee and other directorships they hold are shown below.
27
Number of
Year First Portfolios in
Position Elected or Fund Complex Other
Name, Address With Appointed to Principal Occupation(s) Overseen by Directorships
and Age Funds Office/(1)/ During Past Five Years Trustee Held
- ----------------------------- -------- ------------ ------------------------------------------- ------------- ----------------
Disinterested Trustees
Douglas A. Hacker (Age 49) Trustee 1996 Executive Vice President - Strategy of 104 None
P.O. Box 66100 United Airlines (airline) since December,
Chicago, IL 60666 2002 (formerly President of UAL Loyalty
Services (airline) from September, 2001 to
December, 2002; Executive Vice President
and Chief Financial Officer of United
Airlines from July, 1999 to September,
2001; Senior Vice President-Finance from
March, 1993 to July, 1999).
Janet Langford Kelly (Age 47) Trustee 1996 Partner, Zelle, Hofmann, Voelbel, Mason & 104 None
9534 W. Gull Lake Drive Gette (law firm); Adjunct Professor of
Richland, MI 49083-8530 Law, Northwestern University, since
September, 2004; (formerly Chief
Administrative Officer and Senior Vice
President, Kmart Holding Corporation
(consumer goods), from September, 2003 to
March, 2004; Executive Vice
President-Corporate Development and
Administration, General Counsel and
Secretary, Kellogg Company (food
manufacturer), from September, 1999 to
August, 2003; Senior Vice President,
Secretary and General Counsel, Sara Lee
Corporation (branded, packaged,
consumer-products manufacturer) from
January, 1995 to September, 1999).
Richard W. Lowry (Age 68) Trustee 1995 Private Investor since August, 1987 106/(2)/ None
10701 Charleston Drive (formerly Chairman and Chief Executive
Vero Beach, FL 32963 Officer, U.S. Plywood Corporation
(building products manufacturer)).
28
Number of
Year First Portfolios in
Position Elected or Fund Complex Other
Name, Address With Appointed to Principal Occupation(s) Overseen by Directorships
and Age Funds Office/(1)/ During Past Five Years Trustee Held
- ----------------------------- -------- ------------ ------------------------------------------- ------------- ----------------
Disinterested Trustees
Charles R. Nelson (Age 62) Trustee 1981 Professor of Economics, University of 104 None
Department of Economics Washington, since January, 1976; Ford and
University of Washington Louisa Van Voorhis Professor of Political
Seattle, WA 98195 Economy, University of Washington, since
September, 1993; (formerly Director,
Institute for Economic Research,
University of Washington, from September,
2001 to June, 2003); Adjunct Professor of
Statistics, University of Washington,
since September, 1980; Associate Editor,
Journal of Money Credit and Banking, since
September, 1993; consultant on econometric
and statistical matters.
John J. Neuhauser (Age 61) Trustee 1985 Academic Vice President and Dean of 106/(2)/ Saucony, Inc.
84 College Road Faculties since August, 1999, Boston (athletic
Chestnut Hill, MA 02467-3838 College (formerly Dean, Boston College footwear)
School of Management from September, 1977
to August, 1999).
Patrick J. Simpson (Age 60) Trustee 2000 Partner, Perkins Coie L.L.P. (law firm). 104 None
1120 N.W. Couch Street
Tenth Floor
Portland, OR 97209-4128
Thomas E. Stitzel (Age 69) Trustee 1998 Business Consultant since 1999 (formerly 104 None
2208 Tawny Woods Place Professor of Finance from 1975 to 1999,
Boise, ID 83706 College of Business, Boise State
University); Chartered Financial Analyst.
29
Number of
Year First Portfolios in
Position Elected or Fund Complex Other
Name, Address With Appointed to Principal Occupation(s) Overseen by Directorships
and Age Funds Office/(1)/ During Past Five Years Trustee Held
- ----------------------------- -------- ------------ ------------------------------------------- ------------- ----------------
Disinterested Trustees
Thomas C. Theobald (Age 67) Trustee 1996 Partner and Senior Advisor, Chicago 104 Anixter
8 Sound Shore Drive and Growth Partners (private equity International
Suite 285 Chairman investing) since September, 2004 (network
Greenwich, CT 06830 of the (formerly Managing Director, William support
Board Blair Capital Partners (private equity equipment
investing) from September, 1994 to distributor);
September, 2004. Ventas, Inc.
(real estate
investment
trust); Jones
Lang LaSalle
(real estate
management
services) and
Ambac
Financial
Group
(financial
guarantee
insurance)
Anne-Lee Verville (Age 59) Trustee 1998 Retired since 1997 (formerly General 104 Chairman of
359 Stickney Hill Road Manager, Global Education Industry, IBM the Board of
Hopkinton, NH 03229 Corporation (computer and technology) Directors,
from 1994 to 1997). Enesco Group,
Inc.
(designer,
importer and
distributor of
giftware and
collectibles)
Richard L. Woolworth (Age 63) Trustee 1991 Retired since December, 2003 (formerly 104 Northwest
100 S.W. Market Street Chairman and Chief Executive Officer, Natural Gas
#1500 The Regence Group (regional health Co. (natural
Portland, OR 97207 insurer); Chairman and Chief Executive gas service
Officer, BlueCross BlueShield of provider)
Oregon; Certified Public Accountant,
Arthur Young & Company)
30
Number of
Year First Portfolios in
Position Elected or Fund Complex Other
Name, Address With Appointed to Principal Occupation(s) Overseen by Directorships
and Age Funds Office/(1)/ During Past Five Years Trustee Held
- ----------------------------- -------- ------------ ------------------------------------------- ------------- ----------------
Interested Trustee
William E. Mayer/(3)/ (Age 64) Trustee 1994 Partner, Park Avenue Equity Partners 106/(2)/ Lee
399 Park Avenue (private equity) since February, 1999 Enterprises
Suite 3204 (formerly Founding Partner, Development (print
New York, NY 10022 Capital LLC from November 1996 to media), WR
February, 1999). Hambrecht +
Co.
(financial
service
provider);
Readers
Digest
(publishing)
and
OPENFIELD
Solutions
(retail
industry
technology
provider)
/1/In October 2003, the trustees of the Liberty Funds and Stein Roe Funds were
elected to the boards of the Columbia Funds; simultaneous with that election,
Patrick J. Simpson and Richard L. Woolworth, who had been directors/trustees of
the Columbia Funds were appointed to serve as trustees of the Liberty Funds and
Stein Roe Funds. The date shown is the earliest date on which a trustee/director
was elected or appointed to the board of a Fund in the Fund Complex.
/2/Messrs. Lowry, Neuhauser and Mayer also serve as directors/trustees of the
All-Star Funds.
/3/Mr. Mayer is an "interested person" (as defined in the 1940 Act) by reason of
his affiliation with WR Hambrecht + Co.
31
Year First
Position Elected or
Name, Address With Appointed to Principal Occupation(s)
and Age Funds Office During Past Five Years
- ------------------------------ ----------------- ------------- -------------------------------------------------------------
Officers
Christopher L. Wilson (Age 47) President 2004 Head of Mutual Funds since August, 2004 and Senior Vice
One Financial Center President of the Advisor since January, 2005; President of
Boston, MA 02111 the Columbia Funds, Liberty Funds and Stein Roe Funds since
October, 2004; President and Chief Executive Officer of the
Nations Funds since January, 2005; Senior Vice President of
BACAP Distributors LLC since January, 2005; Director of FIM
Funding, Inc. since January, 2005; Senior Vice President of
Columbia Funds Distributor, Inc. since January, 2005;
Director of Columbia Funds Services, Inc. since January, 2005
(formerly President and Chief Executive Officer, CDC IXIS
Asset Management Services, Inc. from September, 1998 to
August, 2004).
J. Kevin Connaughton (Age 40) Treasurer 2000 Treasurer of the Columbia Funds since October, 2003 and of
One Financial Center the Liberty Funds, Stein Roe Funds and All-Star Funds since
Boston, MA 02111 December, 2000; Vice President of the Advisor since April,
2003 (formerly President of the Columbia Funds, Liberty Funds
and Stein Roe Funds from February, 2004 to October, 2004;
Chief Accounting Officer and Controller of the Liberty Funds
and All-Star Funds from February, 1998 to October, 2000);
Treasurer of the Galaxy Funds since September, 2002 (formerly
Treasurer from December, 2002 to December, 2004 and President
from February, 2004 to December, 2004 of the Columbia
Management Multi-Strategy Hedge Fund, LLC; Vice President of
Colonial Management Associates, Inc. from February, 1998 to
October, 2000).
Mary Joan Hoene (Age 54) Senior Vice 2004 Senior Vice President and Chief Compliance Officer of the
40 West 57th Street President and Columbia Funds, Liberty Funds, Stein Roe Funds and All-Star
New York, NY 10005 Chief Compliance Funds since August, 2004 (formerly Partner, Carter, Ledyard &
Officer Milburn LLP from January, 2001 to August, 2004; Counsel,
Carter, Ledyard & Milburn LLP from November, 1999 to
December, 2000; Vice President and Counsel, Equitable Life
Assurance Society of the United States from April, 1998 to
November, 1999,).
Michael G. Clarke (Age 35) Chief Accounting 2004 Chief Accounting Officer of the Columbia Funds, Liberty
One Financial Center Officer Funds, Stein Roe Funds and All-Star Funds since October, 2004
Boston, MA 02111 (formerly Controller of the Columbia Funds, Liberty Funds,
Stein Roe Funds and All-Star Funds from May, 2004 to October,
2004; Assistant Treasurer from June, 2002 to May, 2004; Vice
President, Product Strategy & Development of the Liberty
Funds and Stein Roe Funds from February, 2001 to June, 2002;
Assistant Treasurer of the Liberty Funds, Stein Roe Funds and
the All-Star Funds from August, 1999 to February, 2001).
32
Year First
Position Elected or
Name, Address With Appointed to Principal Occupation(s)
and Age Funds Office During Past Five Years
- ------------------------------ ----------------- ------------- -------------------------------------------------------------
Officers
Jeffrey R. Coleman (Age 35) Controller 2004 Controller of the Columbia Funds, Liberty Funds, Stein Roe
One Financial Center Funds and All-Star Funds since October, 2004 (formerly Vice
Boston, MA 02111 President of CDC IXIS Asset Management Services, Inc. and
Deputy Treasurer of the CDC Nvest Funds and Loomis Sayles
Funds from February, 2003 to September, 2004; Assistant Vice
President of CDC IXIS Asset Management Services, Inc. and
Assistant Treasurer of the CDC Nvest Funds from August, 2000
to February, 2003; Tax Manager of PFPC, Inc. from November,
1996 to August, 2000).
R. Scott Henderson (Age 45) Secretary 2004 Secretary of the Columbia Funds, Liberty Funds and Stein Roe
One Financial Center Funds since December, 2004 (formerly Of Counsel, Bingham
Boston, MA 02111 McCutchen from April, 2001 to September, 2004; Executive
Director and General Counsel, Massachusetts Pension Reserves
Investment Management Board from September, 1997 to March,
2001).
33
Trustee Positions
As of December 31, 2004, no disinterested Trustee or any of their
immediate family members owned beneficially or of record any class of securities
of Columbia Management, another investment advisor, sub-advisor or portfolio
manager of any of the Funds in the Fund Complex or any person controlling,
controlled by or under common control with any such entity.
Approving the Investment Advisory Contract
The Investment Company Act of 1940 requires that each investment
advisory agreement between Columbia Management and the Trust on behalf of each
Fund and each investment sub-advisory agreement among Columbia Management, each
sub-advisor and the Trust on behalf of each sub-advised Fund be approved
annually both by the Board of Trustees and also by a majority of the independent
trustees voting separately. The investment advisory and investment sub-advisory
agreements are referred to individually as a "management agreement" and
collectively as the "management agreements." For purposes of the following
discussion, Columbia Management and each sub-advisor are referred to
individually as an "advisor" and collectively as the "advisors." In determining
to approve the most recent annual extension of the Funds' management agreements,
the Trustees met over the course of the year with the relevant investment
advisory personnel from the advisors and considered information provided by the
advisors relating to the education, experience and number of investment
professionals and other personnel providing services under those agreements. See
"Trust Management Organizations" in the Funds' Prospectuses and "Trustees and
Officers" in this SAI. The Trustees also took into account the time and
attention devoted by senior management to the Funds and the other funds in the
Fund Complex. The Trustees evaluated the level of skill required to manage the
Funds and concluded that the human resources devoted by the advisors to the
relevant Funds were appropriate to fulfill effectively their duties under the
respective management agreements. The Trustees also considered the business
reputation of each advisor and its financial resources, and concluded that each
would be able to meet any reasonably foreseeable obligations under the
respective management agreements.
The Trustees received information concerning the investment philosophy
and investment process applied by the advisors in managing the relevant Fund.
See "Principal Investment Strategies" and "Principal Investment Risks" in the
Funds' Prospectuses. In this connection, the Trustees considered each advisor's
in-house research capabilities as well as other resources available to the
advisor's personnel, including research services available to the advisor as a
result of securities transactions effected for the Funds and other investment
advisory clients. The Trustees concluded that each advisor's investment process,
research capabilities and philosophy were well suited to the relevant Fund,
given the Fund's investment goals and policies.
The Trustees considered the scope of the services provided by each
advisor to the relevant Fund under the agreements relative to services provided
by third parties to other mutual funds. See "Trust Charges and Expenses" and
"Management Arrangements." The Trustees concluded that the scope of each
advisor's services to the relevant Fund was consistent with the Fund's
operational requirements, including, in addition to its investment goals,
compliance with the Fund's investment restrictions, tax and reporting
requirements and related shareholder services.
The Trustees considered the quality of the services provided by the
advisors to the Funds. The Trustees evaluated each advisor's record with respect
to regulatory compliance and compliance with the investment policies of the
Funds. The Trustees also evaluated selected procedures of each advisor designed
to fulfill its fiduciary duty to the Funds with respect to possible conflicts of
interest, including each advisor's code of ethics (regulating the personal
trading of its officers and employees) (see "Code of Ethics"), the procedures by
which each advisor allocates trades among its various investment advisory
clients and the record of each advisor in these matters. The Trustees also
received information concerning standards of each advisor with respect to the
execution of portfolio transactions. See "Portfolio Transactions."
34
The Trustees considered Columbia Management's management of non-advisory
services provided by persons other than Columbia Management by reference, among
other things, to the Funds' total expenses and the reputation of the Funds'
other service providers. The Trustees also considered information provided by
third parties relating to the Funds' investment performance relative to their
performance benchmark(s), relative to other similar funds managed by the
relevant advisor and relative to funds managed similarly by other advisors. The
Trustees reviewed performance over various periods, including the Funds' one,
five and ten year calendar year periods and/or the life of the Fund, as
applicable (See "Performance History" in the Funds' Prospectuses), as well as
factors identified by the advisor as contributing to the relevant Fund's
performance. See the Funds' most recent annual and semi-annual reports. The
Trustees concluded that the scope and quality of each advisor's services was
sufficient to merit reapproval of the agreements for another year.
In reaching that conclusion, the Trustees also gave substantial
consideration to the fees payable under the agreements. The Trustees reviewed
information concerning fees paid to investment advisors of similarly managed
funds. The Trustees also considered the fees of the Funds as a percentage of
assets at different asset levels and possible economies of scale to Columbia
Management. The Trustees evaluated Columbia Management's profitability with
respect to the Funds, concluding that such profitability appeared to be
generally consistent with levels of profitability that had been determined by
courts to be "not excessive." For these purposes, the Trustees took into account
not only the actual dollar amount of fees paid by each Fund directly to Columbia
Management, but also so-called "fallout benefits" to Columbia Management such as
reputational value derived from serving as investment Advisor to the Funds and
the research services available to Columbia Management by reason of brokerage
commissions generated by the Funds' turnover. In evaluating the Funds' advisory
fees, the Trustees also took into account the complexity of investment
management for the Funds relative to other types of funds. Based on challenges
associated with less readily available market information about foreign issuers
and smaller capitalization companies, limited liquidity of certain securities,
and the specialization required for focused funds, the Trustees concluded that
generally greater research intensity and trading acumen is required for equity
funds, and for international or global funds, as compared to funds investing,
respectively, in debt obligations or in U.S. issuers. Similarly, the Trustees
concluded that, generally, small capitalization equity funds and focused funds
including state specific municipal funds, require greater intensity of research
and trading acumen than larger capitalization or more diversified funds. See
"The Funds" in the Funds' Prospectus.
Based on the foregoing, the Trustees concluded that the fees to be paid
under the management agreements were fair and reasonable, given the scope and
quality of the services rendered by the advisors.
General
Messrs. Lowry, Mayer and Neuhauser are also trustees/directors of the
Liberty All-Star Funds.
Compensation of Trustees
The Trustees serve as trustees of all open-end funds managed by Columbia
Management for which each Trustee will receive an annual retainer of $45,000 and
attendance fees of $9,500 for each regular and special joint board meeting and
$1,000 for each special telephonic joint board meeting. Beginning in December,
2003, Mr. Theobald began serving as the Chairman of the Board. Mr. Theobald
receives an additional annual retainer of $40,000 for serving in this capacity.
All committee chairs, except the Audit Committee chair, receive an annual
retainer of $5,000 and members of Committees, except the Audit Committee,
receive $1,500 for each committee meeting . The Audit Committee chair receives
an annual retainer of $10,000 and each Audit Committee member receives $2,000
for each Audit Committee meeting. Committee members receive $1,500 for each
special committee meeting attended on a day other than a regular joint board
meeting day. Two-thirds of the Trustee fees are allocated among the funds in the
Fund Complex based on each fund's relative net assets and one-third of the fees
is divided equally among the funds.
35
Columbia Management or its affiliates pay the compensation of all the
officers of the funds in the Fund Complex advised by Columbia Management,
including the Trustees who are affiliated with Columbia Management. For the
fiscal and calendar year ended December 31, 2004, the Trustees received the
following compensation for serving as Trustees:
Pension or Total Compensation from the Fund
Retirement Benefits Complex Paid to the Trustees for
Accrued as part of the Calendar Year Ended
Trustee(a) Fund Expenses(b) December 31, 2004 (a)
- ---------- ------------------- --------------------------------
Douglas A. Hacker N/A $ 135,000
Janet Langford Kelly N/A 148,500
Richard W. Lowry N/A 150,700
William E. Mayer N/A 166,700
Charles R. Nelson N/A 141,500
John J. Neuhauser N/A 158,284
Patrick J. Simpson (c) N/A 129,000
Thomas E. Stitzel N/A 149,000
Thomas C. Theobald(d) N/A 172,500
Anne-Lee Verville(e) N/A 157,000
Richard L. Woolworth N/A 131,000
Aggregate Aggregate Aggregate Aggregate
Compensation from Compensation from Compensation from Compensation from
the International the Growth & the Strategic Income the Small Cap Fund
Fund for the Fiscal Income Fund for the Fund for the Fiscal for the Fiscal Year
Year Ended Fiscal Year Ended Year Ended Ended
Trustee December 31, 2004 December 31, 2004 December 31, 2004 December 31, 2004
- ------- ------------------- ------------------- -------------------- -------------------
Douglas A. Hacker $ 569 $ 864 $ 705 $ 705
Janet Langford Kelly 627 961 781 781
Richard W. Lowry 532 801 656 656
William E. Mayer 600 907 741 741
Charles R. Nelson 597 906 739 741
John J. Neuhauser 561 845 691 739
Patrick J. Simpson (c) 543 816 668 691
Thomas E. Stitzel 628 944 773 668
Thomas C. Theobald(d) 727 1,125 913 773
Anne-Lee Verville(e) 662 1,000 817 913
Richard L. Woolworth 550 816 673 817
36
Aggregate Aggregate Aggregate
Compensation from Compensation from Compensation from
the High Yield Fund the Select Value the 500 Index Fund
for the Fiscal Year Fund for the Fiscal for the Fiscal Year
Ended Year Ended Ended
Trustee December 31, 2004 December 31, 2004 December 31, 2004
- ------- ------------------- ------------------- -------------------
Douglas A. Hacker $ 499 $ 486 $ 526
Janet Langford Kelly 552 536 580
Richard W. Lowry 466 455 494
William E. Mayer 526 513 557
Charles R. Nelson 523 510 553
John J. Neuhauser 491 479 520
Patrick J. Simpson (c) 476 464 504
Thomas E. Stitzel 552 538 584
Thomas C. Theobald(d) 634 619 665
Anne-Lee Verville(e) 580 566 614
Richard L. Woolworth 482 471 513
(a) As of December 31, 2004, the Fund Complex consisted of 127 open-end and
12 closed-end management investment company portfolios. Effective
October 8, 2003, Patrick J. Simpson and Richard L. Woolworth, then
directors/trustees of the Columbia Funds, were appointed to the board of
trustees of the Liberty Funds and Stein Roe Funds. Also effective
October 8, 2003, the trustees of the Liberty Funds and the Stein Roe
Funds were elected as directors/trustees of the Columbia Funds. A single
combined board of trustees/directors now oversees all of the Liberty
Funds, Stein Roe Funds and Columbia Funds. The All-Star Funds, Columbia
Management Multi-Strategy Hedge Fund, LLC, the Galaxy Funds, the Acorn
Funds and the WAT Funds each have separate boards of trustees/directors.
(b) The Funds do not currently provide pension or retirement plan benefits
to the Trustees.
(c) During the fiscal year ended December 31, 2004, Mr. Simpson deferred his
total compensation for each Fund pursuant to the deferred compensation
plan. During the calendar year ended December 31, 2004, he deferred his
total compensation from the Fund Complex pursuant to the deferred
compensation plan. At December 31, 2004, the value of Mr. Simpson's
account under that plan was $143,646.
(d) During the fiscal year ended December 31, 2004, Mr. Theobald deferred
the following amounts of his compensation for each Fund listed: $381 for
the International Fund, $633 for the Growth & Income Fund, $502 for the
Strategic Income Fund, $502 for the Small Cap Fund, $328 for the High
Yield Fund, $321 for the Select Value Fund and $334 for the 500 Index
Fund, and $90,000 of his total compensation from the Fund Complex
pursuant to the deferred compensation plan. At December 31, 2004, the
value of Mr. Theobald's account under that plan was $157,328.
(e) During the fiscal year ended December 31, 2004, Ms. Verville deferred
the following amounts of her compensation for each Fund listed: $175 for
the International Fund, $387 for the Growth & Income Fund, $307 for the
Strategic Income Fund, $307 for the Small Cap Fund, $160 for the High
Yield Fund, $196 for the Select Value Fund and $204 for the 500 Index
Fund pursuant to the deferred compensation plan. During the calendar
year ended December 31, 2004, she deferred $55,000 of her total
compensation from the Fund Complex pursuant to the deferred compensation
plan. At December 31, 2004, the value of Ms. Verville's account under
that plan was $653,275.
37
Role of the Board of Trustees
The Trustees of the Funds are responsible for the overall management and
supervision of the Funds' affairs and for protecting the interests of the
shareholders. The Trustees meet periodically throughout the year to oversee the
Funds' activities, review contractual arrangements with service providers for
the Funds and review the Funds' performance. The Trustees have created several
committees to perform specific functions for the Funds. Mr. Theobald was elected
Chairman of the Board of Trustees of the Liberty Funds, Stein Roe Funds and
Columbia Funds effective December, 2003.
Audit Committee
Ms. Verville and Messrs. Hacker, Stitzel and Woolworth are members of
the Audit Committee of the Board of Trustees of the Funds. The Audit Committee's
functions include making recommendations to the Trustees regarding the selection
and performance of the independent accountants, and reviewing matters relative
to accounting and auditing practices and procedures, accounting records, and the
internal accounting controls, of the Funds and certain service providers. For
the fiscal year ended December 31, 2004, the Audit Committee convened eleven
times.
Governance Committee
Messrs. Lowry, Mayer, Simpson and Theobald are members of the Governance
Committee of the Board of Trustees of the Funds. The Governance Committee's
functions include recommending to the Trustees nominees for independent Trustee
positions and for appointments to various committees, performing periodic
evaluations of the effectiveness of the Board, reviewing and recommending to the
Board policies and practices to be followed in carrying out the Trustees' duties
and responsibilities and reviewing and making recommendations to the Board
regarding the compensation of the Trustees who are not affiliated with the
Funds' investment advisors. The Governance Committee will consider candidates
for Trustee recommended by shareholders. Written recommendations with supporting
information should be directed to the Committee, in care of the Funds. For the
fiscal year ended December 31, 2004, the Governance Committee convened four
times.
Advisory Fees & Expenses Committee
Ms. Kelly and Messrs. Mayer, Nelson and Neuhauser are members of the
Advisory Fees & Expenses Committee of the Board of Trustees of the Funds. The
Advisory Fees & Expenses Committee's functions include reviewing and making
recommendations to the Board as to contracts requiring approval of a majority of
the disinterested Trustees and as to any other contracts that may be referred to
the Committee by the Board. For the fiscal year ended December 31, 2004, the
Advisory Fees & Expenses Committee convened seven times.
Compliance Committee
Ms. Kelly, Messrs. Nelson and Simpson and Ms. Verville are members of
the Compliance Committee of the Board of Trustees of the Funds. Prior to August
10, 2004, Ms. Kelly, Mr. Nelson and Ms. Verville were members of the Compliance
Committee of the Board of Trustees of the Funds. The Compliance Committee's
functions include providing oversight of the monitoring processes and controls
regarding the Trust. The Committee uses legal, regulatory and internal rules,
policies, procedures and standards other than those relating to accounting
matters and oversight of compliance by the Trust's investment adviser, principal
underwriter and transfer agent. For the fiscal year ended December 31, 2004, the
Compliance Committee convened six times.
38
Investment Oversight Committees
Beginning in 2004, each Trustee of the Funds also began serving on an
Investment Oversight Committee ("IOC"). Each IOC is responsible for monitoring,
on an ongoing basis, a select group of funds in the Fund Complex and gives
particular consideration to such matters as the Funds' adherence to their
investment mandates, historical performance, changes in investment processes and
personnel, and proposed changes to investment objectives. Investment personnel
who manage the Funds attend IOC meetings from time to time to assist each IOC in
its review of the Funds. Each IOC meets four times a year. The following are
members of the respective IOCs and the general categories of funds in the Fund
Complex which they review:
IOC #1: Messrs. Lowry, Mayer and Neuhauser are responsible for
reviewing funds in the following asset categories: Large Growth
Diversified, Large Growth Concentrated, Small Growth, Outside
Managed (i.e., sub-advised) and Municipal.
IOC #2: Mr. Hacker and Ms. Verville are responsible for reviewing
funds in the following asset categories: Large Blend, Small
Blend, Foreign Stock, Fixed Income - Multi Sector, Fixed Income
- Core and Young Investor.
IOC #3: Messrs. Theobald and Stitzel and Ms. Kelly are responsible
for reviewing funds in the following asset categories: Large
Value, Mid Cap Value, Small Value, Asset Allocation, High Yield
and Money Market.
IOC #4: Messrs. Nelson, Simpson and Woolworth are responsible for
reviewing funds in the following asset categories:
Large/Multi-Cap Blend, Mid Cap Growth, Small Growth, Asset
Allocation, Specialty Equity and Taxable Fixed Income.
Share Ownership
The following table shows the dollar range of equity securities
beneficially owned by each Trustee as of December 31, 2004 (i) in each Fund and
(ii) in all funds in the Fund Complex.
Dollar Range of Dollar Range of
Equity Securities Equity Securities Dollar Range of Dollar Range of
Owned in the Owned in the Equity Securities Equity Securities
International Growth & Income Owned in the Owned in the
Name of Trustee Fund Fund High Yield Fund Small Cap Fund
- --------------- ----------------- ----------------- ----------------- -----------------
Disinterested Trustees
Douglas A. Hacker $ 0 $ 0 $ 0 $ 0
Janet Langford Kelly $ 0 $ 0 $ 0 $ 0
Richard W. Lowry $ 0 $ 0 $ 0 $ 0
Charles R. Nelson $ 0 $ 0 $ 0 $ 0
John J. Neuhauser $ 0 $ 0 $ 0 $ 0
Patrick J. Simpson $ 0 $ 0 $ 0 $ 0
Thomas E. Stitzel $ 0 $ 0 $ 0 $ 0
Thomas C. Theobald $ 0 $ 0 $ 0 $ 0
Anne-Lee Verville (a) $ 0 $ 0 $ 0 $ 0
Richard L. Woolworth $ 0 $ 0 $ 0 $ 0
Interested Trustee
William E. Mayer $ 0 $ 0 $ 0 $ 0
39
Aggregate Dollar
Dollar Range of Dollar Range of Range of
Equity Equity Securities Dollar Range of Equity Securities
Securities Owned Owned in the Equity Securities Owned in all Funds
in the Strategic Select Value Owned in the 500 Overseen by Trustee
Name of Trustee Income Fund Fund Index Fund in Fund Complex
- --------------- ---------------- ----------------- ----------------- -------------------
Disinterested Trustees
Douglas A. Hacker $ 0 $ 0 $ 0 Over $100,000
Janet Langford Kelly $ 0 $ 0 $ 0 Over $100,000
Richard W. Lowry $ 0 $ 0 $ 0 Over $100,000
Charles R. Nelson $ 0 $ 0 $ 0 Over $100,000
John J. Neuhauser $ 0 $ 0 $ 0 Over $100,000
Patrick J. Simpson $ 0 $ 0 $ 0 Over $100,000
Thomas E. Stitzel $ 0 $ 0 $ 0 Over $100,000
Thomas C. Theobald $ 0 $ 0 $ 0 Over $100,000
Anne-Lee Verville (a) $ 0 $ 0 $ 0 Over $100,000
Richard L. Woolworth $ 0 $ 0 $ 0 Over $100,000
Interested Trustee
William E. Mayer $ 0 $ 0 $ 0 $ 50,001-100,000
- ----------
(a) Ms. Verville has elected to defer her compensation as a Trustee under
the deferred compensation plan for independent Trustees of the Fund
Complex. The value of her deferred compensation is determined as if the
amounts had been invested, as of the date of deferral, in shares of one
or more funds in the Fund Complex as specified by her. At December 31,
2004, the value of her deferred compensation account exceeded $100,000.
40
Portfolio Managers
Other Accounts Managed by Portfolio Managers
The following table shows the number and assets of other investment
accounts (or portions of investment accounts) that each Fund's portfolio
managers managed as of each Fund's fiscal year-end.
Other SEC-registered
open-end and closed- Other pooled investment
end funds vehicles Other accounts
------------------------------ ------------------------------- -------------------------------
Number of Assets Number of Assets Number of Assets
Portfolio Manager accounts accounts accounts
- ------------------------------ --------------- -------------- --------------- --------------- --------------- ---------------
Stephen D. Barbaro 3 $1.047 1 $36 million 4 $22 million
billion
Laura A. Ostrander 4 $1.75 0 $0 4 $205
billion thousand
Kurt M. Havnaer 9 $2.3 1 $3.9 28 $442
billion million million
Jeffrey L. Rippey 7 $2.7 1 $4 22 $450
billion million million
Penelope L. Burgess 5 $1.918 2 $540 10 $350.3
billion million million
Deborah F. Snee 5 $1.918 2 $540 10 $350.3
billion million million
Brian Cunningham 6 $3.577 1 $485.38 27 $94
billion million million
Gregory M. Miller 7 $4.399 1 $485.38 59 $1.306
billion million billion
Richard Dahlberg 6 $2.458 0 $0 83 $596
billion million
Diane L. Sobin 8 $4.323 1 $97.1 2,052 $2.1
billion million billion
David I. Hoffman 8 $4.323 1 $97.1 2,052 $2.1
billion million billion
James May 3 $59 3 $91.3 16 $26.6
billion billion billion
See "Other Considerations - Portfolio Transactions - Potential conflicts
of interest in managing multiple accounts" for information on how the Advisor
addresses potential conflicts of interest resulting from an individual's
management of more than one account.
41
Ownership of Securities
The table below shows the dollar ranges of shares of each Fund
beneficially owned (as determined pursuant to Rule 16a-1(a)(2) under the
Securities Exchange Act of 1934, as amended) by the portfolio managers listed
above at the end of each Fund's most recent fiscal year:
Dollar Range of Equity Securities in the
Portfolio Manager Fund Beneficially Owned
- ----------------- -----------------------
Stephen D. Barbaro $0
Laura A. Ostrander $0
Kurt M. Havnaer $0
Jeffrey L. Rippey $0
Penelope L. Burgess $10,001-$50,000
Deborah F. Snee $1-$10,000
Brian Cunningham $0
Gregory M. Miller $0
Richard Dahlberg $0
Diane L. Sobin $0
David I. Hoffman $0
James May $0
Compensation
All Funds, except the 500 Index Fund.
As of the Funds' most recent fiscal year end, the portfolio managers
received all of their compensation from the Advisor and its parent company,
Columbia Management Group, in the form of salary, bonus, stock options and
restricted stock. A portfolio manager's bonus is variable and is generally based
on (1) an evaluation of the manager's investment performance and (2) the results
of a peer and/or management review of such individual, which takes into account
skills and attributes such as team participation, investment process,
communication and professionalism. In evaluating investment performance, the
Advisor generally considers the one-, three- and five-year performance of mutual
funds and other accounts under the portfolio manager's oversight relative to the
benchmarks noted below, emphasizing each manager's three- and five-year
performance. The Advisor may also consider a portfolio manager's performance in
managing client assets in sectors and industries assigned to the manager as part
of his or her investment team responsibilities, where applicable. For portfolio
managers who also have group management responsibilities, another factor in
their evaluation is an assessment of the group's overall investment performance.
42
Portfolio Manager Performance Benchmark
- ----------------- ---------------------
Stephen D. Barbaro Russell 2000 Value Index
Laura A. Ostrander Lehman Brothers Government/Credit Bond Index
Kurt M. Havnaer Merrill Lynch U.S. High Yield, Cash Pay Index
Jeffrey L. Rippey Merrill Lynch U.S. High Yield, Cash Pay Index
Penelope L. Burgess Morgan Stanley Capital International Europe, Australasia,
Far East Index
Deborah F. Snee Morgan Stanley Capital International Europe, Australasia,
Far East Index
Brian Cunningham Russell 1000 Value Index
Gregory M. Miller Russell 1000 Value Index
Richard Dahlberg Russell 1000 Value Index
Diane L. Sobin Russell Midcap Value Index
David I. Hoffman Russell Midcap Value Index
The size of the overall bonus pool each year is determined by Columbia
Management Group and depends in part on levels of compensation generally in the
investment management industry (based on market compensation data) and the
Advisor's profitability for the year, which is influenced by assets under
management.
500 Index Fund only.
The compensation of SSgA FM's investment professionals is based on a
number of factors. The first factor considered is external market. Through
extensive compensation survey process, SSgA FM seeks to understand what its
competitors are paying people to perform similar roles. This data is then used
to determine a competitive baseline in the areas of base pay, bonus, and long
term incentive (i.e. equity). The second factor taken into consideration is the
size of the pool available for this compensation. SSgA FM is a part of State
Street Corporation, and therefore works within its corporate environment on
determining the overall level of its incentive compensation pool. Once
determined, this pool is then allocated to the various locations and departments
of SSgA and SSgA FM. The determination of the allocation amounts to these
locations and departments is influenced by the competitive market data, as well
as the overall performance of the group. The pool is then allocated to
individual employees based on their individual performance. There is no fixed
formula for determining these amounts, nor is anyone's compensation directly
tied to the investment performance or asset value of a product or strategy. The
same process is followed in determining equity allocations.
Principal Holders of Securities
All the shares of the Funds are held of record by sub-accounts of
separate accounts of Participating Insurance Companies on behalf of the owners
of VA contracts and VLI policies, by Columbia Management or by the general
account of Sun Life. At all meetings of shareholders of the Funds each
Participating Insurance Company will vote the shares held of record by
sub-accounts of its separate accounts as to which instructions are received from
the VA contract and VLI policy owners on behalf of whom such shares are held
only in accordance with such instructions. All such shares as to which no
instructions are received (as well as, in the case of Sun Life, all shares held
by its general account) will be voted in the same proportion as shares as to
which instructions are received (with Sun Life's general account shares being
voted in the proportions determined by instructing owners of Sun Life VA
contracts and VLI policies). There is no requirement as to the minimum level of
instructions which must be received from policy and contract owners.
Accordingly, each Participating Insurance Company and Sun Life disclaims
beneficial ownership of the shares of the Funds held of record by the
sub-accounts of their respective separate accounts (or, in the case of Sun Life,
its general account).
43
As of record on March 31, 2005, the following shareholders owned of
record 5% or more of one or more of each class of the following Funds' then
outstanding shares:
International Fund
Class A
- -------
Keyport Life Insurance Company 6.12%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 65.29%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 22.10%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Class B
- -------
Keyport Life Insurance Company 11.25%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 88.75%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Growth & Income Fund
Class A
- -------
Keyport Life Insurance Company 7.28%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 63.23%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
44
Sun Life Assurance Company of Canada (U.S.) 21.56%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Class B
- -------
Keyport Life Insurance Company 16.32%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 80.84%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Strategic Income Fund
Class A
- -------
Keyport Life Insurance Company 7.83%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 63.77%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 17.64%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Class B
- -------
Keyport Life Insurance Company 15.25%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 78.92%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Financial 5.55%
P.O. Box 9133
Wellesley Hills, MA 02481-9133
45
Small Cap Fund
Class A
- -------
Keyport Life Insurance Company 9.97%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 68.08%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Liberty Life Assurance Co of Boston 6.54%
Policy Holder Svcs - Attn S. Labella
100 Liberty Way
Dover, NH 03820
Transamerica Life Insurance Company 8.74%
Attn FMG Accounting MS 4410
4333 Edgewood Road NE
Cedar Rapids, IA 52499-0001
Class B
- -------
Sun Life Assurance Company of Canada (U.S.) 6.18%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
ING USA Annuity and Life Insurance Company 90.83%(*)
1475 Dunwoody Drive
Attn: John Stanziani
Westchester, PA 19380-1478
High Yield Fund
Class A
- -------
Keyport Life Insurance Company 10.95%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 66.58%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
46
American Skandia Life Assurance Co 10.82%
Attn: Alison Mitnick
1 Corporate Drive
9th Floor
Shelton, CT 06484-6208
American Express - Managed Assets Trust 8.82%
American Enterprise Life Insurance
222 AXP Financial Center
Minneapolis, MN 55474-0002
Class B
- -------
American Express - Managed Assets Trust 15.14%
American Enterprise Life Insurance
1497 AXP Financial Center
Minneapolis, MN 55474-0014
Sun Life Assurance Company of Canada (U.S.) 20.00%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
American Express - Managed Assets Trust 55.96%(*)
IDS Life Insurance Company
1497 AXP Financial Center
Minneapolis, MN 55474-0014
Select Value Fund
Class A
- -------
Sun Life Assurance Company of Canada (U.S.) 8.93%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Transamerica Life Insurance Company 46.09%
Attn FMG Accounting MS 4410
4333 Edgewood Road NE
Cedar Rapids, IA 52499-0001
Transamerica Life Insurance Company 34.93%
Attn FMG Accounting MS 4410
4333 Edgewood Road NE
Cedar Rapids, IA 52499-0001
Transamerica Life Insurance Company 8.96%
Attn FMG Accounting MS 4410
4333 Edgewood Road NE
Cedar Rapids, IA 52499-0001
47
Class B
Keyport Life Insurance Company 11.56%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 85.36%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
500 Index Fund
Class A
- -------
Sun Life Assurance Company of Canada (U.S.) 100.00%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Class B
- -------
Keyport Life Insurance Company 16.15%
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Assurance Company of Canada (U.S.) 77.04%(*)
c/o Sun Life Financial
P.O. Box 9133
Wellesley Hills, MA 02481-9133
Sun Life Financial 5.65%
P.O. Box 9133
Wellesley Hills, MA 02481-9133
(*) As of record on March 31, 2005, this Participating Insurance Company
owned 25% or more of the then outstanding shares of the Fund indicated
and, therefore, may be deemed to "control" the Fund.
48
Custodian
State Street Bank & Trust Company, located at 2 Avenue De Lafayette,
Boston, MA 02111-2900, is custodian of the securities and cash owned by all of
the Funds. The custodian is responsible for holding all securities and cash of
each Fund, receiving and paying for securities purchased, delivering against
payment securities sold, receiving and collecting income from investments,
making all payments covering expenses of the Funds, and performing other
administrative duties, all as directed by persons authorized by the Trust. The
custodian does not exercise any supervisory function in such matters as the
purchase and sale of portfolio securities, payment of dividends, or payment of
expenses of the Funds or the Trust. Portfolio securities of the Funds purchased
in the U.S. are maintained in the custody of the custodian and may be entered
into the Federal Reserve Book Entry system, or the security depository system of
the Depository Trust & Clearing Company or other securities depository systems.
Portfolio securities purchased outside the U.S. are maintained in the custody of
various foreign branches of the custodian and/or third party subcustodians,
including foreign banks and foreign securities depositories.
OTHER CONSIDERATIONS
Portfolio Turnover
Although no Fund purchases securities with a view to rapid turnover,
there are no limitations on the length of time that securities must be held by
any Fund and a Fund's annual portfolio turnover rate may vary significantly from
year to year. A 100% turnover rate would occur if all of the securities in the
portfolio were sold and either repurchased or replaced within one year. Although
the Funds cannot predict portfolio turnover rate, it is estimated that, under
normal circumstances, the annual rate for each Fund will be no greater than
100%. The portfolio turnover rates of the Funds are shown under "Financial
Highlights" in the Prospectuses.
If a Fund writes a substantial number of call or put options (on
securities or indexes) or engages in the use of futures contracts or options on
futures contracts (all referred to as "Collateralized Transactions"), and the
market prices of the securities underlying the Collateralized Transactions move
inversely to the Collateralized Transaction, there may be a very substantial
turnover of the portfolios. The Funds pay brokerage commissions in connection
with options and futures transactions and effecting closing purchase or sale
transactions, as well as for the purchases and sales of other portfolio
securities other than fixed income securities.
International Fund may be expected to experience a higher portfolio
turnover rate if such Fund makes a change in its investments from one geographic
sector (e.g., Europe; Japan; emerging Asian markets; etc.) to another geographic
sector. Costs will be greater if the change is from the sector in which the
greatest proportion of its assets are invested.
Suspension of Redemptions
The right to redeem shares or to receive payment with respect to any
redemption of shares of the Funds may only be suspended (i) for any period
during which trading on the NYSE is restricted or the NYSE is closed, other than
customary weekend and holiday closing, (ii) for any period during which an
emergency exists as a result of which disposal of securities or determination of
the net asset value of the Funds is not reasonably practicable, or (iii) for
such other periods as the SEC may by order permit for protection of shareholders
of the Funds.
49
Valuation of Securities
The assets of the Funds are valued as follows:
Debt securities generally are valued by a pricing service which
determines valuations based upon market transactions for normal,
institutional-size trading units of similar securities. However, in
circumstances where such prices are not available or where Columbia Management
(the Trust's pricing and bookkeeping agent) deems it appropriate to do so, an
over-the-counter or exchange bid quotation is used. Securities listed on an
exchange or on NASDAQ are valued at the last sale price (or the closing price
reported by the NASDAQ system, if different, as applicable). Listed securities
for which there were no sales during the day and unlisted securities are valued
at the last quoted bid prices. Short-term obligations with a maturity of 60 days
or less are valued at amortized cost when such cost approximates market value
pursuant to procedures approved by the Trustees. The values of foreign
securities quoted in foreign currencies are translated into U.S. dollars at the
exchange rate as of 3:00 p.m. Eastern time. Portfolio positions for which there
are no such valuations and other assets are valued at fair value as determined
in good faith under the direction of the Trustees.
The net asset value of shares of each Fund is normally calculated as of
the close of regular trading on the NYSE, currently 4:00 p.m., Eastern time, on
every day the NYSE is open for trading, except on days where both (i) the degree
of trading in a Fund's portfolio securities would not materially affect the net
asset value of that Fund's shares and (ii) no shares of a Fund were tendered for
redemption and no purchase order was received. The NYSE is open Monday through
Friday, except on the following holidays: New Year's Day, Martin Luther King
Jr., Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
Generally, trading in certain securities (such as foreign securities) is
substantially completed each day at various times prior to the close of the
NYSE. The values of these securities used in determining the net asset value are
computed as of such times. Also, because of the amount of time required to
collect and process trading information as to large numbers of securities
issues, the values of certain securities (such as convertible bonds and U.S.
government securities) are determined based on market quotations collected
earlier in the day at the latest practicable time prior to the close of the
NYSE. Occasionally, events affecting the value of such securities may occur
between such times and the close of the NYSE which will not be reflected in the
computation of a Fund's net asset value. If events materially affecting the
value of such securities occur during such period, then these securities will be
valued at their fair value following procedures approved by the Trustees.
Portfolio Transactions
The Trust has no obligation to do business with any broker-dealer or
group of broker-dealers in executing transactions in securities with respect to
the Funds, and the Funds have no intention to deal exclusively with any
particular broker-dealer or group of broker-dealers.
Each of Columbia Management and SSgA FM places the transactions of the
Funds with broker-dealers selected by it and, if applicable, negotiates
commissions. Broker-dealers may receive brokerage commissions on portfolio
transactions, including the purchase and writing of options, the effecting of
closing purchase and sale transactions, and the purchase and sale of underlying
securities upon the exercise of options and the purchase or sale of other
instruments. The Funds from time to time may also execute portfolio transactions
with such broker-dealers acting as principals.
50
Except as described below in connection with commissions paid to a
clearing agent on sales of securities, it is each Fund's policy and the policy
of its Advisor always to seek best execution, which is to place the Fund's
transactions where the Fund can obtain the most favorable combination of price
and execution services in particular transactions or provided on a continuing
basis by a broker-dealer, and to deal directly with a principal market maker in
connection with over-the-counter transactions, except when the Advisor believes
that best execution is obtainable elsewhere. In evaluating the execution
services of, including the overall reasonableness of brokerage commissions paid
to, a broker-dealer, consideration is given to, among other things, the firm's
general execution and operational capabilities, and to its reliability,
integrity and financial condition.
Subject to such policy of always seeking best execution, and subject to
the additional matters described below regarding the International Fund,
securities transactions of the Funds may be executed by broker-dealers who also
provide research services (as defined below) to an Advisor, the Funds or other
accounts as to which such Advisor exercises investment discretion. Such advisor
may use all, some or none of such research services in providing investment
advisory services to each of its clients, including the Fund(s) it advises. To
the extent that such services are used by the Advisors, they tend to reduce
their expenses. It is not possible to assign an exact dollar value for such
services.
Subject to such policies as the Board of Trustees may determine, each of
the Advisors may cause a Fund to pay a broker-dealer that provides brokerage and
research services to it an amount of commission for effecting a securities
transaction, including the sale of an option or a closing purchase transaction,
for a Fund in excess of the amount of commission that another broker-dealer
would have charged for effecting that transaction. As provided in Section 28(e)
of the Securities Exchange Act of 1934, "brokerage and research services"
include advice as to the value of securities, the advisability of investing in,
purchasing or selling securities and the availability of securities or
purchasers or sellers of securities; furnishing analyses and reports concerning
issuers, industries, securities, economic factors and trends and portfolio
strategy and performance of accounts; and effecting securities transactions and
performing functions incidental thereto (such as clearance and settlement). An
Advisor placing a brokerage transaction must determine in good faith that such
greater commission is reasonable in relation to the value of the brokerage and
research services provided to it by the executing broker-dealer viewed in terms
of that particular transaction or its overall responsibilities to the applicable
Fund and all its other clients.
Certain of the other accounts of any of the Advisors may have investment
goals and programs that are similar to those of the Funds. Accordingly,
occasions may arise when each of the Advisors engages in simultaneous purchase
and sale transactions of securities that are consistent with the investment
goals and programs of a Fund and such other accounts. On those occasions, the
Advisor will allocate purchase and sale transactions in an equitable manner
according to written procedures as approved by the Board of Trustees. Such
procedures may, in particular instances, be either advantageous or
disadvantageous to a Fund.
Consistent with applicable rules of the National Association of
Securities Dealers, Inc., and subject to seeking best execution and such other
policies as the Board of Trustees may determine, each of the Advisors may
consider sales of VA contracts and VLI policies as a factor in the selection of
broker-dealers to execute securities transactions for the Funds.
51
Additional Matters Pertaining to International Fund. The Fund and the
other accounts advised by the managers sometimes invest in the same securities
and sometimes enter into similar transactions utilizing futures contracts and
foreign currencies. In certain cases, purchases and sales on behalf of the Fund
and such other accounts will be bunched and executed on an aggregate basis. In
such cases, each participating account (including the International Fund) will
receive the average price at which the trade is executed. Where less than the
desired aggregate amount is able to be purchased or sold, the actual amount
purchased or sold will be allocated among the participating accounts (including
the International Fund) in proportion to the amounts desired to be purchased or
sold by each. Although in some cases these practices could have a detrimental
effect on the price or volume of the securities, futures or currencies as far as
the International Fund is concerned, Columbia Management believes that in most
cases these practices should produce better executions. It is the opinion of
Columbia Management that the advantages of these practices outweigh the
disadvantages, if any, which might result from them.
Portfolio transactions on behalf of the International Fund may be
executed by broker-dealers who provide research services to Columbia Management
which are used in the investment management of such Fund or other accounts over
which Columbia Management exercises investment discretion. Such transactions
will be effected in accordance with the policies described above. No portfolio
transactions on behalf of the Fund will be directed to a broker-dealer in
consideration of the broker-dealer's provision of research services to Columbia
Management, unless a determination is made that such research assists Columbia
Management in its investment management of the International Fund or other
accounts over which Columbia Management exercises investment discretion.
52
The table below shows information on brokerage commissions paid by the
following Funds during the periods indicated.
International Growth &
Fund Income Fund Small Cap Fund
------------- ------------ --------------
Total amount of brokerage commissions paid during 2004 $391,355 $199,675 $2,154,498
Total amount of directed transactions paid during 2004 $27,799,940 $26,989,190 $1,153,196
Total amount of commissions on directed transactions paid during 2004 $76,293 $24,951 $2,285
Total amount of brokerage commissions paid during 2004 to Fleet
Securities, Inc. (% of total commission paid) $0 $0 $0
Total Amount of brokerage commissions paid during 2004 to Banc of
America Securities (% of total commission paid) $0 $0 $10,192 (b)
Total amount of brokerage commissions paid during 2003 $385,757 $535,053 $169,617
Total amount of directed transactions paid during 2003 $21,408,601 $40,081,156 $0
Total amount of commissions on directed transactions paid during 2003 $73,123 $83,618 $0
Total amount of brokerage commissions paid during 2003 to AlphaTrade
Inc. (% of total commission paid) (a) (a) (a)
Total amount of brokerage commissions paid during 2003 to Fleet
Securities, Inc. (% of total commission paid) $0 $0 $0
Total amount of brokerage commissions paid during 2002 $85,257 $488,274 $100,639
Total amount of directed transactions paid during 2002 $8,284,770 $23,756,750 $31,460
Total amount of commissions on directed transactions paid during 2002 $22,537 $78,392 $100
Total amount of brokerage commissions paid during 2002 to AlphaTrade $0 $19,051 $1,491
Inc. (% of total commission paid) (4%) (1%)
Total amount of brokerage commissions paid during 2002 to Fleet $0 $670
Securities, Inc. (% of total commission paid) (1%) $0
53
Strategic Select Value 500 Index
Income Fund Fund Fund
------------ ------------ -----------
Total amount of brokerage commissions paid during 2004 $1,550,138 $30,256 $3,666
Total amount of directed transactions paid during 2004 $66,133,652 $3,294,424 $0
Total amount of commissions on directed transactions paid $5,827 $0
during 2004 $78,705
Total amount of brokerage commissions paid during 2004 to
Fleet Securities, Inc. (% of total commission paid) $0 $0 $0
Total Amount of brokerage commissions paid during 2004 to
Banc of America Securities (% of total commission paid) $0 $0 $0
Total amount of brokerage commissions paid during 2003 $0 $14,720 $10,048
Total amount of directed transactions paid during 2003 $0 $0 $0
Total amount of commissions on directed transactions paid
during 2003 $0 $0 $0
Total amount of brokerage commissions paid during 2003 to
AlphaTrade Inc. (% of total commission paid) (a) (a) (a)
Total amount of brokerage commissions paid during 2003 to $0 $0 $0
Fleet Securities, Inc. (% of total commission paid)
Total amount of brokerage commissions paid during 2002 $23 $19,391 $7,997
Total amount of directed transactions paid during 2002 $0 $180,466 $0
Total amount of commissions on directed transactions paid $385 $0
during 2002 $0
Total amount of brokerage commissions paid during 2002 to $597 $0
AlphaTrade Inc. (% of total commission paid) $0 (3%)
An increase in brokerage commissions can be due to a number of factors.
For example, a Fund with a large portfolio turnover rate due to a new portfolio
manager and new strategies or a Fund that had significant increases in assets
causing more securities to be purchased and, therefore, incurring more brokerage
commissions.
(a) As of May, 2002, AlphaTrade Inc. is no longer used for
transactions.
(b) Rounds to less than 1%.
54
The Trust is required to identify any securities of its "regular brokers
or dealers" that the Funds have acquired during their most recent fiscal year.
At December 31, 2004, the following Funds held securities of their regular
brokers or dealers as set forth below:
Name Broker/Dealer Value
- ------- --------------- -------------
International Fund: AXA $ 450,634
Nomura Securities Co. LTD 318,887
Growth & Income Fund: Citigroup, Inc. $ 10,709,595
JP Morgan Chase & Co. 7,336,182
Wachovia Corp. 3,450,928
Goldman Sachs Group, Inc. 2,290,649
State Street Corp. 1,765,275
Janus Capital Group, Inc. 1,266,023
Strategic Income Fund: LaBranche & Co., Inc. $ 471,900
E*Trade Financial Corp. 193,050
Small Cap Fund: MFC Bancorp LTD $ 2,192,000
LaBranche & Co., Inc. 514,304
Select Value Fund: Janus Capital Group, Inc. $ 433,698
Bear Stearns Companies, Inc. 429,702
Lehman Brothers Holding, Inc. 306,180
500 Index Fund: Citigroup, Inc. $ 1,198,044
Bank of America Corp. 910,290
JP Morgan Chase & Co. 665,316
Wachovia Corp. 402,232
Morgan Stanley 293,035
Merrill Lynch & Co., Inc. 266,335
Goldman Sachs Group, Inc. 244,702
Lehman Brothers, Inc. 112,937
Franklin Resources, Inc. 85,878
PNC Financial Services Group 80,761
Marsh and McLennan Co., Inc. 83,336
State Street Corp. 79,378
Charles Schwab Corp. 78,099
Mellon Financial Corp. 64,895
Principal Financial Group, Inc. 63,375
Bear Stearns Companies, Inc. 54,940
T Rowe Price Group 39,248
E*Trade Group, Inc. 25,415
Janus Capital Group, Inc. 18,625
Federated Investors, Inc. Class B 16,051
55
Potential conflicts of interest in managing multiple accounts. Like
other investment professionals with multiple clients, a portfolio manager for
one of the Funds may face certain potential conflicts of interest in connection
with managing both the Fund and other accounts at the same time. The paragraphs
below describe some of these potential conflicts, which the Advisor believes are
faced by investment professionals at most major financial firms. The Advisor and
the Trustees of the Columbia Funds have adopted compliance policies and
procedures that attempt to address certain of these potential conflicts.
The management of accounts with different advisory fee rates and/or fee
structures, including accounts that pay advisory fees based on account
performance ("performance fee accounts"), may raise potential conflicts of
interest by creating an incentive to favor higher-fee accounts. These potential
conflicts may include, among others:
. The most attractive investments could be allocated to higher-fee
accounts or performance fee accounts.
. The trading of higher-fee accounts could be favored as to timing
and/or execution price. For example, higher-fee accounts could be permitted to
sell securities earlier than other accounts when a prompt sale is desirable or
to buy securities at an earlier and more opportune time.
. The trading of other accounts could be used to benefit higher-fee
accounts ("front- running").
. The investment management team could focus their time and efforts
primarily on higher-fee accounts due to a personal stake in compensation.
Potential conflicts of interest may also arise when the portfolio
managers have personal investments in other accounts that may create an
incentive to favor those accounts. As a general matter and subject to limited
exceptions, the Advisor's investment professionals do not have the opportunity
to invest in client accounts, other than the Columbia Funds.
A potential conflict of interest may arise when a Fund and other
accounts purchase or sell the same securities. On occasions when a portfolio
manager considers the purchase or sale of a security to be in the best interests
of the Fund as well as other accounts, the Advisor's trading desk may, to the
extent permitted by applicable laws and regulations, aggregate the securities to
be sold or purchased in order to obtain the best execution and lower brokerage
commissions, if any. Aggregation of trades may create the potential for
unfairness to the Fund or another account if one account is favored over another
in allocating the securities purchased or sold - for example, by allocating a
disproportionate amount of a security that is likely to increase in value to a
favored account.
"Cross trades," in which one Columbia account sells a particular
security to another account (potentially saving transaction costs for both
accounts), may also pose a potential conflict of interest. Cross trades may be
seen to involve a potential conflict of interest if, for example, one account is
permitted to sell a security to another account at a higher price than an
independent third party would pay. The Advisor and the Funds' Trustees have
adopted compliance procedures that provide that any transactions between the
Funds and another Columbia-advised account are to be made at an independent
current market price, as required by law.
Another potential conflict of interest may arise based on the different
investment objectives and strategies of the Funds and other accounts. For
example, another account may have a shorter-term investment horizon or different
investment objectives, policies or restrictions than the Funds. Depending on
another account's objectives or other factors, a portfolio manager may give
advice and make decisions that may differ from advice given, or the timing or
nature of decisions made, with respect to the Funds. In addition, investment
decisions are the product of many factors in addition to basic suitability for
the particular account involved. Thus, a particular security may be bought or
sold for certain accounts even though it could have been bought or sold for
other accounts at the same time. More rarely, a particular security may be
bought for one or more accounts managed by a portfolio manager when one or more
other accounts are selling the security (including short sales). There may be
circumstances when purchases or sales of portfolio securities for one or more
accounts may have an adverse effect on other accounts.
56
The Funds' portfolio manager who is responsible for managing multiple
funds and/or accounts may devote unequal time and attention to the management of
those funds and/or accounts. As a result, the portfolio manager may not be able
to formulate as complete a strategy or identify equally attractive investment
opportunities for each of those accounts as might be the case if he or she were
to devote substantially more attention to the management of a single fund. The
effects of this potential conflict may be more pronounced where funds and/or
accounts overseen by a particular portfolio manager have different investment
strategies.
The Funds' portfolio managers may be able to select or influence the
selection of the brokers and dealers that are used to execute securities
transactions for a Fund. In addition to executing trades, some brokers and
dealers provide portfolio managers with brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange Act of
1934), which may result in the payment of higher brokerage fees than might have
otherwise be available. These services may be more beneficial to certain funds
or accounts than to others. Although the payment of brokerage commissions is
subject to the requirement that the portfolio manager determine in good faith
that the commissions are reasonable in relation to the value of the brokerage
and research services provided to the fund, a portfolio manager's decision as to
the selection of brokers and dealers could yield disproportionate costs and
benefits among the funds and/or accounts that he or she manages.
The Advisor or an affiliate may provide more services (such as
distribution or recordkeeping) for some types of funds or accounts than for
others. In such cases, a portfolio manager may benefit, either directly or
indirectly, by devoting disproportionate attention to the management of fund
and/or accounts that provide greater overall returns to the investment manager
and its affiliates.
The Funds' portfolio manager(s) may also face other potential conflicts
of interest in managing a Fund, and the description above is not a complete
description of every conflict that could be deemed to exist in managing both the
Fund and other accounts. In addition, the Funds' portfolio managers may also
manage other accounts (including their personal assets or the assets of family
members) in their personal capacity. The management of these accounts may also
involve certain of the potential conflicts described above. Investment personnel
at the Advisor, including each Fund's portfolio manager, are subject to
restrictions on engaging in personal securities transactions pursuant to Codes
of Ethics adopted by the Advisor and the Funds, which contain provisions and
requirements designed to identify and address certain conflicts of interest
between personal investment activities and the interests of the Funds.
Applies to 500 Index Fund only. When a portfolio manager has
responsibility for managing more than one account, potential conflicts of
interest may arise. Those conflicts could include preferential treatment of one
account over others in terms of allocation of resources or of investment
opportunities. SSgA FM has adopted policies and procedures designed to address
these potential material conflicts. For instance, portfolio managers within SSgA
FM are normally responsible for all accounts within a certain investment
discipline, and do not, absent special circumstances, differentiate among the
various accounts when allocating resources. Additionally, SSgA FM and its
advisory affiliates utilize a system for allocating investment opportunities
among portfolios that is designed to provide a fair and equitable allocation.
57
Information About the Standard & Poor's 500 Composite
The 500 Index Fund is not sponsored, endorsed, sold or promoted by
Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P
makes no representation or warranty, express or implied, to the owners of the
500 Index Fund or any member of the public regarding the advisability of
investing in securities generally or in the 500 Index Fund particularly or the
ability of the S&P 500 Index to track general stock market performance. S&P's
only relationship to the Licensee is the licensing of certain trademarks and
trade names of S&P and of the S&P 500 Index which is determined, composed and
calculated by S&P without regard to the Licensee or the 500 Index Fund. S&P has
no obligation to take the needs of the Licensee or the owners of the 500 Index
Fund into consideration in determining, composing or calculating the S&P 500
Index. S&P is not responsible for and has not participated in the determination
of the prices and amount of the 500 Index Fund or the timing of the issuance or
sale of the 500 Index Fund or in the determination or calculation of the
equation by which the 500 Index Fund is to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the 500 Index Fund.
Stock Price Index
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY
ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE 500 INDEX FUND,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA
INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Taxes
Each Fund has elected to be treated and to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986
("Code"). As a result of such election, for any tax year in which a Fund meets
the investment limitations and the distribution, diversification and other
requirements referred to below, that Fund will not be subject to federal income
tax, and the income of the Fund will be treated as the income of its
shareholders. Under current law, since the shareholders are life insurance
company "segregated asset accounts," they will not be subject to income tax
currently on this income to the extent such income is applied to increase the
values of VA contracts and VLI policies.
Among the conditions for qualification and avoidance of taxation at the
Trust level, Subchapter M imposes investment limitations, distribution
requirements, and requirements relating to the diversification of investments.
The requirements of Subchapter M may affect the investments made by each Fund.
Any of the applicable diversification requirements could require a sale of
assets of a Fund that would affect the net asset value of the Fund.
Pursuant to the requirements of Section 817(h) of the Code, the only
shareholders of the Trust and its Funds will be Participating Insurance
Companies and their separate accounts that fund VA contracts, VLI policies and
other variable insurance contracts. The prospectus that describes a particular
VA contract or VLI policy discusses the taxation of both separate accounts and
the owner of such contract or policy.
58
Each Fund intends to comply with the requirements of Section 817(h) and
the related regulations issued thereunder by the Treasury Department. These
provisions impose certain diversification requirements affecting the securities
in which the Funds may invest and other limitations. The diversification
requirements of Section 817(h) of the Code are in addition to the
diversification requirements under Subchapter M and the Investment Company Act
of 1940. Failure to meet the requirements of Section 817(h) could result in
taxation of the Participating Insurance Companies offering the VA contracts and
VLI policies and immediate taxation of all owners of the contracts and policies
to the extent of appreciation on investment under the contracts. The Trust
believes it is in compliance with these requirements.
The Secretary of the Treasury may issue additional rulings or
regulations that will prescribe the circumstances in which an owner of a
variable insurance contract's control of the investments of a segregated asset
account may cause such owner, rather than the insurance company, to be treated
as the owner of the assets of a segregated asset account. It is expected that
such regulations would have prospective application. However, if a ruling or
regulation were not considered to set forth a new position, the ruling or
regulation could have retroactive effect.
The Trust therefore may find it necessary, and reserves the right to
take action to assure, that a VA contract or VLI policy continues to qualify as
an annuity or insurance contract under federal tax laws. The Trust, for example,
may be required to alter the investment objectives of any Fund or substitute the
shares of one Fund for those of another. No such change of investment goal or
substitution of securities will take place without notice to the contract and
policy owners with interests invested in the affected Fund and without prior
approval of the SEC, or the approval of a majority of such owners, to the extent
legally required.
To the extent a Fund invests in foreign securities, investment income
received by the Fund from sources within foreign countries may be subject to
foreign income taxes withheld at the source. The United States has entered into
tax treaties with many foreign countries which entitle a Fund to a reduced rate
of tax or exemption from tax on most investment income, typically capital gains
and interest. Gains and losses from foreign currency dispositions,
foreign-currency denominated debt securities and payables or receivables, and
foreign currency forward contracts are subject to special tax rules that may
affect the timing and amount of the Fund's recognition of income, gain or loss.
It is impossible to determine the effective rate of foreign tax in
advance since the amount of a Fund's assets, if any, to be invested within
various countries will fluctuate and the extent to which tax refunds will be
recovered is uncertain. The Funds intend to operate so as to qualify for
treaty-reduced tax rates where applicable.
The preceding is a brief summary of some relevant tax considerations.
This discussion is not intended as a complete explanation or a substitute for
careful tax planning and consultation with individual tax advisors.
DESCRIPTION OF CERTAIN INVESTMENTS
The following is a description of certain types of investments which may
be made by one or more of the Funds.
Money Market Instruments
As stated in the Prospectuses, each Fund may invest in a variety of
high-quality money market instruments. The money market instruments that may be
used by each Fund may include:
59
United States Government Obligations. These consist of various types of
marketable securities issued by the U.S. Treasury, i.e., bills, notes and bonds.
Such securities are direct obligations of the U.S. Government and differ mainly
in the length of their maturity. Treasury bills, the most frequently issued
marketable government security, have a maturity of up to one year and are issued
on a discount basis. Treasury notes have initial maturities of one to ten years;
and Treasury bonds generally have initial maturities of more than ten years.
Securities issued or guaranteed by the U.S. Government, its agencies and
instrumentalities historically have involved little risk of loss of principal.
However, due to fluctuations in interest rates, the market value of such
securities may vary during the period a shareholder owns shares of the Funds.
United States Government Agency Securities. These consist of debt
securities issued by agencies and instrumentalities of the U.S. Government,
including the various types of instruments currently outstanding or which may be
offered in the future. Agencies include, among others, the Federal Housing
Administration, Government National Mortgage Association, Farmer's Home
Administration, Export-Import Bank of the United States, Maritime
Administration, and General Services Administration. Instrumentalities include,
for example, each of the Federal Home Loan Banks, the National Bank for
Cooperatives, the Federal Home Loan Mortgage Corporation, the Farm Credit Banks,
the Federal National Mortgage Association, and the United States Postal Service.
These securities are either: (i) backed by the full faith and credit of the U.S.
Government (e.g., U.S. Treasury bills); (ii) guaranteed by the U.S. Treasury
(e.g., Government National Mortgage Association mortgage-backed securities);
(iii) supported by the issuing agency's or instrumentality's right to borrow
from the U.S. Treasury (e.g., Federal National Mortgage Association Discount
Notes); or (iv) supported only by the issuing agency's or instrumentality's own
credit (e.g., securities issued by the Farmer's Home Administration).
Bank and Savings and Loan Obligations. These include certificates of
deposit, bankers' acceptances, and time deposits. Certificates of deposit
generally are short-term, interest-bearing negotiable certificates issued by
commercial banks or savings and loan associations against funds deposited in the
issuing institution. Bankers acceptances are time drafts drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction (e.g., to finance the import, export, transfer, or storage of
goods). With a bankers' acceptance, the borrower is liable for payment as is the
bank, which unconditionally guarantees to pay the draft at its face amount on
the maturity date. Most bankers' acceptances have maturities of six months or
less and are traded in secondary markets prior to maturity. Time deposits are
generally short-term, interest-bearing negotiable obligations issued by
commercial banks against funds deposited in the issuing institutions. With the
exception of the Select Value Fund, the Funds will not invest in any security
issued by a commercial bank or a savings and loan association unless the bank or
savings and loan association is organized and operating in the United States,
has total assets of at least one billion dollars, and is a member of the Federal
Deposit Insurance Corporation ("FDIC"), in the case of banks, or insured by the
FDIC in the case of savings and loan associations; provided, however, that such
limitation will not prohibit investments in foreign branches of domestic banks
which meet the foregoing requirements. Time deposits with a maturity longer than
seven days or that do not provide for payment within seven days after notice
will be subject to each Fund's limitation on purchases of illiquid securities
described under "Investment Restrictions" above.
Short-Term Corporate Debt Instruments. These include commercial paper
(i.e., short-term, unsecured promissory notes issued by corporations to finance
short-term credit needs). Commercial paper is usually sold on a discount basis
and has a maturity at the time of issuance not exceeding nine months. Also
included are non-convertible corporate debt securities (e.g., bonds and
debentures). Corporate debt securities with a remaining maturity of less than 13
months are liquid (and tend to become more liquid as their maturities lessen)
and are traded as money market securities. Each Fund may purchase corporate debt
securities having greater maturities.
60
Commercial paper may include securities issued by corporations without
registration under the 1933 Act in reliance on the so-called "private placement"
exemption in Section 4(2) of the 1933 Act ("Section 4(2) Paper"). Section 4(2)
Paper is restricted as to disposition under the federal securities laws in that
any resale must similarly be made in an exempt transaction. Section 4(2) Paper
is normally resold to other institutional investors through or with the
assistance of investment dealers which make a market in Section 4(2) Paper, thus
providing liquidity. For purposes of each Fund's limitation on purchases of
illiquid instruments described above, Section 4(2) Paper will not be considered
illiquid if the Advisor has determined, in accordance with the guidelines
approved by the Board of Trustees, that an adequate trading market exists for
such securities. The Funds may also purchase Rule 144A securities. See
"Investment Restrictions" above for a discussion of possible consequences to the
Funds as a result of investing in Rule 144A securities. In addition, the Funds
may, consistent with their investment policies, invest in Canadian commercial
paper and Europaper (U.S. dollar-denominated commercial paper of foreign
issuers).
Repurchase Agreements. The Funds may invest in repurchase agreements. A
repurchase agreement is an instrument under which the investor (such as a Fund)
acquires ownership of a security (known as the "underlying security") and the
seller (i.e., a bank or primary dealer) agrees, at the time of the sale, to
repurchase the underlying security at a mutually agreed upon time and price,
thereby determining the yield during the term of the agreement. This results in
a fixed rate of return insulated from market fluctuations during such period,
unless the seller defaults on its repurchase obligations. The underlying
securities will consist only of securities issued by the U.S. Government, its
agencies or instrumentalities ("U.S. Government Securities"). Repurchase
agreements are, in effect, collateralized by such underlying securities, and,
during the term of a repurchase agreement, the seller will be required to
mark-to-market such securities every business day and to provide such additional
collateral as is necessary to maintain the value of all collateral at a level at
least equal to the repurchase price. Repurchase agreements usually are for short
periods, often under one week, and will not be entered into by a Fund for a
duration of more than seven days if, as a result, more than 15% of the value of
that Fund's total assets would be invested in such agreements or other
securities which are illiquid. Repurchase agreements are considered to be loans
by a Fund under the 1940 Act.
The Funds will seek to assure that the amount of collateral with respect
to any repurchase agreement is adequate. As with any extension of credit,
however, there is risk of delay in recovery or the possibility of inadequacy of
the collateral should the seller of the repurchase agreement fail financially.
In addition, a Fund could incur costs in connection with disposition of the
collateral if the seller were to default. The Funds will enter into repurchase
agreements only with sellers deemed by the Advisors to be creditworthy under
creditworthiness standards approved by the Board of Trustees and only when the
economic benefit to the Funds is believed to justify the attendant risks. The
Board of Trustees believes these standards are designed to reasonably assure
that such sellers present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the repurchase agreement. The
Funds may enter into repurchase agreements only with commercial banks or
registered broker-dealers.
Reverse Repurchase Agreements. The Funds may borrow funds for temporary
purposes by selling portfolio securities to financial institutions such as banks
and broker/dealers and agreeing to repurchase them at a mutually specified date
and price ("reverse repurchase agreements"). Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Fund may
decline below the repurchase price. The Funds would pay interest on amounts
obtained pursuant to a reverse repurchase agreement.
Whenever a Fund enters into a reverse repurchase agreement, it will
place in a segregated custodial account liquid assets such as cash or liquid
portfolio securities equal to the repurchase price (including accrued interest).
The Fund will monitor the account to ensure such equivalent value is maintained.
Reverse repurchase agreements are considered to be borrowings by a Fund under
the 1940 Act.
Adjustable Rate and Floating Rate Securities. Adjustable rate securities
(i.e., variable rate and floating rate instruments) are securities that have
interest rates that are adjusted periodically, according to a set formula. The
maturity of some adjustable rate securities may be shortened under certain
special conditions described more fully below.
61
Variable rate instruments are obligations (usually certificates of
deposit) that provide for the adjustment of their interest rates on
predetermined dates or whenever a specific interest rate changes. A variable
rate instrument subject to a demand feature is considered to have a maturity
equal to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand.
Floating rate instruments (generally corporate notes, bank notes or
Eurodollar certificates of deposit) have interest rate reset provisions similar
to those for variable rate instruments and may be subject to demand features
like those for variable rate instruments. The interest rate is adjusted,
periodically (e.g. daily, monthly, semi-annually), to the prevailing interest
rate in the marketplace. The interest rate on floating rate securities is
ordinarily determined by reference to, or is a percentage of, a bank's prime
rate, the 90-day U.S. Treasury bill rate, the rate of return on commercial paper
or bank certificates of deposit, an index of short-term interest rates or some
other objective measure. The maturity of a floating rate instrument is
considered to be the period remaining until the principal amount can be
recovered through demand.
If a variable or floating rate instrument is not rated, Columbia
Management must determine that such instrument is comparable to rated
instruments eligible for purchase by a Fund and will consider the earning power,
cash flows and other liquidity ratios of the issuers and guarantors of such
instruments and will continuously monitor their financial status in order to
meet payment on demand. In determining average weighted portfolio maturity of a
Fund, a variable or floating rate instrument issued or guaranteed by the U.S.
Government or an agency or instrumentality thereof will be deemed to have a
maturity equal to the period remaining until the obligation's next interest rate
adjustment.
Investment Company Securities
Each of the Growth & Income Fund and High Yield Fund may invest in
securities issued by other investment companies which invest in high quality,
short-term debt securities and which determine their net asset value per share
based on the amortized cost or penny-rounding method. Investments in other
investment companies will cause a Fund (and, indirectly, the Fund's
shareholders) to bear proportionately the costs incurred in connection with the
investment companies' operations. Securities of other investment companies will
be acquired by a Fund within the limits prescribed by the 1940 Act and the rules
and regulations thereunder.
Each Fund currently intends to limit its investments so that, as
determined immediately after a securities purchase is made: (a) not more than 5%
of the value of its total assets will be invested in the securities of any one
investment company; (b) not more than 10% of the value of its total assets will
be invested in the aggregate in securities of other investment companies as a
group; (c) not more than 3% of the outstanding voting stock of any one
investment company will be owned by the Fund; and (d) not more than 10% of the
outstanding voting stock of any one closed-end investment company will be owned
in the aggregate by the Fund or any other investment companies advised by
Columbia Management.
Exchange-traded funds ("ETFs")
The Small Cap Value Fund and Select Value Fund may invest, to the extent
permitted under the 1940 Act in ETFs, which are shares of publicly-traded unit
investment trusts, open-end funds, or depositary receipts that seek to track the
performance and dividend yield of specific indexes or companies in related
industries. These indexes may be either broad-based, sector or international.
ETF shareholders are generally subject to the same risks as holders of
the underlying securities they are designed to track. ETFs are also subject to
certain additional risks, including (1) the risk that their prices may not
correlate perfectly with changes in the prices of the underlying securities they
are designed to track; and (2) the risk of possible trading halts due to market
conditions or other reasons, based on the policies of the exchange upon which an
ETF trades. In addition, an exchange traded sector fund may be adversely
affected by the performance of that specific sector or group of industries on
which it is based.
62
The Fund would bear, along with other shareholders of an ETF, its pro
rata portion of the ETF's expenses, including management fees. Accordingly, in
addition to bearing their proportionate share of the Fund's expenses (i.e.,
management fees and operating expenses), shareholders of the Fund may also
indirectly bear similar expenses of an ETF.
REITs
The Small Cap Value Fund and Select Value Fund may invest without limit
in real estate investment trusts ("REITs"). The Growth & Income Fund may invest
up to 10% of its net assets in REITs. REITs pool investors' funds for investment
primarily in income-producing real estate or real estate-related loans or
interests. A REIT is not taxed on income distributed to shareholders if it
complies with several requirements relating to its organization, ownership,
assets and income, and a requirement that it distribute to its shareholders at
least 95% of its taxable income (other than net capital gains) for each taxable
year.
REITs can generally be classified as equity REITs, mortgage REITs and
hybrid REITs. Equity REITs invest the majority of their assets directly in real
property and derive their income principally from rental and lease payments.
Equity REITs can also realize capital gains by selling properties that have
appreciated in value. Mortgage REITs make loans to commercial real estate
developers and derive their income primarily from interest payments on such
loans. Hybrid REITs combine the characteristics of both equity and mortgage
REITs. REITs may be subject to certain risks associated with the direct
ownership of real estate, including declines in the value of real estate, risks
related to general and local economic conditions, overbuilding and increased
competition, increases in property taxes and operating expenses, and variations
in rental income. Generally, increases in interest rates will decrease the value
of high yielding securities and increase the costs of obtaining financing, which
could decrease the value of a REIT's investments. In addition, equity REITs may
be affected by changes in the value of the underlying property owned by the
REITs, while mortgage REITs may be affected by the quality of credit extended.
Equity and mortgage REITs are dependent upon management skill, are not
diversified and are subject to the risks of financing projects. REITs are also
subject to heavy cash flow dependency, defaults by borrowers, self-liquidation
and the possibility of failing to qualify for tax-free pass-through of income
under the Internal Revenue Code and to maintain exemption from the 1940 Act.
REITs pay dividends to their shareholders based upon available funds
from operations. It is quite common for these dividends to exceed a REIT's
taxable earnings and profits resulting in the excess portion of such dividends
being designated as a return of capital. Each Fund intends to include the gross
dividends from any investments in REITs in its periodic distributions to its
shareholders and, accordingly, a portion of the Fund's distributions may also be
designated as a return of capital.
Asset-Backed and Mortgage-Backed Securities
To the extent consistent with its investment policies, the High Yield
Fund may purchase asset-backed securities, which represent a participation in,
or are secured by and payable from, a stream of payments generated by particular
assets, most often a pool of assets similar to one another. Assets generating
such payments will consist of such instruments as motor vehicle installment
purchase obligations, credit card receivables, home equity loans, manufactured
housing loans, and other securitized assets. Payment of principal and interest
may be guaranteed up to certain amounts and for a certain time period by a
letter of credit issued by a financial institution unaffiliated with entities
issuing the securities. The estimated life of an asset-backed security varies
with the prepayment experience with respect to the underlying debt instruments.
The rate of such prepayments, and hence the life of the asset-backed security,
will be primarily a function of current market rates, although other economic
and demographic factors will be involved.
63
Asset-backed securities are generally issued as pass-through
certificates, which represent undivided fractional ownership interests in an
underlying pool of assets, or as debt instruments, which are also known as
collateralized obligations, and are generally issued as the debt of a special
purpose entity organized solely for the purpose of owning such assets and
issuing such debt. Asset-backed securities are often backed by a pool of assets
representing the obligations of a number of different parties.
A Fund may invest in mortgage-backed securities that represent pools of
mortgage loans assembled for sale to investors by various governmental agencies
and government-related organizations, such as the Government National Mortgage
Association ("GNMA"), Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). Mortgage-backed securities
provide a monthly payment consisting of interest and principal payments.
Additional payments may be made out of unscheduled repayments of principal
resulting from the sale of the underlying residential property, refinancing or
foreclosure, net of fees or costs that may be incurred. Prepayments of principal
on mortgage-backed securities may tend to increase due to refinancing of
mortgages as interest rates decline. To the extent that the Fund purchases
mortgage-backed securities at a premium, mortgage foreclosures and prepayments
of principal by mortgagors (which may be made at any time without penalty) may
result in some loss of the Fund's principal investment to the extent of the
premium paid. The yield of the Fund, should it invest in mortgage-backed
securities, may be affected by reinvestment of prepayments at higher or lower
rates than the original investment.
Mortgage-backed securities include fixed and adjustable Mortgage
Pass-Through Certificates, which provide the holder with a pro-rata share of
interest and principal payments on a pool of mortgages, ordinarily on
residential properties. There are a number of important differences among the
agencies and instrumentalities of the U.S. Government that issue mortgage-backed
securities and among the securities that they issue. Pass-Through Certificates
guaranteed by GNMA (also known as "Ginnie Maes") are guaranteed as to the timely
payment of principal and interest by GNMA, whose guarantee is backed by the full
faith and credit of the United States. Mortgage-backed securities issued by FNMA
include FNMA guaranteed Mortgage Pass-Through Certificates (also known as
"Fannie Maes") which are guaranteed as to timely payment of principal and
interest by FNMA. They are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of FNMA to borrow
from the Treasury. Mortgage-backed securities issued by FHLMC include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs"). Freddie Macs
are not guaranteed by the United States or by any Federal Home Loan Bank and do
not constitute a debt or obligation of the United States or of any Federal Home
Loan Bank. Freddie Macs entitle the holder to timely payment of interest, which
is guaranteed by FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC is required to remit the
amount due on account of its guarantee of ultimate payment of principal no later
than one year after it becomes payable.
Other mortgage-backed securities are issued by private issuers,
generally originators of and investors in mortgage loans, including savings
associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities. These private mortgage-backed securities may be
supported by U.S. Government mortgage-backed securities or some form of
non-government credit enhancement. Mortgage-backed securities have either fixed
or adjustable interest rates. The rate of return on mortgage-backed securities
may be affected by prepayments of principal on the underlying loans, which
generally increase as interest rates decline; as a result, when interest rates
decline, holders of these securities normally do not benefit from appreciation
in market value to the same extent as holders of other non-callable debt
securities. In addition, like other debt securities, the values of
mortgage-related securities, including government and government-related
mortgage pools, generally will fluctuate in response to market interest rates.
64
Mortgage-backed securities also include collateralized mortgage
obligations ("CMOs"), which provide the holder with a specified interest in the
cash flow of a pool of underlying mortgages or other mortgage-backed securities.
Issuers of CMOs frequently elect to be taxed as pass-through entities known as
real estate mortgage investment conduits, or REMICs. CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. Although the relative payment rights of these classes can be
structured in a number of different ways, most often payments of principal are
applied to the CMO classes in order of respective stated maturities. CMOs can
expose a Fund to more volatility and interest rate risk than other types of
mortgage-backed securities.
The yield characteristics of asset-backed and mortgage-backed securities
differ from traditional debt securities. A major difference is that the
principal amount of the obligations may be prepaid at any time because the
underlying assets (i.e., loans) generally may be prepaid at any time. As a
result, a decrease in interest rates in the market may result in increases in
the level of prepayments as borrowers, particularly mortgagors, refinance and
repay their loans. An increased prepayment rate will have the effect of
shortening the maturity of the security. If a Fund has purchased an asset-backed
or mortgage-backed security at a premium, a faster than anticipated prepayment
rate could result in a loss of principal to the extent of the premium paid.
Conversely, an increase in interest rates may result in lengthening the
anticipated maturity because expected prepayments are reduced. A prepayment rate
that is faster than expected will reduce yield to maturity, while a prepayment
rate that is slower than expected may have the opposite effect of increasing
yield to maturity.
In general, the assets supporting non-mortgage asset-backed securities
are of shorter maturity than the assets supporting mortgage-backed securities.
Like other fixed-income securities, when interest rates rise the value of an
asset-backed security generally will decline; however, when interest rates
decline, the value of an asset-backed security with prepayment features may not
increase as much as that of other fixed income securities, and, as noted above,
changes in market rates of interest may accelerate or retard prepayments and
thus affect maturities.
These characteristics may result in a higher level of price volatility
for these assets under certain market conditions. In addition, while the trading
market for short-term mortgages and asset-backed securities is ordinarily quite
liquid, in times of financial stress the trading market for these securities
sometimes becomes restricted.
Mortgage Dollar Rolls
To the extent consistent with their investment policies, the Strategic
Income Fund and High Yield Fund may enter into mortgage "dollar rolls" in which
the Fund sells securities for delivery in the current month and simultaneously
contracts with the same counterparty to repurchase similar (same type, coupon
and maturity) but not identical securities on a specified future date not
exceeding 120 days. During the roll period, the Fund loses the right to receive
principal and interest paid on the securities sold. However, the Fund would
benefit to the extent of any difference between the price received for the
securities sold and the lower forward price for the future purchase (often
referred to as the "drop") or fee income plus the interest earned on the cash
proceeds of the securities sold until the settlement date of the forward
purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the
securities sold as part of the mortgage dollar roll, the use of this technique
will diminish the investment performance of the Fund compared with what such
performance would have been without the use of mortgage dollar rolls. All cash
proceeds will be invested in instruments that are permissible investments for
the Fund. The Fund will hold and maintain in a segregated account until the
settlement date, cash or liquid securities in an amount equal to the forward
purchase price.
For financial reporting and tax purposes, each Fund proposes to treat
mortgage dollar rolls as two separate transactions, one involving the purchase
of a security and a separate transaction involving a sale. The Funds do not
currently intend to enter into mortgage dollar rolls that are accounted for as a
financing.
65
Mortgage dollar rolls involve certain risks. If the broker-dealer to
whom the Fund sells the security becomes insolvent, the Fund's right to purchase
or repurchase the mortgage-related securities may be restricted and the
instrument which the Fund is required to repurchase may be worth less than an
instrument which the Fund originally held. Successful use of mortgage dollar
rolls may depend upon the Advisor's ability to predict correctly interest rates
and mortgage prepayments. For these reasons, there is no assurance that mortgage
dollar rolls can be successfully employed.
Stripped Obligations
To the extent consistent with its investment goals, the High Yield Fund
may purchase Treasury receipts and other "stripped" securities that evidence
ownership in either the future interest payments or the future principal
payments on U.S. Government and other obligations. These participations, which
may be issued by the U.S. Government or by private issuers, such as banks and
other institutions, are issued at their "face value," and may include stripped
mortgage-backed securities ("SMBS"), which are derivative multi-class mortgage
securities. Stripped securities, particularly SMBS, may exhibit greater price
volatility than ordinary debt securities because of the manner in which their
principal and interest are returned to investors.
SMBS are usually structured with two or more classes that receive
different proportions of the interest and principal distributions from a pool of
mortgage-backed obligations. A common type of SMBS will have one class receiving
all of the interest, while the other class will receive all of the principal.
However, in some instances, one class will receive some of the interest and most
of the principal while the other class will receive most of the interest and the
remainder of the principal. If the underlying obligations experience greater
than anticipated prepayments of principal, the Funds may fail to fully recoup
their initial investments in these securities. The market value of the class
consisting entirely of principal payments generally is extremely volatile in
response to changes in interest rates. The yields on a class of SMBS that
receives all or most of the interest are generally higher than prevailing market
yields on other mortgage-backed obligations because their cash flow patterns are
more volatile and there is a greater risk that the initial investment will not
be fully recouped. SMBS which are not issued by the U.S. Government (or a U.S.
Government agency or instrumentality) are considered illiquid. The Advisor may
determine that SMBS acquired by the Fund are liquid under guidelines established
by the Board of Trustees. Obligations issued by the U.S. Government may be
considered liquid under guidelines established by the Board of Trustees if they
can be disposed of promptly in the ordinary course of business at a value
reasonably close to that used in the calculation of net asset value per share.
66
Investments in Less Developed Countries
International Fund's investments in foreign securities may include
investments in countries whose economies or securities markets are considered by
Columbia Management not to be highly developed (referred to as "emerging market
countries"). Normally no more than 40% of the International Fund's assets will
be invested in such emerging market countries. As of May 1, 2005, the following
countries were considered by Columbia Management to be emerging market
countries:
Europe and the
Asia Latin America Middle East Africa
- ---- ------------- --------------- -------
China Argentina Czech Republic South Africa
India Brazil Estonia
Indonesia Chile Hungary
South Korea Colombia Israel
Malaysia Mexico Jordan
Pakistan Peru Poland
Philippines Venezuela Russia
Sri Lanka Turkey
Taiwan
Thailand
Foreign Currency Transactions
Each of International Fund and Strategic Income Fund may engage in
currency exchange transactions to protect against uncertainty in the level of
future currency exchange rates. These Funds may purchase foreign currencies on a
spot or forward basis in conjunction with their investments in foreign
securities and to hedge against fluctuations in foreign currencies.
International Fund and Strategic Income Fund also may buy and sell currency
futures contracts and options thereon for such hedging purposes. Strategic
Income Fund also may buy options on currencies for hedging purposes.
A Fund may engage in both "transaction hedging" and "position hedging."
When it engages in transaction hedging, a Fund enters into foreign currency
transactions with respect to specific receivables or payables of the Fund
generally arising in connection with purchases or sales of its portfolio
securities. A Fund will engage in transaction hedging when it desires to "lock
in" the U.S. dollar price of a security it has agreed to purchase or sell, or
the U.S. dollar equivalent of a dividend or interest payment in a foreign
currency. By transaction hedging a Fund attempts to protect itself against a
possible loss resulting from an adverse change in the relationship between the
U.S. dollar and the applicable foreign currency during the period between the
date on which the security is purchased or sold, or on which the dividend or
interest payments is declared, and the date on which such payments are made or
received.
A Fund may purchase or sell a foreign currency on a spot (or cash) basis
at the prevailing spot rate in connection with the settlement of transactions in
portfolio securities denominated in that foreign currency. A Fund may also enter
into contracts to purchase or sell foreign currencies at a future date ("forward
contracts") and (if the Fund is so authorized) purchase and sell foreign
currency futures contracts.
67
For transaction hedging purposes a Fund which is so authorized may also
purchase exchange-listed and over-the-counter call and put options on foreign
currency futures contracts and on foreign currencies. Over-the-counter options
are considered to be illiquid by the SEC staff. A put option on a futures
contract gives the Fund the right to assume a short position in the futures
contract until expiration of the option. A put option on a currency gives the
Fund the right to sell a currency at an exercise price until the expiration of
the option. A call option on a futures contract gives the Fund the right to
assume a long position in the futures contract until the expiration of the
option. A call option on a currency gives the Fund the right to purchase a
currency at the exercise price until the expiration of the option.
When it engages in position hedging, a Fund enters into foreign currency
exchange transactions to protect against a decline in the values of the foreign
currencies in which its portfolio securities are denominated (or an increase in
the value of currency for securities which the Fund expects to purchase, when
the Fund holds cash or short-term investments). In connection with position
hedging, a Fund which is so authorized may purchase put or call options on
foreign currency and foreign currency futures contracts and buy or sell forward
contracts and foreign currency futures contracts. A Fund may enter into short
sales of a foreign currency to hedge a position in a security denominated in
that currency. In such circumstances, the Fund will maintain in a segregated
account with its Custodian an amount of cash or liquid securities equal to the
excess of (i) the amount of foreign currency required to cover such short sale
position over (ii) the amount of such foreign currency which could then be
realized through the sale of the foreign securities denominated in the currency
subject to the hedge.
The precise matching of the amounts of foreign currency exchange
transactions and the value of the portfolio securities involved will not
generally be possible since the future value of such securities in foreign
currencies will change as a consequence of market movements in the value of
those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
It is impossible to forecast with precision the market value of
portfolio securities at the expiration or maturity of a forward or futures
contract. Accordingly, it may be necessary for a Fund to purchase additional
foreign currency on the spot market (and bear the expense of such purchase) if
the market value of the security or securities being hedged is less than the
amount of foreign currency the Fund is obligated to deliver and if a decision is
made to sell the security or securities and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security or securities
if the market value of such security or securities exceeds the amount of foreign
currency the Fund is obligated to deliver.
Transaction and position hedging do not eliminate fluctuations in the
underlying prices of the securities which the Fund owns or intends to purchase
or sell. They simply establish a rate of exchange which the Fund can achieve at
some future point in time. Additionally, although these techniques tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they tend to limit any potential gain which might result from the increase in
value of such currency.
68
Currency Forward and Futures Contracts
Each of International Fund and Strategic Income Fund will enter into
such contracts only when cash or equivalents equal in value to either (i) the
commodity value (less any applicable margin deposits) or (ii) the difference
between the commodity value (less any applicable margin deposits) and the
aggregate market value of all equity securities denominated in the particular
currency held by the Fund have been deposited in a segregated account of the
Fund's custodian. A forward currency contract involves an obligation to purchase
or sell specific currency at a future date, which may be any fixed number of
days from the date of the contract as agreed by the parties, at a price set at
the time of the contract. In the case of a cancelable contract, the holder has
the unilateral right to cancel the contract at maturity by paying a specified
fee. The contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. A
contract generally has no deposit requirement, and no commissions are charged at
any stage for trades. A currency futures contract is a standardized contract for
the future delivery of a specified amount of a foreign currency at a future date
at a price set at the time of the contract. Currency futures contracts traded in
the United States are designed and traded on exchanges regulated by the
Commodities Futures Trading Commission ("CFTC"), such as the New York Mercantile
Exchange.
Forward currency contracts differ from currency futures contracts in
certain respects. For example, the maturity date of a forward contract may be
any fixed number of days from the date of the contract agreed upon the parties,
rather than a predetermined date in a given month. Forward contracts may be in
any amounts agreed upon by the parties rather than predetermined amounts. Also,
forward contracts are traded directly between currency traders so that no
intermediary is required. A forward contract generally requires no margin or
other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or at or
prior to maturity enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Positions in currency futures contracts may be closed out only on an
exchange or board of trade which provides a secondary market in such contracts.
Although the Funds intend to purchase or sell currency futures contracts only on
exchanges or boards of trade where there appears to be an active secondary
market, there is no assurance that a secondary market on an exchange or board of
trade will exist for any particular contract or at any particular time. In such
event, it may not be possible to close a futures position and, in the event of
adverse price movements, the Fund would continue to be required to make daily
cash payments or variation margin.
Currency Options
In general, options on currencies operate similarly to options on
securities and are subject to many risks similar to those applicable to currency
futures and forward contracts. Currency options are traded primarily in the
over-the-counter market, although options on currencies have recently been
listed on several exchanges. Options are traded not only on the currencies of
individual nations, but also on the Euro. The Euro is the official currency of
the European Economic Community's European Monetary System.
Strategic Income Fund will only purchase or write currency options when
Columbia Management believes that a liquid secondary market exists for such
options. There can be no assurance that a liquid secondary market will exist for
a particular option at any specified time. Currency options are affected by all
of those factors which influence exchange rates and investments generally. To
the extent that these options are traded over the counter, they are considered
to be illiquid by the SEC staff.
69
The value of any currency, including the U.S. dollar, may be affected by
complex political and economic factors applicable to the issuing country. In
addition, the exchange rates of currencies (and therefore the value of currency
options) may be significantly affected, fixed, or supported directly or
indirectly by government actions. Government intervention may increase risks
involved in purchasing or selling currency options, since exchange rates may not
be free to fluctuate in respect to other market forces.
The value of a currency option reflects the value of an exchange rate
which in turn reflects relative values of two currencies, the U.S. dollar and
the foreign currency in question. Because currency transactions occurring in the
interbank market involve substantially larger amounts than those that may be
involved in the exercise of currency options, investors may be disadvantaged by
having to deal in an odd-lot market for the underlying currencies in connection
with options at prices that are less favorable than for round-lots. Foreign
governmental restrictions or taxes could result in adverse changes in the cost
of acquiring or disposing of currencies.
Valuations
There is no systematic reporting of last sale information for currencies
and there is no regulatory requirement that quotations available through dealers
or other market sources be firm or revised on a timely basis. Available
quotation information is generally representative of very large round-lot
transactions in the interbank market and thus may not reflect exchange rates for
smaller odd-lot transactions (less than $1 million) where rates may be less
favorable. The interbank market in currencies is a global, around-the-clock
market. To the extent that options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
Settlement Procedures
Settlement procedures relating to the Funds' investments in foreign
securities and to their foreign currency exchange transactions may be more
complex than settlements with respect to investments in debt or equity
securities of U.S. issuers, and may involve certain risks not present in such
Funds' domestic investments, including foreign currency risks and local custom
and usage. Foreign currency transactions may also involve the risk that an
entity involved in the settlement may not meet its obligations.
Foreign Currency Conversion
Although foreign exchange dealers do not charge a fee for currency
conversion, they do realize a profit based on the difference (the "spread")
between prices at which they are buying and selling various currencies. Thus, a
dealer may offer to sell a foreign currency to the Funds at one rate, while
offering a lesser rate of exchange should the Funds desire to resell that
currency to the dealer. Foreign currency transactions may also involve the risk
that an entity involved in the settlement may not meet its obligations.
70
American, European and Continental Depositary Receipts
The Growth & Income Fund may invest up to 10% of its total assets and
the Small Cap Value Fund and the Select Value Fund may invest up to 20% of their
total assets in ADRs, EDRs and CDRs. American Depositary Receipts ("ADRs") are
receipts issued in registered form by a U.S. bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. European
Depositary Receipts ("EDRs"), which are sometimes referred to as Continental
Depositary Receipts ("CDRs"), are receipts issued in Europe typically by
non-U.S. banks or trust companies and foreign branches of U.S. banks that
evidence ownership of foreign or U.S. securities. Global Depositary Receipts
("GDRs") are receipts structured similarly to EDRs and CDRs and are marketed
globally. ADRs may be listed on a national securities exchange or may be traded
in the over-the-counter market. EDRs and CDRs are designed for use in European
exchanges and over-the-counter markets. GDRs are designed for trading in
non-U.S. securities markets. ADRs, EDRs, CDRs and GDRs traded in the
over-the-counter market which do not have an active or substantial secondary
market will be considered illiquid and therefore will be subject to the Funds'
respective limitations with respect to such securities, if any. If a Fund
invests in an unsponsored ADR, EDR, CDR or GDR, there may be less information
available to the Fund concerning the issuer of the securities underlying the
unsponsored ADR, EDR, CDR or GDR than is available for an issuer of securities
underlying a sponsored ADR, EDR, CDR or GDR. ADR prices are denominated in U.S.
dollars although the underlying securities are denominated in a foreign
currency. Investments in ADRs, EDRs, CDRs and GDRs involve risks similar to
those accompanying direct investments in foreign securities.
Convertible Securities
The Growth & Income Fund and High Yield Fund may from time to time, in
accordance with their investment policies, invest in convertible securities.
Convertible securities are fixed income securities which may be exchanged or
converted into a predetermined number of shares of the issuer's underlying
common stock at the option of the holder during a specified time period.
Convertible securities may take the form of convertible preferred stock,
convertible bonds or debentures, units consisting of "usable" bonds and warrants
or a combination of the features of several of these securities.
Convertible bonds and convertible preferred stocks generally retain the
investment characteristics of fixed income securities until they have been
converted but also react to movements in the underlying equity securities. The
holder is entitled to receive the fixed income of a bond or the dividend
preference of a preferred stock until the holder elects to exercise the
conversion privilege. Usable bonds are corporate bonds that can be used in whole
or in part, customarily at full face value, in lieu of cash to purchase the
issuer's common stock. When owned as part of a unit along with warrants, which
are options to buy the common stock, they function as convertible bonds, except
that the warrants generally will expire before the bond's maturity. Convertible
securities are senior to equity securities and therefore have a claim to the
assets of the issuer prior to the holders of common stock in the case of
liquidation. However, convertible securities are generally subordinated to
similar non-convertible securities of the same issuer. The interest income and
dividends from convertible bonds and preferred stocks provide a stable stream of
income with generally higher yields than common stocks, but lower than
non-convertible securities of similar quality. A Fund will exchange or convert
the convertible securities held in its portfolio into shares of the underlying
common stock in instances in which, in the Advisor's opinion, the investment
characteristics of the underlying common shares will assist the Fund in
achieving its investment goals. Otherwise, a Fund will hold or trade the
convertible securities. In selecting convertible securities for a Fund, the
Advisor evaluates the investment characteristics of the convertible security as
a fixed income instrument, and the investment potential of the underlying equity
security for capital appreciation. In evaluating these matters with respect to a
particular convertible security, the Advisor considers numerous factors,
including the economic and political outlook, the value of the security relative
to other investment alternatives, trends in the determinants of the issuer's
profits, and the issuer's management capability and practices.
71
Convertible bonds acquired by the High Yield Fund will generally be
rated BB or lower by S&P or Ba or lower by Moody's. The High Yield Fund may
acquire common stock in the following circumstances: (i) in connection with the
purchase of a unit of securities that includes both fixed income securities and
common stock; (ii) when fixed income securities held by the Fund are converted
by the issuer into common stock; (iii) upon the exercise of warrants attached to
fixed income securities held by the Fund; and (iv) when purchased as a part of a
corporate transaction in which the holders of common stock will receive newly
issued fixed income securities. Common stock acquired by the High Yield Fund in
these circumstances may be held to permit orderly disposition or to establish
long-term holding periods for federal income tax purposes.
When-Issued, Forward Commitment and Delayed Settlement Transactions
The Strategic Income Fund, Growth & Income Fund and High Yield Fund may
purchase eligible securities on a "when-issued" basis and may purchase or sell
eligible securities on a "forward commitment" basis. Each Fund may also purchase
and sell eligible securities on a "delayed settlement" basis. When-issued and
forward commitment transactions, which involve a commitment by a Fund to
purchase or sell particular securities with payment and delivery taking place at
a future date (perhaps one or two months later), permit the Fund to lock in a
price or yield on a security it owns or intends to purchase regardless of future
changes in interest rates. Delayed settlement describes settlement of a
securities transaction in the secondary market which will occur sometime in the
future.
When a Fund agrees to purchase securities on a when-issued, forward
commitment or delayed settlement basis, the Fund's custodian will set aside cash
or liquid portfolio securities equal to the amount of the commitment in a
separate account. In the event of a decline in the value of the securities that
the custodian has set aside, the Fund may be required to place additional assets
in the separate account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitment. A Fund's net assets may fluctuate
to a greater degree if it sets aside portfolio securities to cover such purchase
commitments than if it sets aside cash. Because a Fund sets aside liquid assets
to satisfy its purchase commitments in the manner described, the Fund's
liquidity and ability to manage its portfolio might be affected in the event its
forward commitments, when-issued purchases or delayed settlements exceeds 25%
(5% in the case of the Strategic Income Fund) of the value of its total assets.
When a Fund engages in when-issued, forward commitment or delayed
settlement transactions, it relies on the seller to consummate the trade.
Failure of the seller to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be advantageous for a
security. For purposes of determining the average weighted maturity of a Fund's
portfolio, the maturity of when-issued securities is calculated from the date of
settlement of the purchase to the maturity date.
When-issued, forward commitment and delayed settlement transactions
involve the risk, however, that the yield or price obtained in a transaction may
be less favorable than the yield or price available in the market when the
securities delivery takes place. It is expected that forward commitments,
when-issued purchases and delayed settlements will not exceed 25% of a Fund's
total assets (5% in the case of the Strategic Income Fund) absent unusual market
conditions. In the event a Fund's forward commitments, when-issued purchases and
delayed settlements ever exceeded 25% (5% in the case of the Strategic Income
Fund) of the value of its total assets, the Fund's liquidity and the ability of
the Advisor to manage the Fund might be adversely affected. The Funds will not
engage in when-issued purchases, forward commitments and delayed settlements for
speculative purposes, but only in furtherance of their respective investment
goals.
72
Derivative Securities
The High Yield Fund may from time to time, in accordance with its
investment policies, purchase certain "derivative" securities. Derivative
securities are instruments that derive their value from the performance of
underlying assets, interest or currency exchange rates, or indices, and include,
but are not limited to, options, futures, indexed securities, swap agreements
and foreign currency exchange contracts.
Derivative securities present, to varying degrees, market risk that the
performance of the underlying assets, interest or exchange rates or indices will
decline; credit risk that the dealer or other counterparty to the transaction
will fail to pay its obligations; volatility and leveraging risk that, if
interest or exchange rates change adversely, the value of the derivative
security will decline more than the assets, rates or indices on which it is
based; liquidity risk that the Fund will be unable to sell a derivative security
when it wants to because of lack of market depth or market disruption; pricing
risk that the value of a derivative security will not correlate exactly to the
value of the underlying assets, rates or indices on which it is based; and
operations risk that loss will occur as a result of inadequate systems and
controls, ambiguous documentation, human error or otherwise. Some derivative
securities are more complex than others, and for those instruments that have
been developed recently, data are lacking regarding their actual performance
over complete market cycles.
Columbia Management will evaluate the risks presented by the derivative
securities purchased by the Fund, and will determine, in connection with the
day-to-day management of the Fund, how such securities will be used in
furtherance of the Fund's investment goals. It is possible, however, that the
Advisor's evaluations will prove to be inaccurate or incomplete and, even when
accurate and complete, it is possible that the Fund will, because of the risks
discussed above, incur losses as a result of its investment in derivative
securities.
Options on Securities
Each of International Fund and High Yield Fund may purchase and sell
options on individual securities.
Writing covered options.
A Fund may write covered call options and covered put options on
securities held in its portfolio when, in the opinion of Columbia Management or
the relevant portfolio manager, such transactions are consistent with the Fund's
investment goals and policies. Call options written by the Fund give the
purchaser the right to buy the underlying securities from the Fund at a stated
exercise price; put options give the purchaser the right to sell the underlying
securities to the Fund at a stated price.
A Fund may write only covered options, which means that, so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges). In the case of put options, the Fund will
hold cash and/or high-grade short-term debt obligations equal to the price to be
paid if the option is exercised. In addition, the Fund will be considered to
have covered a put or call option if and to the extent that it holds an option
that offsets some or all of the risk of the option it has written. The Fund may
write combinations of covered puts and calls on the same underlying security.
73
A Fund will receive a premium from writing a put or call option, which
increases the Fund's return on the underlying security if the option expires
unexercised or is closed out at a profit. The amount of the premium reflects,
among other things, the relationship between the exercise price and the current
market value of the underlying security, the volatility of the underlying
security, the amount of time remaining until expiration, current interest rates,
and the effect of supply and demand in the options market and in the market for
the underlying security. By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying
security above the exercise price of the option but continues to bear the risk
of a decline in the value of the underlying security. By writing a put option,
the Fund assumes the risk that it may be required to purchase the underlying
security for an exercise price higher than its then-current market value,
resulting in a potential capital loss unless the security subsequently
appreciates in value.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an offsetting option. The Fund realizes a profit or loss from a closing
transaction if the cost of the transaction (option premium plus transaction
costs) is less or more than the premium received from writing the option.
Because increases in the market price of a call option generally reflect
increases in the market price of the security underlying the option, any loss
resulting from a closing purchase transaction may be offset in whole or in part
by unrealized appreciation of the underlying security.
If a Fund writes a call option but does not own the underlying security,
and then it writes a put option, the Fund may be required to deposit cash or
securities with its broker as "margin" or collateral for its obligation to buy
or sell the underlying security. As the value of the underlying security varies,
the Fund may have to deposit additional margin with the broker. Margin
requirements are complex and are fixed by individual brokers, subject to minimum
requirements currently imposed by the Federal Reserve Board and by stock
exchanges and other self-regulatory organizations.
Purchasing put options.
A Fund may purchase put options to protect its portfolio holdings in an
underlying security against a decline in market value. Such hedge protection is
provided during the life of the put option since the Fund, as holder of the put
option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. For a put
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the Fund will reduce any
profit it might otherwise have realized from appreciation of the underlying
security by the premium paid for the put option and by transaction costs.
Purchasing call options.
A Fund may purchase call options to hedge against an increase in the
price of securities that the Fund wants ultimately to buy. Such hedge protection
is provided during the life of the call option since the Fund, as holder of the
call option, is able to buy the underlying security at the exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. These costs will reduce any profit the Fund might have
realized had it bought the underlying security at the time it purchased the call
option.
74
Over-the-Counter ("OTC") options.
The Staff of the Division of Investment Management of the SEC has taken
the position that OTC options purchased by a Fund and assets held to cover OTC
options written by the Fund are illiquid securities. Although the Staff has
indicated that it is continuing to evaluate this issue, pending further
developments, a Fund will enter into OTC options transactions only with primary
dealers in U.S. Government securities and, in the case of OTC options written by
the Fund, only pursuant to agreements that will assure that the Fund will at all
times have the right to repurchase the option written by it from the dealer at a
specified formula price. The Fund will treat the amount by which such formula
price exceeds the amount, if any, by which the option may be "in the money" as
an illiquid investment. It is the present policy of the Funds not to enter into
any OTC option transaction if, as a result, more than 15% of the Fund's net
assets would be invested in (i) illiquid investments (determined under the
foregoing formula) relating to OTC options written by the Fund, (ii) OTC options
purchased by the Fund, (iii) securities which are not readily marketable and
(iv) repurchase agreements maturing in more than seven days.
Risk factors in options transactions.
The successful use of a Fund's options strategies depends on the ability
of Columbia Management or the relevant portfolio manager to forecast interest
rate and/or market movements correctly.
When it purchases an option, the Fund runs the risk that it will lose
its entire investment in the option in a relatively short period of time, unless
the Fund exercises the option or enters into a closing sale transaction with
respect to the option during the life of the option. If the price of the
underlying security does not rise (in the case of a call) or fall (in the case
of a put) to an extent sufficient to cover the option premium and transaction
costs, the Fund will lose part or all of its investment in the option. This
contrasts with an investment by the Fund in the underlying securities, since the
Fund may continue to hold its investment in those securities notwithstanding the
lack of a change in price of those securities.
The effective use of options also depends on a Fund's ability to
terminate option positions at times when Columbia Management deems it desirable
to do so. Although the Fund will take an option position only if Columbia
Management believes there is a liquid secondary market for the option, there is
no assurance that the Fund will be able to effect closing transactions at any
particular time or at an acceptable price.
If a secondary trading market in options were to become unavailable, a
Fund could no longer engage in closing transactions. Lack of investor interest
might adversely affect the liquidity of the market for particular options or
series of options. A marketplace may discontinue trading of a particular option
or options generally. In addition, a market could become temporarily unavailable
if unusual events -- such as volume in excess of trading or clearing capability
- -- were to interrupt normal market operations.
A marketplace may at times find it necessary to impose restrictions on
particular types of options transactions, which may limit a Fund's ability to
realize its profits or limit its losses.
Disruptions in the markets for the securities underlying options
purchased or sold by a Fund could result in losses on the options. If trading is
interrupted in an underlying security, the trading of options on that security
is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes,
and it may be faced with losses if trading in the security reopens at a
substantially different price. In addition, the Options Clearing Corporation
("OCC") or other options markets may impose exercise restrictions. If a
prohibition on exercise is imposed at the time when trading in the option has
also been halted, the Fund as purchaser or writer of an option will be locked
into its position until one of the two restrictions has been lifted. If a
prohibition on exercise remains in effect until an option owned by the Fund has
expired, the Fund could lose the entire value of its option.
75
Special risks are presented by internationally traded options. Because
of time differences between the United States and various foreign countries, and
because different holidays are observed in different countries, foreign options
markets may be open for trading during hours or on days when U.S. markets are
closed. As a result, option premiums may not reflect the current prices of the
underlying interest in the United States.
Futures Contracts and Related Options
Each of International Fund, Strategic Income Fund and High Yield Fund
may buy and sell certain futures contracts (and in certain cases related
options), to the extent and for the purposes specified in the Prospectuses.
A futures contract sale creates an obligation by the seller to deliver
the type of financial instrument called for in the contract in a specified
delivery month for a stated price. A futures contract purchase creates an
obligation by the purchaser to take delivery of the type of financial instrument
called for in the contract in a specified delivery month at a stated price. The
specific instruments delivered or taken at settlement date are not determined
until on or near that date. The determination is made in accordance with the
rules of the exchanges on which the futures contract was made. Futures contracts
are traded in the United States only on a commodity exchange or boards of trade
- -- known as "contract markets" -- approved for such trading by the CFTC, and
must be executed through a futures commission merchant or brokerage firm which
is a member of the relevant contract market.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying financial instruments, the contracts usually are
closed out before the settlement date without the making or taking of delivery.
Closing out a futures contract sale is effected by purchasing a futures contract
for the same aggregate amount of the specific type of financial instrument with
the same delivery date. If the price of the initial sale of the futures contract
exceeds the price of the offsetting purchase, the seller is paid the difference
and realizes a gain. Conversely, if the price of the offsetting purchase exceeds
the price of the initial sale, the seller realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the purchaser's
entering into a futures contract sale. If the offsetting sale price exceeds the
purchase price, the purchaser realizes a gain, and if the purchase price exceeds
the offsetting sale price, the purchaser realizes a loss.
Unlike when a Fund purchases or sells a security, no price is paid or
received by the Fund upon the purchase or sale of a futures contract, although
the Fund is required to deposit with its custodian in a segregated account in
the name of the futures broker an amount of cash and/or U.S. Government
securities. This amount is known as "initial margin." The nature of initial
margin in futures transactions is different from that of margin in security
transactions in that futures contract margin does not involve the borrowing of
funds by the Fund to finance the transactions. Rather, initial margin is in the
nature of a performance bond or good faith deposit on the contract that is
returned to the Fund upon termination of the futures contract, assuming all
contractual obligations have been satisfied. Futures contracts also involve
brokerage costs.
Subsequent payments, called "variation margin," to and from the broker
(or the custodian) are made on a daily basis as the price of the underlying
security or commodity fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as "marking to market."
A Fund may elect to close some or all of its futures positions at any
time prior to their expiration. The purpose of making such a move would be to
reduce or eliminate the hedge position then currently held by the Fund. The Fund
may close its positions by taking opposite positions which will operate to
terminate the Fund's position in the futures contracts. Final determinations of
variation margin are then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain. Such closing
transactions involve additional commission costs.
A Fund upon entering into futures contracts, in compliance with the
SEC's requirements, cash or liquid securities equal in value to the amount of
the Fund's obligation under the contract (less any applicable margin deposits
and any assets that constitute "cover" for such obligation), will be segregated
with the Fund's custodian.
76
Options on futures contracts
A Fund may purchase and write call and put options on futures contracts
it may buy or sell and enter into closing transactions with respect to such
options to terminate existing positions. The Fund may use such options on
futures contracts in lieu of purchasing and selling the underlying futures
contracts. Such options generally operate in the same manner as options
purchased or written directly on the underlying investments.
As with options on securities, the holder or writer of an option may
terminate his position by selling or purchasing an offsetting option. There is
no guarantee that such closing transactions can be effected.
A Fund will be required to deposit initial margin and maintenance margin
with respect to put and call options on futures contracts written by it pursuant
to brokers' requirements similar to those described above. The Fund will enter
into written options on futures contracts only when, in compliance with the
SEC's requirements, cash or liquid securities equal in value to the amount of
the Fund's obligation under the contract (less any applicable margin deposits
and any assets that constitute "cover" for such obligation), will be segregated
with the Fund's custodian.
Although permitted by its investment policies, the High Yield Fund does
not currently intend to write futures options during the current fiscal year.
Risks of transactions in futures contracts and related options
Successful use of futures contracts by a Fund is subject to Columbia
Management's or the relevant portfolio manager's ability to predict correctly
movements in the direction of interest rates and other factors affecting
securities markets.
Compared to the purchase or sale of futures contracts, the purchase of
call or put options on futures contracts involves less potential risk to a Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund when
the purchase or sale of a futures contract would not, such as when there is no
movement in the prices of the hedged investments. The writing of an option on a
futures contract involves risks similar to those relating to the sale of futures
contracts.
There is no assurance that higher than anticipated trading activity or
other unforeseen events might not at times render certain market clearing
facilities inadequate, and thereby result in the institution by exchanges of
special procedures which may interfere with the timely execution of customer
orders.
To reduce or eliminate a hedge position held by a Fund, the Fund may
seek to close out a position. The ability to establish and close out positions
will be subject to the development and maintenance of a liquid secondary market.
It is not certain that this market will develop or continue to exist for a
particular futures contract. Reasons for the absence of a liquid secondary
market on an exchange include the following: (i) there may be insufficient
trading interest in certain contracts or options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of contracts or options, or underlying
securities; (iv) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading volume;
or (vi) one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of contracts or options
(or a particular class or series of contracts or options), in which event the
secondary market on that exchange (or in the class or series of contacts or
options), would cease to exist, although outstanding contracts or options on the
exchange that had been issued by a clearing corporation as a result of trades on
that exchange would continue to be exercisable in accordance with their terms.
77
Index futures contracts and related options; associated risks
An index futures contract is a contract to buy or sell units of an index
at a specified future date at a price agreed upon when the contract is made.
Entering into a contract to buy units of an index is commonly referred to as
buying or purchasing a contract or holding a long position in the index.
Entering into a contract to sell units of an index is commonly referred to as
selling a contract or holding a short position. A unit is the current value of
the index. A Fund may enter into stock index future contracts, debt index
futures contracts, or other index futures contracts (e.g., an interest rate
futures contract), as specified in the Prospectuses. A Fund may also purchase
and sell options on index futures contracts, to the extent specified in the
Prospectuses.
There are several risks in connection with the use by a Fund of index
futures as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the index futures and movements
in the prices of securities which are the subject of the hedge. Columbia
Management or the relevant portfolio manager will attempt to reduce this risk by
selling, to the extent possible, futures on indices the movements of which will,
in its judgment, have a significant correlation with movements in the prices of
the Fund's portfolio securities sought to be hedged.
Successful use of index futures by a Fund for hedging purposes is also
subject to Columbia Management's or the relevant portfolio manager's ability to
predict correctly movements in the direction of the market. It is possible that,
where the Fund has sold futures to hedge its portfolio against a decline in the
market, the index on which the futures are written may advance and the value of
securities subject to the hedge held in the Fund's portfolio may decline. If
this occurs, the Fund would lose money on the futures and also experience a
decline in the value in its portfolio securities. However, while this could
occur to a certain degree, over time the value of the Fund's portfolio should
tend to move in the same direction as the market indices which are intended to
correlate to the price movements of the portfolio securities sought to be
hedged. It is also possible that, if the Fund has hedged against the possibility
of a decline in the market adversely affecting securities held in its portfolio
and securities prices increase instead, the Fund will lose part or all of the
benefit of the increased values of those securities that it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements.
In addition to the possibility that there may be an imperfect
correlation, or no correlation at all, between movements in the index futures
and the securities of the portfolio being hedged, the prices of index futures
may not correlate perfectly with movements in the underlying index due to
certain market distortions. First, all participants in the futures markets are
subject to margin deposit and maintenance requirements. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through offsetting transactions which would distort the normal relationship
between the index and futures markets. Second, margin requirements in the
futures markets are less onerous than margin requirements in the securities
markets, and as a result the futures markets may attract more speculators than
the securities markets. Increased participation by speculators in the futures
markets may also cause temporary price distortions. Due to the possibility of
price distortions in the futures markets and also because of the imperfect
correlation between movements in the index and movements in the prices of index
futures, even a correct forecast of general market trends by Columbia Management
or a Fund's portfolio manager may still not result in a successful hedging
transaction.
78
Options on index futures are similar to options on securities except
that options on index futures give the purchaser the right, in return for the
premium paid, to assume a position in an index futures contract (a long position
if the option is a call and a short position if the option is a put), at a
specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the index future. If an option is exercised on
the last trading day prior to the expiration date of the option, the settlement
will be made entirely in cash equal to the difference between the exercise price
of the option and the closing level of the index on which the future is based on
the expiration date. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.
Securities Loans
Each of Growth & Income Fund and High Yield Fund may make loans of its
portfolio securities amounting to not more than 30% of its total assets. The
risks in lending portfolio securities, as with other extensions of credit,
consist of possible delay in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. As a matter of
policy, securities loans are made to broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or short-term
debt obligations at least equal at all times to the value of the securities on
loan. This collateral is deposited with the Trust's custodian which segregates
and identifies these assets on its books as security for the loan. The borrower
pays to the Fund an amount equal to any dividends, interest or other
distributions received on securities lent. The borrower is obligated to return
identical securities on termination of the loan. The Fund retains all or a
portion of the interest received on investment of the cash collateral or
receives a fee from the borrower. Although voting rights or rights to consent
with respect to the loaned securities pass to the borrower, the Fund retains the
right to call the loans at any time on reasonable notice, and it will do so in
order that the securities may be voted by the Fund if the holders of such
securities are asked to vote upon or consent to matters materially affecting the
investment. The Fund may also call such loans in order to sell the securities
involved. The Trust has adopted these policies, in part, so that interest,
dividends and other distributions received on the loaned securities, the
interest or fees paid by the borrower to the Fund for the loan, and the
investment income from the collateral will qualify under certain investment
limitations under Subchapter M of the Internal Revenue Code.
Swap Agreements ("Swaps," "Caps," "Collars" and "Floors")
The High Yield Fund and Strategic Income Fund may enter into interest
rate swaps, currency swaps, and other types of swap agreements such as caps,
collars, and floors. In a typical interest rate swap, one party agrees to make
regular payments equal to a floating interest rate times a "notional principal
amount," in return for payments equal to a fixed rate times the same amount, for
a specified period of time. If a swap agreement provides for payments in
different currencies, the parties might agree to exchange notional principal
amount as well. Swaps may also depend on other prices or rates, such as the
value of an index or mortgage prepayment rates.
In a typical cap or floor agreement, one party agrees to make payments
only under specified circumstances, usually in return for payment of a fee by
the other party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest rate exceeds
an agreed upon level, while the seller of an interest rate floor is obligated to
make payments to the extent that a specified interest rate falls below an agreed
upon level. An interest rate collar combines elements of buying a cap and
selling a floor.
Swap agreements will tend to shift a Fund's investment exposure from one
type of investment to another. For example, if a Fund agreed to exchange
payments in dollars for payments in foreign currency, the swap agreement would
tend to decrease the Fund's exposure to U.S. interest rates and increase its
exposure to foreign currency and interest rates. Caps and floors have an effect
similar to buying or writing options. Depending on how they are used, swap
agreements may increase or decrease the overall volatility of a Fund's
investments and its share price and yield.
79
Swap agreements are sophisticated hedging instruments that typically
involve a small investment of cash relative to the magnitude of risks assumed.
As a result, swaps can be highly volatile and may have a considerable impact on
the Funds' performance. Swap agreements are subject to risks related to the
counterparty's ability to perform, and may decline in value if the
counterparty's creditworthiness deteriorates. The Funds may also suffer losses
if they are unable to terminate outstanding swap agreements or reduce their
exposure through offsetting transactions.
INDEPENDENT REGISTERED PULIC ACCOUNTING FIRM AND FINANCIAL STATEMENTS
PricewaterhouseCoopers LLP, an independent registered public accounting
firm, with offices at 125 High Street, Boston, Massachusetts 02110-1707, serves
as independent auditors for all of the Funds. The financial statements
incorporated by reference in this SAI have been so incorporated, and the
financial highlights have been included in the Prospectus, in reliance upon the
reports of PricewaterhouseCoopers LLP given on the authority of said firm as
experts in accounting and auditing.
The financial statements of the Funds and Report of Independent
Registered Public Accounting Firm appearing in the December 31, 2004 Annual
Report of the Trust are incorporated in this SAI by reference.
80
APPENDIX I
Columbia Management Advisors, Inc. ("CMA")
Proxy Voting Policies and Procedures
Adopted July 1, 2003, as revised July 15, 2003, February 11, 2004,
October 4, 2004 and March 4, 2005
POLICY:
All proxies/1/ regarding client securities for which Columbia Management
Advisors, Inc. ("CMA") has assumed authority to vote shall, unless CMA
determines in accordance with policies stated below to abstain from voting, be
voted in a manner considered by CMA to be in the best interest of CMA's clients,
including the CMG Family Funds/2/ and their shareholders, without regard to any
resulting benefit or detriment to CMA or its affiliates. The best interest of
clients is defined for this purpose as the interest of enhancing or protecting
the economic value of client accounts, considered as a group rather than
individually, as CMA determines in its sole and absolute discretion. In the
event a client believes that its other interests require a different vote, CMA
shall vote as the client clearly instructs, provided CMA receives such
instructions in time to act accordingly.
CMA endeavors to vote, in accordance with this Policy, all proxies of which it
becomes aware, subject to the following exceptions (unless otherwise agreed)
when CMA expects to routinely abstain from voting:
1. Proxies will usually not be voted in cases where the security
has been loaned from the Client's account.
2. Proxies will usually not be voted in cases where CMA deems the
costs to the Client and/or the administrative inconvenience of
voting the security (e.g., some foreign securities) outweigh the
benefit of doing so.
CMA seeks to avoid the occurrence of actual or apparent material conflicts of
interest in the proxy voting process by voting in accordance with predetermined
voting guidelines, as stated below. For those proxy proposals that require
special consideration or in instances where special circumstances may require
varying from the predetermined guidelines, the CMG Proxy Committee will
determine the best interest of CMA's clients and vote accordingly, without
consideration of any resulting benefit or detriment to CMA or its affiliates.
OVERVIEW:
CMA's policy is based upon its fiduciary obligation to act in its clients' best
interest. Citing this obligation, the SEC has adopted rules pursuant to the
Investment Advisers Act of 1940 and Investment Company Act of 1940 with respect
to proxy voting.
PROCEDURE:
I. ACCOUNT POLICIES
Except as otherwise directed by the client, CMA shall vote as follows:
Separately Managed Accounts
CMA shall vote proxies on securities held in its separately managed accounts.
- ----------
/1/ The term "proxy" as used herein refers to consents, elections and
authorizations solicited by any party with respect to securities of any sort.
/2/ A CMG Family Fund or a Fund is a registered investment company or series of
a registered investment company managed or advised by Columbia Management
Advisors, Inc.
81
Columbia Trust Company ("CTC") Trust Pools
CMA shall vote proxies on securities held in the trust pools.
CMG Family Funds/CMA Fund Trust
CMA shall vote proxies on securities held in the Funds, including multi-managed
and subadvised Funds.
Columbia Private Portfolio
CMA shall vote proxies on securities held in its separately managed accounts.
Alternative Investment Group
CMA's clients may invest in securities ("Alternative Investments") issued by
alternative investment vehicles (i.e. hedge funds, private equity funds, and
other alternative investment pools) that are structured as private limited
partnerships ("LPs"), limited liability companies ("LLCs") or offshore
corporations. Generally, CMA's Alternative Investment Group ("AIG") is the
platform through which CMA provides advisory services relating to Alternative
Investments.
The voting rights of Alternative Investments generally are rights of contract
set forth in the limited liability company or limited partnership agreement, in
the case of LLCs and LPs, or Memorandum and Articles of Association or By-laws,
in the case of offshore corporations. Also, as privately placed securities,
Alternative Investments generally are not subject to the regulatory scheme
applicable to public companies. Consequently, in most cases, proxies are not
solicited regarding Alternative Investment vehicles. Instead, consents may be
solicited from members, limited partners or shareholders.
Because of the unique characteristics of Alternative Investments, CMA has a
tailored process for voting Alternative Investment proxies and consents.
Process
AIG will vote all Alternative Investment proxies and consents in accordance with
this Policy. The committee voting AIG proxies consists of AIG senior management,
investment and operations professionals. Conflicts of interest are to be
monitored and resolved as set forth in this Policy.
II. PROXY COMMITTEE
CMA shall establish a Proxy Committee whose standing members shall include the
head of core equity, head of value, head of growth, head of income strategies,
head of equity research and head of fixed income research. Each standing member
may designate a senior portfolio manager or a senior analyst officer to act as a
substitute in a given matter on their behalf.
The Proxy Committee's functions shall include, in part,
(a) direction of the vote on proposals where there has been a
recommendation to the Committee, pursuant to Section IV.B, not to vote
according to the predetermined Voting Guidelines stated in Section IV.A
or on proposals which require special, individual consideration in
accordance with Section IV.C;
(b) review at least annually of this Proxy Voting Policy and Procedure
to ensure consistency with internal policies, client disclosures and
regulatory requirements;
(c) review at least annually of existing Voting Guidelines and need for
development of additional Voting Guidelines to assist in the review of
proxy proposals; and
82
(d) development and modification of Voting Procedures, as stated in
Section V, as it deems appropriate or necessary.
The Proxy Committee shall establish a charter, which shall set forth the
Committee's purpose, membership and operation. The Committee's charter shall be
consistent, in all material respects, with this policy and procedure.
III. CONFLICTS OF INTEREST
With Other Bank of America Businesses
- -------------------------------------
Bank of America Corporation ("BAC"), the ultimate corporate parent of CMA, Bank
of America, N.A. and all of their numerous affiliates owns, operates and has
interests in many lines of business that may create or give rise to the
appearance of a conflict of interest between BAC or its affiliates and those of
Firm-advised clients. For example, the commercial and investment banking
business lines may have interests with respect to issuers of voting securities
that could appear to or even actually conflict with CMA's duty, in the proxy
voting process, to act in the best economic interest of its clients.
Within CMA
- ----------
Conflicts of interest may also arise from the business activities of CMA. For
example, CMA might manage (or be seeking to manage) the assets of a benefit plan
for an issuer. CMA may also be presented with an actual or apparent conflict of
interest where proxies of securities issued by BAC or a CMG Family Fund, for
which CMA serves as investment adviser, are to be voted for a client's account.
Management of Conflicts
- -----------------------
CMA's policy is to always vote proxies in the best interest of its clients, as a
whole, without regard to its own self-interest or that of its affiliates. BAC as
well as CMA has various compliance policies and procedures in place in order to
address any material conflicts of interest that might arise in this context.
1. BAC's enterprise-wide Code of Ethics specifically prohibits the
flow of certain business-related information between associates
on the commercial and/or investment banking side of the
corporation and associates charged with trust or (as in the case
of BACAP associates) non-trust fiduciary responsibilities,
including investment decision-making and proxy voting.
2. In addition, BAC has adopted "Global Policies and Procedures
Regarding Information Walls and Inside Information." Pursuant to
these policies and procedures, "information barriers" have been
established between various BAC business lines designed to
prohibit the passage of certain information across those
barriers.
3. Within CMA, CMA's Code of Ethics affirmatively requires that
associates of CMA act in a manner whereby no actual or apparent
conflict of interest may be seen as arising between the
associate's interests and those of CMA's Clients.
4. By assuming his or her responsibilities pursuant to this Policy,
each member of the Proxy Committee and any CMA or BAC associate
advising or acting under the supervision or oversight of the
Proxy Committee undertakes:
83
. To disclose to the chairperson of the Proxy Committee
and the chairperson to the head of CMG Compliance any
actual or apparent personal material conflicts of
interest which he or she may have (e.g., by way of
substantial ownership of securities, relationships with
nominees for directorship, members of an issuer's or
dissident's management or otherwise) in determining
whether or how CMA shall vote proxies. In the event the
chairperson of the Proxy Committee has a conflict of
interest regarding a given matter, he or she shall
abstain from participating in the Committee's
determination of whether and/or how to vote in the
matter; and
. To refrain from taking into consideration, in the
decision as to whether or how CMA shall vote proxies:
. The existence of any current or prospective
material business relationship between CMA, BAC
or any of their affiliates, on one hand, and any
party (or its affiliates) that is soliciting or
is otherwise interested in the proxies to be
voted, on the other hand; and/or
. Any direct, indirect or perceived influence or
attempt to influence such action which the
member or associate views as being inconsistent
with the purpose or provisions of this Policy or
the Code of Ethics of CMA or BAC.
Where a material conflict of interest is determined to have arisen in the proxy
voting process that may not be adequately mitigated by voting in accordance with
the predetermined Voting Guidelines, CMA's policy is to invoke one or more of
the following conflict management procedures:
1. Convene the Proxy Committee for the purpose of voting the
affected proxies in a manner that is free of the conflict.
2. Causing the proxies to be voted in accordance with the
recommendations of a qualified, independent third party, which
may include CMA's proxy voting agent.
3. In unusual cases, with the Client's consent and upon ample
notice, forwarding the proxies to CMA's clients so that they may
vote the proxies directly.
IV. VOTING GUIDELINES
A. The Proxy Committee has adopted the following guidelines for voting proxies:
1. Matters Relating to the Board of Directors/Corporate Governance
---------------------------------------------------------------
CMA generally will vote FOR:
. Proposals for the election of directors or for an increase or
decrease in the number of directors, provided that no more than
one-third of the Board of Directors would, presently or at any
time during the previous three-year period, be from management.
However, CMA generally will WITHHOLD votes from pertinent director
nominees if:
(i) the board as proposed to be constituted would
have more than one-third of its members from
management;
84
(ii) the board does not have audit, nominating, and
compensation committees composed solely of
directors who qualify as being regarded as
"independent," i.e. having no material
relationship, directly or indirectly, with the
Company, as CMA's proxy voting agent may
determine (subject to the Proxy Committee's
contrary determination of independence or
non-independence);
(iii) the nominee, as a member of the audit committee,
permitted the company to incur excessive
non-audit fees (as defined below regarding other
business matters -- ratification of the
appointment of auditors);
(iv) a director serves on more than six public
company boards;
(v) the CEO serves on more than two public company
boards other than the company's board.
On a CASE-BY-CASE basis, CMA may WITHHOLD votes for a director
nominee who has failed to observe good corporate governance
practices or, through specific corporate action or inaction
(e.g. failing to implement policies for which a majority of
shareholders has previously cast votes in favor), has
demonstrated a disregard for the interests of shareholders.
. Proposals requesting that the board audit, compensation and/or
nominating committee be composed solely of independent
directors. The Audit Committee must satisfy the independence and
experience requirements established by the Securities and
Exchange Commission ("SEC") and the New York Stock Exchange, or
appropriate local requirements for foreign securities. At least
one member of the Audit Committee must qualify as a "financial
expert" in accordance with SEC rules.
. Proposals to declassify a board, absent special circumstances
that would indicate that shareholder interests are better served
by a classified board structure.
CMA generally will vote FOR:
. Proposals to create or eliminate positions or titles for senior
management. CMA generally prefers that the role of Chairman of
the Board and CEO be held by different persons unless there are
compelling reasons to vote AGAINST a proposal to separate these
positions, such as the existence of a counter-balancing
governance structure that includes at least the following
elements in addition to applicable listing standards:
. Established governance standards and guidelines.
. Full board composed of not less than two-thirds
"independent" directors, as defined by applicable
regulatory and listing standards.
. Compensation, as well as audit and nominating (or
corporate governance) committees composed entirely of
independent directors.
. A designated or rotating presiding independent director
appointed by and from the independent directors with the
authority and responsibility to call and preside at
regularly and, as necessary, specially scheduled
meetings of the independent directors to be conducted,
unless the participating independent directors otherwise
wish, in executive session with no members of management
present.
. Disclosed processes for communicating with any
individual director, the presiding independent director
(or, alternatively, all of the independent directors, as
a group) and the entire board of directors, as a group.
. The pertinent class of the Company's voting securities
has out-performed, on a three-year basis, both an
appropriate peer group and benchmark index, as indicated
in the performance summary table of the Company's proxy
materials. This requirement shall not apply if there has
been a change in the Chairman/CEO position within the
three-year period.
. Proposals that grant or restore shareholder ability to remove
directors with or without cause.
85
. Proposals to permit shareholders to elect directors to fill
board vacancies.
. Proposals that encourage directors to own a minimum amount of
company stock.
. Proposals to provide or to restore shareholder appraisal rights.
. Proposals to adopt cumulative voting.
. Proposals for the company to adopt confidential voting.
CMA generally will vote AGAINST:
. Proposals to classify boards, absent special circumstances
indicating that shareholder interests would be better served by
a classified board structure.
. Proposals that give management the ability to alter the size of
the board without shareholder approval.
. Proposals that provide directors may be removed only by
supermajority vote.
. Proposals to eliminate cumulative voting.
. Proposals which allow more than one vote per share in the
election of directors.
. Proposals that provide that only continuing directors may elect
replacements to fill board vacancies.
. Proposals that mandate a minimum amount of company stock that
directors must own.
. Proposals to limit the tenure of non-management directors.
CMA will vote on a CASE-BY-CASE basis in contested elections of directors.
CMA generally will vote on a CASE-BY-CASE basis on board approved proposals
relating to corporate governance. Such proposals include, but are not limited
to:
. Director and officer indemnification and liability protection.
CMA is opposed to entirely eliminating directors' and officers'
liability for monetary damages for violating the duty of care.
CMA is also opposed to expanding coverage beyond just legal
expenses to acts, such as negligence, that are more serious
violations of fiduciary obligation than mere carelessness. CMA
supports proposals which provide such expanded coverage in cases
when a director's or officer's legal defense was unsuccessful
if: (i) the director was found to have acted in good faith and
in a manner that he/she reasonably believed was in the best
interests of the company, AND (ii) if the director's legal
expenses would be covered.
. Reimbursement of proxy solicitation expenses taking into
consideration whether or not CMA was in favor of the dissidents.
. Proxy contest advance notice. CMA generally will vote FOR
proposals that allow shareholders to submit proposals as close
to the meeting date as possible while allowing for sufficient
time for Company response, SEC review, and analysis by other
shareholders.
86
2. Compensation
------------
CMA generally will vote FOR management sponsored compensation plans (such as
bonus plans, incentive plans, stock option plans, pension and retirement
benefits, stock purchase plans or thrift plans) if they are consistent with
industry and country standards. However, CMA generally is opposed to
compensation plans that substantially dilute ownership interest in a company,
provide participants with excessive awards, or have objectionable structural
features. Specifically, for equity-based plans, if the proposed number of shares
authorized for option programs (excluding authorized shares for expired options)
exceeds an average of 10% of the currently outstanding shares over the previous
three years or an average of 3% over the previous three years for directors
only, the proposal should be referred to the Proxy Committee. The Committee will
then consider the circumstances surrounding the issue and vote in the best
interest of CMA's clients. CMA requires that management provide substantial
justification for the repricing of options.
CMA generally will vote FOR:
. Proposals requiring that executive severance arrangements be
submitted for shareholder ratification.
. Proposals asking a company to expense stock options.
. Proposals to put option repricings to a shareholder vote.
. Employee stock purchase plans that have the following features:
(i) the shares purchased under the plan are acquired for no less
than 85% of their market value, (ii) the offering period under
the plan is 27 months or less, and (iii) dilution is 10% or
less.
CMA generally will vote AGAINST:
. Stock option plans that permit issuance of options with an
exercise price below the stock's current market price, or that
permit replacing or repricing of out-of-the money options.
. Proposals to authorize the replacement or repricing of
out-of-the money options.
CMA will vote on a CASE-BY-CASE basis proposals regarding approval of specific
executive severance arrangements.
3. Capitalization
--------------
CMA generally will vote FOR:
. Proposals to increase the authorized shares for stock dividends,
stock splits (and reverse stock splits) or general issuance,
unless proposed as an anti-takeover measure or a general
issuance proposal increases the authorization by more than 30%
without a clear need presented by the company. Proposals for
reverse stock splits should include an overall reduction in
authorization.
For companies recognizing preemptive rights for existing
shareholders, CMA generally will vote FOR general issuance
proposals that increase the authorized shares by more than 30%.
CMA will vote on a CASE-BY-CASE basis all such proposals by
companies that do not recognize preemptive rights for existing
shareholders.
. Proposals for the elimination of authorized but unissued shares
or retirement of those shares purchased for sinking fund or
treasury stock.
87
. Proposals to institute/renew open market share repurchase plans
in which all shareholders may participate on equal terms.
. Proposals to reduce or change the par value of common stock,
provided the number of shares is also changed in order to keep
the capital unchanged.
4. Mergers, Restructurings and Other Transactions
----------------------------------------------
CMA will review, on a CASE-BY-CASE basis, business transactions such as mergers,
acquisitions, reorganizations, liquidations, spinoffs, buyouts and sale of all
or substantially all of a company's assets.
5. Anti-Takeover Measures
----------------------
CMA generally will vote AGAINST proposals intended largely to avoid acquisition
prior to the occurrence of an actual event or to discourage acquisition by
creating a cost constraint. With respect to the following measures, CMA
generally will vote as follows:
Poison Pills
. CMA votes FOR shareholder proposals that ask a company to submit
its poison pill for shareholder ratification.
. CMA generally votes FOR shareholder proposals to eliminate a
poison pill.
. CMA generally votes AGAINST management proposals to ratify a
poison pill.
Greenmail
. CMA will vote FOR proposals to adopt anti-greenmail charter or
bylaw amendments or to otherwise restrict a company's ability to
make greenmail payments.
Supermajority vote
. CMA will vote AGAINST board-approved proposals to adopt
anti-takeover measures such as supermajority voting provisions,
issuance of blank check preferred stock, the creation of a
separate class of stock with disparate voting rights and charter
amendments adopting control share acquisition provisions.
Control Share Acquisition Provisions
. CMA will vote FOR proposals to opt out of control share
acquisition statutes.
6. Other Business Matters
----------------------
CMA generally will vote FOR:
. Proposals to approve routine business matters such as changing
the company's name and procedural matters relating to the
shareholder meeting such as approving the minutes of a prior
meeting.
. Proposals to ratify the appointment of auditors, unless any of
the following apply in which case CMA will generally vote
AGAINST the proposal:
. Credible reason exists to question:
. The auditor's independence, as determined by
applicable regulatory requirements.
. The accuracy or reliability of the auditor's
opinion as to the company's financial position.
88
. Feespaid to the auditor or its affiliates for
"non-audit" services were excessive, i.e., in
excess of the total fees paid for "audit,"
"audit-related" and "tax compliance" and/or "tax
return preparation" services, as disclosed in
the company's proxy materials.
. Bylaw or charter changes that are of a housekeeping nature
(e.g., updates or corrections).
. Proposals to approve the annual reports and accounts provided
the certifications required by the Sarbanes Oxley Act of 2002
have been provided.
CMA generally will vote AGAINST:
. Proposals to eliminate the right of shareholders to act by
written consent or call special meetings.
. Proposals providing management with authority to adjourn an
annual or special shareholder meeting absent compelling reasons,
or to adopt, amend or repeal bylaws without shareholder
approval, or to vote unmarked proxies in favor of management.
. Shareholder proposals to change the date, time or location of
the company's annual meeting of shareholders.
CMA will vote AGAINST:
. Authorization to transact other unidentified substantive (as
opposed to procedural) business at a meeting.
CMA will vote on a CASE-BY-CASE basis:
. Proposals to change the location of the company's state of
incorporation. CMA considers whether financial benefits (e.g.,
reduced fees or taxes) likely to accrue to the company as a
result of a reincorporation or other change of domicile outweigh
any accompanying material diminution of shareholder rights.
. Proposals on whether and how to vote on "bundled" or otherwise
conditioned proposals, depending on the overall economic effects
upon shareholders.
CMA generally will ABSTAIN from voting on shareholder proposals predominantly
involving social, socio-economic, environmental, political or other similar
matters on the basis that their impact on share value can rarely be anticipated
with any high degree of confidence. CMA may, on a CASE-BY-CASE basis, vote:
. FOR proposals seeking inquiry and reporting with respect to,
rather than cessation or affirmative implementation of, specific
policies where the pertinent issue warrants separate
communication to shareholders; and
. FOR or AGAINST the latter sort of proposal in light of the
relative benefits and detriments (e.g. distraction, costs, other
burdens) to share value which may be expected to flow from
passage of the proposal.
7. Other Matters Relating to Foreign Issues
----------------------------------------
CMA generally will vote FOR:
. Most stock (scrip) dividend proposals. CMA votes AGAINST
proposals that do not allow for a cash option unless management
demonstrates that the cash option is harmful to shareholder
value.
. Proposals to capitalize the company's reserves for bonus issues
of shares or to increase the par value of shares.
89
. Proposals to approve control and profit transfer agreements
between a parent and its subsidiaries.
. Management proposals seeking the discharge of management and
supervisory board members, unless there is concern about the
past actions of the company's auditors/directors and/or legal
action is being taken against the board by other shareholders.
. Management proposals concerning allocation of income and the
distribution of dividends, unless the dividend payout ratio has
been consistently below 30 percent without adequate explanation
or the payout is excessive given the company's financial
position.
. Proposals for the adoption of financing plans if they are in the
best economic interests of shareholders.
8. Investment Company Matters
--------------------------
Election of Directors:
CMA will vote on a CASE-BY-CASE basis proposals for the election of directors,
considering the following factors:
. Board structure
. Attendance at board and committee meetings.
CMA will WITHHOLD votes from directors who:
. Attend less than 75 percent of the board and committee meetings
without a valid excuse for the absences. Valid reasons include
illness or absence due to company business. Participation via
telephone is acceptable. In addition, if the director missed
only one meeting or one day's meetings, votes should not be
withheld even if such absence dropped the director's attendance
below 75 percent.
. Ignore a shareholder proposal that is approved by a majority of
shares outstanding;
. Ignore a shareholder proposal this is approved by a majority of
the votes cast for two consecutive years;
. Are interested directors and sit on the audit or nominating
committee; or
. Are interested directors and the full board serves as the audit
or nominating committee or the company does not have one of
these committees.
Proxy Contests:
CMA will vote on a CASE-BY-CASE basis proposals for proxy contests, considering
the following factors:
. Past performance relative to its peers
. Market in which fund invests
. Measures taken by the board to address the pertinent issues
(e.g., closed-end fund share market value discount to NAV)
. Past shareholder activism, board activity and votes on related
proposals
. Strategy of the incumbents versus the dissidents
. Independence of incumbent directors; director nominees
. Experience and skills of director nominees
. Governance profile of the company
. Evidence of management entrenchment
Converting Closed-end Fund to Open-end Fund:
CMA will vote conversion proposals on a CASE-BY-CASE basis, considering the
following factors:
. Past performance as a closed-end fund
. Market in which the fund invests
. Measures taken by the board to address the discount
. Past shareholder activism, board activity, and votes on related
proposals.
90
Investment Advisory Agreements:
CMA will vote investment advisory agreements on a CASE-BY-CASE basis,
considering the following factors:
. Proposed and current fee schedules
. Fund category/investment objective
. Performance benchmarks
. Share price performance as compared with peers
. Resulting fees relative to peers
. Assignments (where the adviser undergoes a change of control)
Approving New Classes or Series of Shares:
CMA will vote FOR the establishment of new classes or series of shares.
Preferred Stock Proposals:
CMA will vote on a CASE-BY-CASE basis proposals for the authorization for or
increase in the preferred shares, considering the following factors:
. Stated specific financing purpose
. Possible dilution for common shares
. Whether the shares can be used for antitakover purposes
Policies Addressed by the Investment Company Act of 1940 ("1940 Act"):
CMA will vote proposals regarding adoption or changes of policies addressed by
the 1940 Act on a CASE-BY-CASE basis, considering the following factors:
. Potential competitiveness
. Regulatory developments
. Current and potential returns
. Current and potential risk
CMA generally will vote FOR these amendments as long as the proposed changes do
not fundamentally alter the investment focus of the fund and do comply with
current SEC interpretations.
Changing a Fundamental Restriction to a Non-fundamental Restriction:
CMA will vote on a CASE-BY-CASE basis proposals to change a fundamental
restriction to a nonfundamental restriction, considering the following factors:
. Fund's target investments
. Reasons given by the fund for the change
. Projected impact of the change on the portfolio
Change Fundamental Investment Objective to Non-fundamental:
CMA will vote AGAINST proposals to change a fund's investment objective from
fundamental to non-fundamental unless management acknowledges meaningful
limitations upon its future requested ability to change the objective.
91
Name Change Proposals:
CMA will vote on a CASE-BY-CASE basis proposals to change a fund's name,
considering the following factors:
. Political/economic changes in the target market
. Consolidation in the target market
. Current asset composition
Change in Fund's Subclassification:
CMA will vote on a CASE-BY-CASE basis proposals to change a fund's
subclassification, considering the following factors:
. Potential competitiveness
. Current and potential returns
. Risk of concentration
. Consolidation in target industry
Disposition of Assets/Termination/Liquidation:
CMA will vote on a CASE-BY-CASE basis these proposals, considering the following
factors:
. Strategies employed to salvage the company
. Past performance of the fund
. Terms of the liquidation
Changes to the Charter Document:
CMA will vote on a CASE-BY-CASE basis proposals to change the charter document,
considering the following factors:
. The degree of change implied by the proposal
. The efficiencies that could result
. The state of incorporation; net effect on shareholder rights
. Regulatory standards and implications
CMA will vote FOR:
. Proposals allowing the Board to impose, without shareholder
approval, fees payable upon redemption of fund shares, provided
imposition of such fees is likely to benefit long-term fund
investors (e.g., by deterring market timing activity by other
fund investors)
. Proposals enabling the Board to amend, without shareholder
approval, the fund's management agreement(s) with its investment
adviser(s) or sub-advisers, provided the amendment is not
required by applicable law (including the Investment Company Act
of 1940) or interpretations thereunder to require such approval
CMA will vote AGAINST:
. Proposals enabling the Board to:
. Change, without shareholder approval the domicile of the
fund
. Adopt, without shareholder approval, material amendments
of the fund's declaration of trust or other
organizational document
92
Changing the Domicile of a Fund:
CMA will vote on a CASE-BY-CASE basis proposals to reincorporate, considering
the following factors:
. Regulations of both states
. Required fundamental policies of both states
. The increased flexibility available
Authorizing the Board to Hire and Terminate Subadvisors Without Shareholder
Approval:
CMA will vote FOR proposals to enable the Board or Investment Adviser to hire
and terminate sub-advisers, without shareholder approval, in accordance with
applicable rules or exemptive orders under the Investment Company Act of 1940
Distribution Agreements:
CMA will vote these proposals on a CASE-BY-CASE basis, considering the following
factors:
. Fees charged to comparably sized funds with similar objectives
. The proposed distributor's reputation and past performance
. The competitiveness of the fund in the industry
. Terms of the agreement
Master-Feeder Structure:
CMA will vote FOR the establishment of a master-feeder structure.
Mergers:
CMA will vote merger proposals on a CASE-BY-CASE basis, considering the
following factors:
. Resulting fee structure
. Performance of both funds
. Continuity of management personnel
. Changes in corporate governance and their impact on shareholder
rights
Shareholder Proposals to Establish Director Ownership Requirement:
CMA will generally vote AGAINST shareholder proposals that mandate a specific
minimum amount of stock that directors must own in order to qualify as a
director or to remain on the board. While CMA favors stockownership on the part
of directors, the company should determine the appropriate ownership
requirement.
Shareholder Proposals to Reimburse Shareholder for Expenses Incurred:
CMA will vote on a CASE-BY-CASE basis proposals to reimburse proxy solicitation
expenses. Shareholder Proposals to Terminate the Investment Adviser:
CMA will vote on a CASE-BY-CASE basis proposals to terminate the investment
adviser, considering the following factors:
. Performance of the fund's NAV
. The fund's history of shareholder relations
. The performance of other funds under the adviser's management
93
9. Alternative Investment Group ("AIG") Matters
The AIG Proxy Sub-Committee generally will vote in accordance with the
guidelines set forth in this policy. With respect to matters that are not
addressed by the guidelines, the AIG Proxy Sub-Committee will vote each such
matter on a CASE-BY-CASE basis.
B. Ability to Vote Proxies Other than as Provided in A Above.
A Portfolio Manager, sub-adviser or other party involved with a client's account
may conclude that the best interest of the firm's client, as defined above,
requires that a proxy be voted in a manner that differs from the predetermined
proxy Voting Guidelines stated in Section IV.A. In this situation, he or she
shall request that the Proxy Committee consider voting the proxy other than
according such Guidelines. If any person, group, or entity requests the Proxy
Committee (or any of its members) vote a proxy other than according to the
predetermined Voting Guidelines, that person shall furnish to the Proxy
Committee a written explanation of the reasons for the request and a description
of the person's, group's, or entity's relationship, if any, with the parties
proposing and/or opposing the matter's adoption.
C. Proposals Requiring Special Consideration
The following proposals require special, individual consideration. The Proxy
Committee will determine how proxies related to all such proposals will be
voted.
1. New Proposals. For each new type of proposal that is expected
to be proposed to shareholders of multiple companies, the Proxy
Committee will develop a Voting Guideline which will be
incorporated into this Policy.
2. Accounts Adhering to Taft Hartley Principles. All proposals
for these accounts shall be voted according to the Taft Hartley
Guidelines developed by Institutional Shareholder Services, Inc.
("ISS").
3. Accounts Adhering to Socially Responsible Principles. All
proposals for these accounts shall be voted according to the
Socially Responsible Guidelines developed by ISS or as specified
by the client.
4. Proxies of International Issuers which Block Securities Sales
between the Time a Shareholder submits a Proxy and the Vote.
Proposals for these securities shall be voted only on the
specific instruction of the Proxy Committee and to the extent
practicable in accordance with the Voting Guidelines set forth
in this Policy.
5. Proxies of Investment Company Shares. Proposals on issues
other than those specified in Section IV.A.
6. Executive/Director Compensation. Except as provided in
Section IV.A, proposals relating to compensation of any
executive or director will be voted as recommended by ISS or as
otherwise directed by the Proxy Committee.
7. Preemptive Rights. Proposals to create or eliminate
shareholder preemptive rights. In evaluating these proposals the
Proxy Committee will consider the size of the company and the
nature of its shareholder base.
94
V. VOTING PROCEDURES
The Proxy Committee has developed the following procedures to aid the voting of
proxies according to the Voting Guidelines set forth in Section IV above. The
Proxy Committee may revise these procedures from time to time, as it deems
necessary or appropriate to effect the purposes of this Policy.
. CMA shall use an independent, third-party vendor (currently
Institutional Shareholder Services ("ISS")), to implement its
proxy voting process as CMAs proxy voting agent. This retention
is subject to CMA continuously assessing the vendor's
independence from CMA and its affiliates, and the vendor's
ability to perform its responsibilities (and, especially, its
responsibility to vote client proxies in accordance with CMA's
proxy voting guidelines) free of any actual, potential or
apparent material conflicts of interests that may arise between
the interests of the vendor, its affiliates, the vendor's other
clients and the owners, officers or employees of any such firm,
on the one hand, and CMA's clients, on the other hand. As means
of performing this assessment, CMA will require various reports
and notices from the vendor, as well as periodic audits of the
vendor's voting record and other due diligence.
. ISS shall provide proxy analysis and record keeping services in
addition to voting proxies on behalf of CMA in accordance with
this Policy.
. On a daily basis CMA shall send to ISS a holdings file detailing
each equity holding held in all accounts over which CMA has
voting authority. Information regarding equity holdings for
international portfolio shall be sent weekly.
. ISS shall receive proxy material information from Proxy Edge or
the custodian bank for the account. This shall include issues to
be voted upon, together with a breakdown of holdings for CMA
accounts. ISS shall then reconcile information it receives from
CMA with that it has received from Proxy Edge and custodian
banks. Any discrepancies shall be promptly noted and resolved by
ISS, with notice to CMA.
. Whenever a vote is solicited, ISS shall execute the vote
according to CMA's Voting Guidelines previously delivered by CMA
to ISS as set forth in Section IV.A.
. If ISS is not sure how to vote a particular proxy, then
ISS will issue a request for voting instructions to CMA
over a secure website. CMA personnel shall check this
website regularly. The request shall be accompanied by a
recommended vote. The recommended vote shall be based
upon CMA's understanding of the Voting Guidelines
previously delivered to ISS. CMA shall promptly provide
ISS with any amendments or modifications to the Voting
Guidelines if necessary. CMA shall return a final
instruction to vote to ISS, which ISS shall record with
Proxy Edge or the custodian bank as our agent.
. Each time that ISS shall send CMA a request to vote the request
shall be accompanied by the recommended vote determined in
accordance with CMA's Voting Guidelines. ISS shall vote as
indicated in the request unless the client has reserved
discretion, the Proxy Committee determines that the best
interest of clients requires another vote or the proposal is a
matter as to which the Proxy Committee affords special,
individual consideration under Section IV.C. In such situations
ISS shall vote based on the direction of the client or the Proxy
Committee, as the case may be. The interests of CMA's Taft
Hartley or Socially Responsible clients may impact a proposal
that normally should be voted in a certain way. ISS shall inform
CMA of all proposals having impact on its Taft Hartley and or
Socially Responsible clients. The Proxy Voting Committee shall
be consulted before a vote is placed in cases where Taft Hartley
or Socially Responsible issues are presented.
95
. ISS shall have procedures in place to ensure that a vote is cast
on every security holding maintained by CMA on which a vote is
solicited unless otherwise directed by the Proxy Committee. On a
yearly basis, or as required by our clients CMA shall receive a
report from ISS detailing CMA's voting for the previous period.
VI. AVAILABILITY OF PROXY POLICY AND VOTING RECORD
A summary disclosure regarding the provisions of this Policy is available in
CMA's Form ADV. Upon receipt of a Client's request for more information, CMA
will provide to the Client a copy of this Policy and/or how CMA voted proxies
for the Client pursuant to this Policy for up to a one-year period.
96
LIBERTY GROWTH & INCOME FUND, VARIABLE SERIES
SUPPLEMENT TO THE STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2005
1. The following language is added to the chart following the
heading "Other Accounts Managed By Portfolio Managers" in the
section "More Facts About the Trust: Portfolio Managers":
Other SEC-registered
open-end and closed- Other pooled investment
Portfolio Manager end funds vehicles Other accounts
- -------------------- ----------------------- -------------------------- ----------------------
Number of Assets Number of Assets Number of Assets
accounts accounts accounts
- -------------------- ----------- ---------- ------------- ----------- ----------- ---------
Growth & Income Fund 11 $6.359 1 $97.1 2,053 $2.1
Lori J. Ensinger billion million billion
Growth & Income Fund 11 $6.359 1 $97.1 2,052 $2.1
David I. Hoffman billion million billion
Growth & Income Fund 11 $6.359 1 $97.1 2,050 $2.1
Noah J. Petrucci billion million billion
Growth & Income Fund 11 $6.359 1 $97.1 2,052 $2.1
Diane L. Sobin billion million billion
2. The following language is added to the chart following the
heading "Ownership of Securities" in the section "More Facts
About the Trust: Portfolio Managers":
Dollar Range of Equity Securities in the Fund
Portfolio Manager Beneficially Owned
- -------------------- ----------------------------------------------
Growth & Income Fund $0
Lori J. Ensinger
Growth & Income Fund $0
David I. Hoffman
Growth & Income Fund $0
Noah J. Petrucci
Growth & Income Fund $0
Diane L. Sobin
3. The following language is added to the chart following the
heading "Compensation" in the section "More Facts About the
Trust: Portfolio Managers":
Portfolio Manager Performance Benchmark
- -------------------- ----------------------------
Growth & Income Fund Russell 1000 Value Index
Lori J. Ensinger
Growth & Income Fund Russell 1000 Value Index
David I. Hoffman
Growth & Income Fund Russell 1000 Value Index
Noah J. Petrucci
Growth & Income Fund Russell 1000 Value Index
Diane L. Sobin
June 23, 2005
LIBERTY GROWTH & INCOME FUND, VARIABLE SERIES
SUPPLEMENT TO THE STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 1, 2005
1. The following language is added to the chart following the
heading "Other Accounts Managed By Portfolio Managers" in the
section "More Facts About the Trust: Portfolio Managers":
Other SEC-registered
open-end and closed- Other pooled investment
Portfolio Manager end funds vehicles Other accounts
- -------------------- ----------------------- -------------------------- ----------------------
Number of Assets Number of Assets Number of Assets
accounts accounts accounts
- -------------------- ----------- ---------- ------------- ----------- ----------- ---------
Growth & Income Fund 11 $6.359 1 $97.1 2,053 $2.1
Lori J. Ensinger billion million billion
Growth & Income Fund 11 $6.359 1 $97.1 2,052 $2.1
David I. Hoffman billion million billion
Growth & Income Fund 11 $6.359 1 $97.1 2,050 $2.1
Noah J. Petrucci billion million billion
Growth & Income Fund 11 $6.359 1 $97.1 2,052 $2.1
Diane L. Sobin billion million billion
2. The following language is added to the chart following the
heading "Ownership of Securities" in the section "More Facts
About the Trust: Portfolio Managers":
Dollar Range of Equity Securities in the Fund
Portfolio Manager Beneficially Owned
- -------------------- ----------------------------------------------
Growth & Income Fund $0
Lori J. Ensinger
Growth & Income Fund $0
David I. Hoffman
Growth & Income Fund $0
Noah J. Petrucci
Growth & Income Fund $0
Diane L. Sobin
3. The following language is added to the chart following the
heading "Compensation" in the section "More Facts About the
Trust: Portfolio Managers":
Portfolio Manager Performance Benchmark
- -------------------- ----------------------------
Growth & Income Fund Russell 1000 Value Index
Lori J. Ensinger
Growth & Income Fund Russell 1000 Value Index
David I. Hoffman
Growth & Income Fund Russell 1000 Value Index
Noah J. Petrucci
Growth & Income Fund Russell 1000 Value Index
Diane L. Sobin
June 24, 2005
Appendix B - Pro Forma Financial Statements
- B-1 -
PRO-FORMA COMBINING INVESTMENT PORTFOLIO
June 30, 2005 (unaudited)
Liberty Growth and Liberty Growth and
Nations Value Income Fund, Income Fund,
% of Net Portfolio Variable Series Variable Series
Assets Acquired Fund Acquiring Fund Pro-Forma Combined
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stocks 99.1% Shares Value ($) Shares Value ($) Shares Value ($)
-------- ---------- -------- ---------- -------- ----------
CONSUMER
DISCRETIONARY 9.2%
Auto
Components 0.1%
Johnson Controls, Inc. 7,200 405,576 - - 7,200 405,576
---------- ---------- ----------
Auto Components
Total 405,576 - 405,576
---------- ---------- ----------
Hotels,
Restaurants &
Leisure 1.8%
Carnival Corp. 8,100 441,855 - - 8,100 441,855
Harrah's Entertainment,
Inc. 9,900 713,493 12,778 920,910 22,678 1,634,403
McDonald's Corp. 13,984 388,056 82,621 2,292,733 96,605 2,680,789
Starwood Hotels &
Resorts Worldwide, Inc. 12,400 726,268 - - 12,400 726,268
---------- ---------- ----------
Hotels,
Restaurants &
Leisure Total 2,269,672 3,213,643 5,483,315
---------- ---------- ----------
Media 3.2%
Clear Channel
Communications, Inc. - - 18,172 562,060 18,172 562,060
Comcast Corp., Class A
(a) 22,400 687,680 35,767 1,098,047 58,167 1,785,727
McGraw-Hill Companies,
Inc. - - 63,796 2,822,973 63,796 2,822,973
News Corp., Class A 49,800 805,764 - - 49,800 805,764
Time Warner, Inc. (a) - - 152,211 2,543,446 152,211 2,543,446
Viacom, Inc., Class A - - 28,751 926,357 28,751 926,357
Viacom, Inc., Class B 12,500 400,250 - - 12,500 400,250
---------- ----------
Media Total 1,893,694 7,952,883 9,846,577
---------- ---------- ----------
Multiline
Retail 2.3% ----------
Federated Department
Stores, Inc. 11,700 857,376 43,204 3,165,989 54,904 4,023,365
J.C. Penney Co., Inc. 15,900 836,022 32,613 1,714,792 48,513 2,550,814
May Department Stores
Co. 10,500 421,680 - - 10,500 421,680
---------- ---------- ----------
Multiline Retail
Total 2,115,078 4,880,781 6,995,859
---------- ---------- ----------
Specialty
Retail 1.8%
Home Depot, Inc. - - 71,708 2,789,441 71,708 2,789,441
Limited Brands, Inc. - - 56,485 1,209,909 56,485 1,209,909
Sherwin-Williams Co. - - 19,700 927,673 19,700 927,673
Staples, Inc. 30,300 645,996 - - 30,300 645,996
---------- ---------- ----------
Specialty Retail
Total 645,996 4,927,023 5,573,019
---------- ---------- ----------
CONSUMER
DISCRETIONARY
TOTAL 7,330,016 20,974,330 28,304,346
------------ - ------------ -------------
CONSUMER
STAPLES 9.5%
Beverages 2.5%
Diageo PLC, ADR 19,700 1,168,210 25,857 1,533,320 45,557 2,701,530
PepsiCo, Inc. 16,918 912,388 74,602 4,023,286 91,520 4,935,674
---------- ---------- ----------
Beverages Total 2,080,598 5,556,606 - 7,637,204
---------- ---------- ----------
Food Products 1.4%
Cadbury Schweppes PLC 9,900 379,467 - - 9,900 379,467
Hershey Co. - - 32,980 2,048,058 32,980 2,048,058
Kraft Foods, Inc.,
Class A - - 63,925 2,033,454 63,925 2,033,454
---------- ---------- ----------
Food Products
Total 379,467 4,081,512 4,460,979
---------- ---------- ----------
Household
Products 2.1%
Clorox Co. - - 41,167 2,293,825 41,167 2,293,825
Kimberly-Clark Corp. 15,400 963,886 35,658 2,231,834 51,058 3,195,720
Procter & Gamble Co. - - 21,394 1,128,534 21,394 1,128,534
---------- ---------- ----------
Household
Products Total 963,886 5,654,193 6,618,079
---------- ---------- ----------
Personal
Products 0.9%
Gillette Co. - - 54,482 2,758,424 54,482 2,758,424
---------- ---------- ----------
Personal Products
Total - 2,758,424 2,758,424
---------- ---------- ----------
Tobacco 2.6%
Altria Group, Inc. 35,000 2,263,100 65,416 4,229,798 6,492,898
UST, Inc. 9,500 433,770 22,530 1,028,720 32,030 1,462,490
---------- ---------- ----------
Tobacco Total 2,696,870 5,258,518 7,955,388
---------- ---------- ----------
CONSUMER STAPLES
TOTAL 6,120,821 23,309,253 29,430,074
---------- ---------- ----------
ENERGY 13.0%
Energy
Equipment &
Services 1.4%
Halliburton Co. 18,400 879,888 25,724 1,230,122 44,124 2,110,010
Nabors Industries Ltd.
(a) 7,300 442,526 - - 7,300 442,526
Schlumberger Ltd. 6,800 516,392 16,930 1,285,664 23,730 1,802,056
---------- ---------- ----------
Energy Equipment
& Services Total 1,838,806 2,515,786 4,354,592
---------- ---------- ----------
Oil, Gas &
Consumable
Fuels 11.6%
BP PLC, ADR 12,600 785,988 74,682 4,658,663 87,282 5,444,651
ChevronTexaco Corp. 26,000 1,453,920 36,120 2,019,831 62,120 3,473,751
ConocoPhillips 9,400 540,406 126,886 7,294,676 136,286 7,835,082
EOG Resources, Inc. 8,700 494,160 - - 8,700 494,160
Exxon Mobil Corp. 61,000 3,505,670 176,894 10,166,098 237,894 13,671,768
Marathon Oil Corp. - - 31,333 1,672,242 31,333 1,672,242
Murphy Oil Corp. 7,200 376,056 - - 7,200 376,056
Occidental Petroleum
Corp. 13,900 1,069,327 - - 13,900 1,069,327
Royal Dutch Petroleum
Co., N.Y. Registered
Shares - - 19,271 1,250,688 19,271 1,250,688
Williams Companies, Inc. 42,400 805,600 - - 42,400 805,600
---------- ---------- ----------
Oil, Gas &
Consumable Fuels
Total 9,031,127 27,062,198 36,093,325
---------- ---------- ----------
ENERGY TOTAL
10,869,933 29,577,984 40,447,917
---------- ---------- ----------
FINANCIALS 29.3%
Capital
Markets 5.0%
A.G. Edwards, Inc. - - 13,642 615,936 13,642 615,936
Bank of New York Co.,
Inc. 30,100 866,278 100,491 2,892,131 130,591 3,758,409
Franklin Resources, Inc. - - 16,830 1,295,573 16,830 1,295,573
Goldman Sachs Group,
Inc. 8,600 877,372 27,451 2,800,551 36,051 3,677,923
Janus Capital Group,
Inc. - - 74,250 1,116,720 74,250 1,116,720
Merrill Lynch & Co.,
Inc. 32,025 1,761,695 30,064 1,653,821 62,089 3,415,516
Morgan Stanley 11,600 608,652 21,950 1,151,717 33,550 1,760,369
---------- ---------- ----------
Capital Markets
Total 4,113,997 11,526,449 15,640,446
---------- ---------- ----------
Commercial
Banks 8.5%
Marshall & Ilsey Corp. 21,200 942,340 14,681 652,570 35,881 1,594,910
National City Corp. - - 34,401 1,173,762 34,401 1,173,762
North Fork
Bancorporation, Inc. 21,600 606,744 20,761 583,177 42,361 1,189,921
PNC Financial Services
Group, Inc. 10,500 571,830 21,090 1,148,561 31,590 1,720,391
SunTrust Banks, Inc. 5,200 375,648 - - 5,200 375,648
U.S. Bancorp 60,737 1,773,520 161,209 4,707,303 221,946 6,480,823
UnionBanCal Corp. 9,500 635,740 - - 9,500 635,740
Wachovia Corp. 39,176 1,943,130 89,105 4,419,608 128,281 6,362,738
Wells Fargo & Co. 34,600 2,130,668 79,305 4,883,601 113,905 7,014,269
---------- ---------- ----------
Commercial Banks
Total 8,979,620 17,568,582 26,548,202
---------- ---------- ----------
Consumer
Finance 0.6%
MBNA Corp. - - 72,263 1,890,400 72,263 1,890,400
---------- ---------- ----------
Consumer Finance
Total - 1,890,400 1,890,400
---------- ---------- ----------
Diversified
Financial
Services 5.8%
CIT Group, Inc. 9,900 425,403 - - 9,900 425,403
Citigroup, Inc. 65,500 3,028,065 213,755 9,881,894 279,255 12,909,959
JPMorgan Chase & Co. - - 133,792 4,725,533 133,792 4,725,533
---------- ---------- ----------
Diversified
Financial
Services Total 3,453,468 14,607,427 18,060,895
---------- ---------- ----------
Insurance 6.2%
ACE Ltd. 13,100 587,535 - - 13,100 587,535
Allstate Corp. 9,900 591,525 23,517 1,405,141 33,417 1,996,666
Ambac Financial Group,
Inc. 9,100 634,816 24,176 1,686,518 33,276 2,321,334
American International
Group, Inc. - - 30,996 1,800,867 30,996 1,800,867
Chubb Corp. - - 17,000 1,455,370 17,000 1,455,370
Genworth Financial,
Inc., Class A (a) 27,600 834,348 - - 27,600 834,348
Hartford Financial
Services Group, Inc. 13,100 979,618 30,065 2,248,261 43,165 3,227,879
Lincoln National Corp. - - 63,436 2,976,417 63,436 2,976,417
St. Paul Travelers
Companies, Inc. 9,662 381,939 - - 9,662 381,939
Willis Group Holdings
Ltd. - - 32,795 1,073,052 32,795 1,073,052
XL Capital Ltd., Class A - - 35,233 2,622,040 35,233 2,622,040
---------- ---------- ----------
Insurance Total 4,009,781 15,267,666 19,277,447
---------- ---------- ----------
Real Estate 2.4%
Archstone-Smith Trust,
REIT 17,900 691,298 42,408 1,637,797 60,308 2,329,095
AvalonBay Communities,
Inc., REIT - - 19,585 1,582,468 19,585 1,582,468
Equity Office
Properties Trust, REIT 23,500 777,850 - - 23,500 777,850
Host Marriott Corp.,
REIT 39,700 694,750 - - 39,700 694,750
Kimco Realty Corp., REIT - - 28,873 1,700,908 28,873 1,700,908
ProLogis Trust, REIT 4,544 182,851 - - 4,544 182,851
---------- ---------- ----------
Real Estate Total 2,346,749 4,921,173 7,267,922
---------- ---------- ----------
Thrifts &
Mortgage
Finance 0.8%
Countrywide Financial
Corp. - - 33,342 1,287,335 33,342 1,287,335
Fannie Mae 10,100 589,840 - - 10,100 589,840
Golden West Financial
Corp. 9,300 598,734 - - 9,300 598,734
---------- ---------- ----------
Thrifts &
Mortgage Finance
Total 1,188,574 1,287,335 2,475,909
---------- ---------- ----------
FINANCIALS TOTAL
24,092,189 67,069,032 91,161,221
---------- ---------- ----------
HEALTH CARE 6.2%
Health Care
Equipment &
Supplies 0.5%
Bausch & Lomb, Inc. - - 8,312 689,896 8,312 689,896
Baxter International,
Inc. 12,600 467,460 - - 12,600 467,460
Hospira, Inc. (a) 10,380 404,820 - - 10,380 404,820
---------- ---------- ----------
Health Care
Equipment &
Supplies Total 872,280 689,896 1,562,176
---------- ---------- ----------
Health Care
Providers &
Services 1.7%
Aetna, Inc. 7,300 604,586 32,588 2,698,938 39,888 3,303,524
CIGNA Corp. 5,800 620,774 13,911 1,488,894 19,711 2,109,668
---------- ---------- ----------
Health Care
Providers &
Services Total 1,225,360 4,187,832 5,413,192
---------- ---------- ----------
Pharmaceuticals 4.0%
Abbott Laboratories 15,300 749,853 - - 15,300 749,853
AstraZeneca PLC 9,900 408,474 - - 9,900 408,474
GlaxoSmithKline PLC, ADR - - 24,323 1,179,909 24,323 1,179,909
Johnson & Johnson - - 28,668 1,863,420 28,668 1,863,420
Merck & Co., Inc. - - 62,340 1,920,072 62,340 1,920,072
Novartis AG, ADR 8,500 403,240 29,243 1,387,288 37,743 1,790,528
Pfizer, Inc. 48,940 1,349,765 110,005 3,033,938 158,945 4,383,703
---------- ---------- ----------
Pharmaceuticals
Total 2,911,332 9,384,627 12,295,959
---------- ---------- ----------
HEALTH CARE TOTAL 5,008,972 14,262,355 19,271,327
---------- ---------- ----------
INDUSTRIALS 12.4%
Aerospace &
Defense 3.6%
General Dynamics Corp. - - 29,522 3,233,840 29,522 3,233,840
Goodrich Corp. 18,900 774,144 - - 18,900 774,144
Honeywell
International, Inc. 20,900 765,567 - - 20,900 765,567
Northrop Grumman Corp. 13,000 718,250 - - 13,000 718,250
United Technologies
Corp. 22,550 1,157,942 88,380 4,538,313 110,930 5,696,255
---------- ---------- ----------
Aerospace &
Defense Total 3,415,903 7,772,153 11,188,056
---------- ---------- ----------
Building
Products 0.1%
American Standard
Companies, Inc. 10,800 452,736 - - 10,800 452,736
---------- ---------- ----------
Building Products
Total 452,736 - 452,736
---------- ---------- ----------
Commercial
Services &
Supplies 1.7%
Cendant Corp. - - 53,697 1,201,202 53,697 1,201,202
Republic Services, Inc. - - 20,959 754,734 20,959 754,734
Waste Management, Inc. 27,800 787,852 87,837 2,489,300 115,637 3,277,152
---------- ---------- ----------
Commercial
Services &
Supplies Total 787,852 4,445,236 5,233,088
---------- ---------- ----------
Construction
& Engineering 0.1%
Fluor Corp. 3,500 201,565 - - 3,500 201,565
---------- ---------- ----------
Construction &
Engineering Total 201,565 - 201,565
---------- ---------- ----------
Industrial
Conglomerates 4.8%
General Electric Co. 21,700 751,905 275,788 9,556,054 297,488 10,307,959
Textron, Inc. - - 58,913 4,468,551 58,913 4,468,551
---------- ---------- ----------
Industrial
Conglomerates
Total 751,905 14,024,605 14,776,510
---------- ---------- ----------
Machinery 1.7%
Caterpillar, Inc. 6,900 657,639 - - 6,900 657,639
Deere & Co. 9,000 589,410 25,050 1,640,524 34,050 2,229,934
Eaton Corp. 5,600 335,440 27,314 1,636,109 32,914 1,971,549
Ingersoll-Rand Co.,
Class A 8,900 635,015 - - 8,900 635,015
---------- ---------- ----------
Machinery Total 2,217,504 3,276,633 5,494,137
---------- ---------- ----------
Road & Rail 0.4%
Burlington Northern
Santa Fe Corp. 11,300 532,004 - - 11,300 532,004
Union Pacific Corp. 9,100 589,680 - - 9,100 589,680
---------- ---------- ----------
Road & Rail Total 1,121,684 - 1,121,684
---------- ---------- ----------
INDUSTRIALS TOTAL 8,949,149 29,518,627 38,467,776
---------- ---------- ----------
INFORMATION
TECHNOLOGY 5.3%
Communications
Equipment 0.6%
Cisco Systems, Inc. (a) - - 33,501 640,204 33,501 640,204
Nokia Oyj, ADR - - 77,644 1,291,996 77,644 1,291,996
---------- ---------- ----------
Communications
Equipment Total - 1,932,200 - 1,932,200
---------- ---------- ----------
Computers &
Peripherals 1.9%
Dell, Inc. (a) 4,900 193,599 - - 4,900 193,599
Hewlett-Packard Co. 36,000 846,360 - - 36,000 846,360
International Business
Machines Corp. 14,200 1,053,640 26,851 1,992,344 41,051 3,045,984
Lexmark International,
Inc., Class A (a) - - 28,863 1,871,189 28,863 1,871,189
---------- ---------- ----------
Computers &
Peripherals Total 2,093,599 3,863,533 5,957,132
---------- ---------- ----------
Electronic
Equipment &
Instruments 0.1%
Agilent Technologies,
Inc. (a) 18,400 423,568 - - 18,400 423,568
---------- ---------- ----------
Electronic
Equipment &
Instruments Total 423,568 - 423,568
---------- ---------- ----------
IT Services 1.2%
Accenture Ltd., Class A
(a) - - 115,183 2,611,198 115,183 2,611,198
Automatic Data
Processing, Inc. - - 27,377 1,149,013 27,377 1,149,013
---------- ---------- ----------
IT Services Total - 3,760,211 3,760,211
---------- ---------- ----------
Office
Electronics 0.5%
Xerox Corp. (a) - - 110,678 1,526,250 110,678 1,526,250
---------- ---------- ----------
Office
Electronics Total - 1,526,250 1,526,250
---------- ---------- ----------
Semiconductors
&
Semiconductor
Equipment 0.4%
Fairchild Semiconductor
International, Inc.,
Class A (a) 22,600 333,350 - - 22,600 333,350
Intel Corp. 7,600 198,056 25,675 669,091 33,275 867,147
---------- ---------- ----------
Semiconductors &
Semiconductor
Equipment Total 531,406 669,091 1,200,497
---------- ---------- ----------
Software 0.6%
Microsoft Corp. - - 72,372 1,797,720 72,372 1,797,720
---------- ---------- ----------
Software Total - 1,797,720 1,797,720
---------- ---------- ----------
INFORMATION
TECHNOLOGY TOTAL 3,048,573 13,549,005 16,597,578
---------- ---------- ----------
MATERIALS 4.5%
Chemicals 2.2%
Air Products &
Chemicals, Inc. - - 69,327 4,180,418 69,327 4,180,418
Ashland, Inc. 5,800 416,846 - - 5,800 416,846
Dow Chemical Co. 12,600 561,078 - - 12,600 561,078
PPG Industries, Inc. 5,600 351,456 13,597 853,348 19,197 1,204,804
Rohm and Haas Co. 12,400 574,616 - - 12,400 574,616
---------- ---------- ----------
Chemicals Total 1,903,996 5,033,766 6,937,762
---------- ---------- ----------
Containers &
Packaging 0.2%
Bemis Co., Inc. 25,300 671,462 - - 25,300 671,462
---------- ---------- ----------
Containers &
Packaging Total 671,462 - 671,462
---------- ---------- ----------
Metals &
Mining 0.4%
Alcoa, Inc. 7,000 182,910 - - 7,000 182,910
Freeport-McMoRan Copper
& Gold, Inc., Class B 20,200 756,288 - - 20,200 756,288
Nucor Corp. 7,200 328,464 - - 7,200 328,464
---------- ---------- ----------
Metals & Mining
Total 1,267,662 - 1,267,662
---------- ---------- ----------
Paper &
Forest
Products 1.7%
MeadWestvaco Corp. - - 94,931 2,661,865 94,931 2,661,865
Weyerhaeuser Co. 9,400 598,310 31,155 1,983,016 40,555 2,581,326
---------- ---------- ----------
Paper & Forest
Products Total 598,310 4,644,881 5,243,191
---------- ---------- ----------
MATERIALS TOTAL
4,441,430 9,678,647 14,120,077
---------- ---------- ----------
TELECOMMUNICATION
SERVICES 4.3%
Diversified
Telecommunication
Services 4.3%
BellSouth Corp. 24,400 648,308 69,709 1,852,168 94,109 2,500,476
SBC Communications, Inc. 41,099 976,101 202,285 4,804,269 243,384 5,780,370
Verizon Communications,
Inc. 35,500 1,226,525 108,845 3,760,595 144,345 4,987,120
---------- ---------- ----------
Diversified
Telecommunication
Services Total 2,850,934 10,417,032 13,267,966
---------- ---------- ----------
TELECOMMUNICATION
SERVICES TOTAL 2,850,934 10,417,032 13,267,966
---------- ---------- ----------
UTILITIES 5.4%
Electric
Utilities 3.9%
American Electric Power
Co., Inc. - - 34,677 1,278,541 34,677 1,278,541
Entergy Corp. 13,800 1,042,590 34,619 2,615,466 48,419 3,658,056
Exelon Corp. 25,200 1,293,516 42,758 2,194,768 67,958 3,488,284
FPL Group, Inc. - - 31,570 1,327,834 31,570 1,327,834
PG&E Corp. 22,800 855,912 38,830 1,457,678 61,630 2,313,590
---------- ---------- ----------
Electric
Utilities Total 3,192,018 8,874,287 12,066,305
---------- ---------- ----------
Independent
Power
Producers &
Energy Traders 0.9%
Duke Energy Corp. 37,600 1,117,848 - - 37,600 1,117,848
TXU Corp. - - 20,853 1,732,676 20,853 1,732,676
---------- ---------- ----------
Independent Power
Producers &
Energy Traders 1,117,848 1,732,676 2,850,524
---------- ---------- ----------
Multi-Utilities 0.6%
Dominion Resources, Inc. 11,000 807,290 16,301 1,196,330 27,301 2,003,620
---------- ---------- ----------
Multi-Utilities 807,290 1,196,330 2,003,620
---------- ---------- ----------
UTILITIES TOTAL
5,117,156 11,803,293 16,920,449
---------- ---------- ----------
Total Common Stocks 77,829,173 230,159,558 307,988,731
---------- ---------- ----------
Investment
Company 0.2%
iShares Russell 1000
Value Index Fund - - 10,917 727,509 10,917 727,509
---------- ---------- ----------
Total Investment Company - 727,509 727,509
---------- ---------- ----------
CONVERTIBLE
PREFERRED
STOCKS 0.1% Par ($) Par ($) Par ($)
-------- -------- --------
FINANCIALS 0.1%
Insurance 0.1%
Genworth Financial, Inc. 8,200 281,670 - - 8,200 281,670
---------- ---------- ----------
Total Preferred Stock 281,670 - 281,670
---------- ---------- ----------
SHORT-TERM
OBLIGATIONS 0.5% - -
Repurchase agreement
with State Street Bank
& Trust Co., dated
06/30/05, due 07/01/05
at 2.700%,
collateralized by a
U.S. Treasury Bond
maturing 05/05/17,
market value of
$173,100 (repurchase
proceeds $169,013) - - 169,000 169,000 169,000 169,000
----------
Repurchase agreement
with State Street Bank
& Trust Co., dated
06/30/05, due 07/01/05
at 3.100%,
collateralized by a
U.S. Government Agency
Bond maturing 07/15/17,
market value of
$1,226,925 (repurchase
proceeds $1,201,103) 1,201,000 1,201,000 1,201,000 1,201,000
---------- -----------
Short-Term
Obligations Total - 1,201,000 169,000 1,370,000
---------- ---------- ---------- -----------
Pro-Forma
Adjustment
Total Investments 99.9% 79,311,843 231,056,067 310,367,910
Other Assets &
Liabilities, Net 0.1% 364,391 11,885 (8,206) 368,070
---------------------------------------------------------------------------------------------------------------------
Net Assets 100.0%
79,676,234 231,067,952 310,735,980
=========== ============ ===========
Total Investments at
Cost 68,380,463(b) 197,178,080(c) 265,558,543
=========== ============ ===========
Notes to Investment
Portfolio:
---------------------------------------------------------------------------------------------------------------------
(a) Non-income producing security.
(b) Cost for federal income tax purposes is $68,380,463.
(c) Cost for federal income tax purposes is $197,178,080.
Acronym Name
----------------------------------------------------
ADR American Depositary Receipt
REIT Real Estate Investment Trust
PRO-FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES
June 30, 2005 (unaudited)
Liberty Growth and Liberty Growth and
Nations Income Fund, Income Fund,
Value Portfolio Variable Series Variable Series
Pro-Forma Pro-Forma
Assets: Acquired Fund Acquiring Adjustments Combined
--------------- --------------- ------------- ---------------
Investments, at cost $ 68,380,463 $ 197,178,080 $ - $ 265,558,543
Affiliated Investments, at cost - - - -
--------------- --------------- ------------- ---------------
Investments, at value $ 79,311,843 $ 231,056,067 $ - $ 310,367,910
Affiliated Investments, at value - - - -
Cash 304 49 - 353
Receivable for: -
Investments sold 492,135 - - 492,135
Fund shares sold 88,786 23,423 - 112,209
Interest 338 13 - 351
Dividends 141,252 396,882 - 538,134
Expense reimbursement due from Investment
Advisor/Distributor - 9,381 9,381
Deferred Trustees' compensation plan - 19,719 - 19,719
Other assets 123 - - 123
--------------- --------------- ------------- ---------------
Total Assets 80,034,781 231,505,534 - 311,540,315
--------------- --------------- ------------- ---------------
Liabilities:
Payable for:
Investments purchased 182,505 - - 182,505
Fund shares repurchased 18,539 212,160 - 230,699
Investment advisory fee 34,510 149,353 - 183,863
Transfer agent fee - 595 - 595
Pricing and bookkeeping fees - 5,409 - 5,409
Distribution fee - Class B - 9,945 - 9,945
Deferred Trustees' fees - 19,719 - 19,719
Other liabilities 122,993 40,401 8,206(b) 171,600
--------------- --------------- ------------- ---------------
Total Liabilities 358,547 437,582 8,206 804,335
--------------- --------------- ------------- ---------------
Net Assets $ 79,676,234 $ 231,067,952 $ (8,206)(b) $ 310,735,980
=============== =============== ============= ===============
Composition of Net Assets:
Paid-in capital $ 64,958,237 $ 238,582,700 $ - $ 303,540,937
Undistributed net investment income 553,800 1,934,808 (8,206)(b) 2,480,402
Accumulated net realized gain (loss) 3,232,817 (43,327,543) - (40,094,726)
Net unrealized appreciation on investments 10,931,380 33,877,987 - 44,809,367
--------------- --------------- ------------- ---------------
Net Assets $ 79,676,234 $ 231,067,952 $ (8,206)(b) $ 310,735,980
=============== =============== ============= ===============
Class A: (a)
Net assets $ 79,676,234 $ 187,141,158 $ (8,206)(b) $ 266,809,186
Shares outstanding 6,624,887 11,755,869 (1,620,286) 16,760,470
=============== =============== ============= ===============
Net asset value per share $ 12.03 $ 15.92 - $ 15.92
=============== =============== ============= ===============
Class B:
Net assets $ - $ 43,926,794 $ - $ 43,926,794
Shares outstanding - 2,765,523 - 2,765,523
=============== =============== ============= ===============
Net asset value per share $ - $ 15.88 - $ 15.88
=============== =============== ============= ===============
(a) Shares of Nations Value Portfolio are exchanged for Class A shares of
Liberty Growth and Income Fund, Variable Series, based on the net asset
value per share of Liberty Growth and Income Fund's Class A shares at the
time of the merger.
(b) Adjustment reflects one time proxy, accounting, legal and other costs of
the reorganization as approved by the Board of Trustees of $20,250 and $0
to be borne by Nations Value Portfolio and Liberty Growth and Income Fund,
Variable Series, respectively. At June 30, 2005, before pro-forma
adjustments, $12,044 of merger related costs had been accrued by Nations
Value Portfolio.
PRO-FORMA COMBINING STATEMENTS OF OPERATIONS
For the Twelve Months Ended June 30, 2005 (unaudited)
Nations Liberty Growth Liberty Growth
Value and Income Fund, and Income Fund,
Portfolio Variable Series Variable Series
Pro-Forma Pro-Forma
Acquired Fund Acquiring Adjustments Combined
-------------- ------------ -------------- ---------------
Investment Income:
Dividends $ 1,714,883 $ 6,226,618 $ - $ 7,941,501
------------ ------------ ------------ ------------
Dividends from affiliates 25,314 - - 25,314
Interest 372 9,687 - 10,059
Securities lending 1,175 - - 1,175
Foreign taxes withheld (4,911) (44,215) - (49,126)
------------ ------------ ------------ ------------
Total Investment Income 1,736,833 6,192,090 - 7,928,923
------------ ------------ ------------ ------------
Expenses:
Investment advisory fee 427,330 1,904,842 108,044 2,440,216(a)
Administration fee 166,054 - (166,054) -(a)
Distribution fee 180,523 112,193 (180,523) 112,193(a)
Transfer agent fee 16,089 7,491 (23,249) 331(f)
Pricing and bookkeeping fees - 69,291 17,098 86,389(c)
Trustees' fees 26,560 11,065 (8,853) 28,772(b)
Custody fee 10,286 20,532 - 30,818
Non-recurring costs (See Note 5) - 4,639 - 4,639
Other expenses 90,163 71,620 (28,695) 133,088(b)
------------ ------------ ------------ ------------
Total Operating Expenses 917,005 2,201,673 (282,232) 2,836,446
Fees and expenses waived or reimbursed by
Investment Advisor (27,917) (184,576) 28,296 (184,197)(d)
Fees waived by Distributor (180,523) (8,975) 180,523 (8,975)(e)
Custody earnings credit (27) (102) - (129)
Non-recurring cost assumed by Investment
Advisor (See Note 5) - (4,639) - (4,639)
------------ ------------ ------------ ------------
Net Expenses 708,538 2,003,381 (73,413) 2,638,506
------------ ------------ ------------ ------------
Net Investment Income 1,028,295 4,188,709 73,413 5,290,417
------------ ------------ ------------ ------------
Net Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments 3,989,162 22,847,167 - 26,836,329
Net change in unrealized appreciation (depreciation) on
investments 3,957,973 (4,154,847) - (196,874)
------------ ------------ ------------ ------------
Net Gain 7,947,135 18,692,320 - 26,639,455
------------ ------------ ------------ ------------
Net Increase in Net Assets from Operations $ 8,975,430 $ 22,881,029 $ 73,413 $ 31,929,872
------------ ------------ ------------ ------------
(a) Based on the contract in effect for the Liberty Growth and Income Fund,
Variable Series, the surviving fund.
(b) Reflects elimination of duplicate expenses achieved as a result of merging
funds.
(c) Adjustment to realign Nations Value Portfolio's fees to Liberty Growth and
Income Fund, Variable Series.
(d) Based on voluntary fee waiver currently in effect for Liberty Growth and
Income Fund, Variable Series, the surviving fund.
(e) Based on voluntary fee waiver currently in effect for Liberty Growth and
Income Fund, Variable Series, the surviving fund.
(f) Reflects the impact of changes to the transfer agent fee structure that
have been implemented prior to consummation of the merger.
Capitalization
The following table shows on an unaudited basis the capitalization of the
Nations Value Portfolio and the Liberty Growth and Income Fund, Variable Series
as of October 31, 2005, and on a pro forma combined basis, giving effect to the
acquisition of the assets and liabilities of the Nations Value Portfolio by the
Liberty Growth and Income Fund, Variable Series at net asset value as of that
date:
Liberty Growth and
Liberty Growth and Income Fund,
Income Fund, Variable Series
Nations Variable Series Pro Forma Pro Forma
Value Portfolio (Acquiring Fund) Adjustments Combined(1)
------------------- ------------------- ----------------- -------------------
Class A
Net asset value $ 80,411,486(2) $ 171,300,507(2) $ 0(3) $ 251,711,993
Shares outstanding 6,582,944 10,614,462 (1,602,074)(3) 15,596,586
Net asset value per share $ 12.22 $ 16.14 $ 16.14
Class B
Net asset value $ - $ 41,597,296 $ - $ 41,597,296
Shares outstanding - 2,585,258 - 2,585,258
Net asset value per share $ - $ 16.09 $ 16.09
(1) Assumes the Acquisition was consummated on October 31, 2005 and is for
information purposes only. No assurance can be given as to how many shares of
the Liberty Growth and Income Fund, Variable Series will be received by the
shareholders of the Nations Value Portfolio on the date the Acquisition takes
place, and the foregoing should not be relied upon to reflect the number of
shares of the Liberty Growth and Income Fund, Variable Series that actually will
be received on or after such date.
(2) One time proxy, accounting, legal and other costs of the reorganization as
approved by the Board of Trustees of $20,250 and $0 have been borne by Nations
Value Portfolio and Liberty Growth and Income Fund, Variable Series,
respectively.
(3) Shares of Nations Value Portfolio are exchanged for Class A shares of
Liberty Growth and Income Fund, Variable Series, based on the net asset value
per share of Liberty Growth and Income Fund, Variable Series' Class A shares at
the time of the merger.
LIBERTY GROWTH AND INCOME FUND, VARIABLE SERIES
AND
NATIONS VALUE PORTFOLIO
PRO FORMA COMBINING FINANCIAL STATEMENTS
Notes to Financial Statements
June 30, 2005
(unaudited)
Note 1. Organization
Liberty Growth and Income Fund, Variable Series (the "Acquiring Fund"),
a series of Liberty Variable Investment Trust (the "Trust"), is a Massachusetts
business trust registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company. Nations Value Portfolio ("Acquired
Fund"), a series of Nations Separate Account Trust, is a Delaware statutory
trust registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
Investment Goal
The Acquiring Fund seeks long-term growth and income. The Acquired Fund seeks
growth of capital by investing in companies that are believed to be undervalued.
Fund Shares
The Acquiring Fund and the Acquired Fund each may issue an unlimited number of
shares. The Acquiring Fund offers two classes of shares: Class A Shares and
Class B Shares. The Acquired Fund offers one series of shares. Shares of each
Fund are available exclusively for variable annuity contracts and variable life
insurance policies offered by the separate accounts of certain life insurance
companies.
Note 2. Basis of Combination
The accompanying pro-forma financial statements are presented to show the effect
of the proposed merger of the Acquired Fund by the Acquiring Fund as if such
merger had occurred on July 1, 2005. The following notes refer to the
accompanying pro-forma financial statements of such proposed merger.
Under the terms of the merger, the combination of the Acquired Fund and
Acquiring Fund will be accounted for by the method of accounting for tax-free
mergers of investment companies. The merger will be accomplished by a
combination of the net assets of the Acquired Fund into the Acquiring Fund in
exchange for new shares of the Acquiring Fund at net asset value.
The Pro Forma Investment Portfolio and Pro Forma Statement of Assets and
Liabilities of the Acquired Fund and Acquiring Fund have been combined to
reflect balances as of June 30, 2005. The Pro Forma Statement of Operations of
the Acquired Fund and Acquiring Fund has been combined to reflect six months
ended June 30, 2005. Columbia Management Advisors, Inc. expects that all of the
securities held by the Acquired Fund as of June 30, 2005, would comply with the
compliance guidelines and/or investment restrictions of the Acquiring Fund.
Following the merger the Acquiring Fund will be the accounting survivor. In
accordance with accounting principles generally accepted in the United States of
America, the historical cost of investment securities will be carried forward to
the Acquiring Fund and the results of operations for pre-combined periods will
not be re-stated.
1
The accompanying pro-forma financial statements should be read in conjunction
with the financial statements of the Acquiring Fund and the Acquired Fund
included within their respective annual shareholder reports dated December 31,
2004, as well as the semi-annual shareholder reports dated June 30, 2005.
Note 3. Significant Accounting Policies
Both the Acquiring Fund and the Acquired Fund have substantially the same
accounting policies which are detailed in the semi-annual reports referenced
above in Note 2.
Federal Income Tax Status
The Fund intends to qualify each year as a "regulated investment company" under
Subchapter M of the Internal Revenue Code, as amended, and will distribute
substantially all of its taxable income, if any, for its tax year, and as such
will not be subject to federal income taxes. In addition, the Fund intends to
distribute in each calendar year substantially all of its net investment income,
capital gains and certain other amounts, if any, such that the Fund should not
be subject to federal excise tax. Therefore, no federal income or excise tax
provision is recorded.
Indemnifications
In the normal course of business, the Fund enters into contracts that contain a
variety of representations and warranties and which provide general indemnities.
The Fund's maximum exposure under these arrangements is unknown, as this would
involve future claims against the Fund that have not yet occurred. Also, under
the Trust's organizational documents, the Trustees and officers of the Trust are
indemnified against certain liabilities that may arise out of their duties to
the Trust. However, based on experience, the Fund expects the risk of loss due
to these warranties and indemnities to be minimal.
Note 4. Fees and Compensations Paid to Affiliates
Investment advisory fees, administration fees and related party transactions are
detailed in the semi-annual report referenced above in Note 2.
Note 5. Capital Shares
The pro-forma combining net asset value per share assumes the issuance of
Acquiring Fund shares to Acquired Fund shareholders in connection with the
proposed merger. The number of shares assumed to be issued is equal to the net
asset value of the Acquired Fund divided by the net asset value per share of the
Acquiring Fund as of June 30, 2005. The pro-forma number of shares outstanding,
by class, for the combined entity consists of the following at June 30, 2005.
Shares of Additional Shares Total Shares
Acquiring Fund Assumed Issued Outstanding
Class of Shares Pre-Combination with Merger Post Combination
- --------------- --------------- ----------------- -----------------
Class A Shares 11,755,869 5,004,601 16,760,470
Class B Shares 2,765,523 - 2,765,523
2
Note 6. Legal Proceedings
On March 15, 2004, Columbia Management and CMD the distributor of the
Fund's shares (collectively, "Columbia"), entered into agreements in principle
with the staff of the U.S. Securities and Exchange Commission ("SEC") and the
Office of the New York Attorney General ("NYAG") to resolve the proceedings
brought in connection with the SEC's and NYAG's investigations of frequent
trading and market timing in certain Columbia mutual funds.
On February 9, 2005, Columbia entered into an Assurance of Discontinuance
with the NYAG (the "NYAG Settlement") and consented to the entry of a
cease-and-desist order by the SEC (the "SEC Order" and together, the
"Settlements"). The Settlements contain substantially the same terms and
conditions as outlined in the agreements in principle.
Under the terms of the SEC Order, Columbia has agreed, among other things,
to: pay $70 million in disgorgement and $70 million in civil money penalties;
cease and desist from violations of the antifraud provisions and certain other
provisions of the federal securities laws; maintain certain compliance and
ethics oversight structures; retain an independent consultant to review
Columbia's applicable supervisory, compliance, control and other policies and
procedures; and retain an independent distribution consultant (see below). The
Funds have also voluntarily undertaken to implement certain governance measures
designed to maintain the independence of their boards of trustees. The NYAG
Settlement also, among other things, requires Columbia and its affiliates Banc
of America Capital Management, LLC and BACAP Distributors, LLC to reduce
Columbia Funds, Nations Funds and other mutual fund management fees collectively
by $32 million per year for five years, for a projected total of $160 million in
management fee reductions.
Pursuant to the procedures set forth in the SEC Order, the settlement
amounts will be distributed in accordance with a distribution plan to be
developed by an independent distribution consultant who is acceptable to the SEC
staff and the Columbia Funds' independent trustees. The distribution plan must
be based on a methodology developed in consultation with Columbia and the Fund's
independent trustees and not unacceptable to the staff of the SEC. More specific
information on the distribution plan will be communicated at a later date.
As a result of these matters or any adverse publicity or other developments
resulting from them, including lawsuits brought by shareholders of the affected
Columbia Funds, there may be increased redemptions or reduced sales of Fund
shares, which could increase transaction costs or operating expenses, or have
other adverse consequences for the Columbia Funds.
A copy of the SEC Order is available on the SEC's website at
http://www.sec.gov. A copy of the NYAG Settlement is available as part of the
Bank of America Corporation Form 8-K filing filed on February 10, 2005.
In connection with the events described in detail above, various parties
have filed suit against certain funds, the Trustees off the Columbia Funds,
FleetBoston Financial Corporation and its affiliated entities and/or Bank of
America and its affiliated entities. More than 300 cases including those filed
against entities unaffiliated with the funds, their Boards, FleetBoston
Financial Corporation and its affiliated entities and/or Bank of America and its
affiliated entities have been transferred to the Federal District Court in
Maryland and consolidated in a multi-district proceeding (the "MDL").
The derivative cases purportedly brought on behalf of the Columbia Funds in
the MDL have been consolidated under the lead case. The fund derivative
plaintiffs allege that the funds were harmed by market timing and late trading
activity and seek, among other things, the removal of the trustees of the
Columbia Funds, removal of the Columbia Group, disgorgement of all management
fees and monetary damages.
On March 21, 2005 purported class action plaintiffs filed suit in
Massachusetts state court alleging that the conduct, including market timing,
entitles Class B shareholders in certain Columbia funds to an exemption from
contingent deferred sales charges upon early redemption ("the CDSC Lawsuit").
The CDSC Lawsuit has been removed to federal court in Massachusetts and the
federal Judicial Panel has conditionally order its transfer to the MDL.
The MDL is ongoing. Accordingly, an estimate of the financial impact of
this litigation on any Fund, if any, cannot currently be made.
In 2004, certain Columbia funds, advisers and affiliated entities were
named as defendants in certain purported shareholder class and derivative
actions making claims, including claims under the Investment Company and the
Investment Advisers Acts of 1940 and state law. The suits allege, inter alia,
that the fees and expenses paid by the funds are excessive and that the advisers
and their affiliates inappropriately used fund assets to distribute the funds
and for other improper purpose. On March 2, 2005, the actions were consolidated
in the Massachusetts federal court as In re Columbia Entities Litigation. The
plaintiffs filed a consolidated amended complaint on June 9, 2005. On November
30, 2005, the judge dismissed all claims by plaintiffs and ordered that the case
be closed.
3
PART C. OTHER INFORMATION
Item 15. Indemnification
See Article Tenth of the Amended and Restated Agreement and Declaration of Trust
filed as Exhibit 1 hereto.
The Registrant's investment adviser, Columbia Management Advisors, Inc.,
maintains investment advisory professional liability insurance to insure it, for
the benefit of the Trust and its non-interested trustees, against loss arising
out of any effort, omission, or breach of any duty owed to the Trust or any Fund
by Columbia Management Advisers, Inc.
Item 16. Exhibits
(1) Amended and Restated Agreement and Declaration of Trust dated
May 23, 2000. (1)
(2) Amended and Restated By-Laws dated August 11,2004. (2)
(3) Not applicable.
(4) Form of Agreement and Plan of Reorganization- Filed as Exhibit A
to Part A of this Registration Statement.
(5) Article IV, Paragraph D; Article V; Article VI, Section II,
Paragraph 2.06; Article VIII, Paragraph A; Article X, Paragraph
D; and Article XII of the Amended and Restated Agreement and
Declaration of Trust, and Article VI and Article IX of the
By-laws, as amended, each define the rights of the shareholders.
(1) (2)
(6) Management Agreement dated November 1, 2003 between the
Registrant and Columbia Management Advisors, Inc. ("Columbia"),
with respect to Liberty Growth and Income Fund, Variable Series.
(3)
(7) Underwriting Agreement dated August 15, 1997, as amended June
18, 1999 between the Registrant and Columbia Funds Distributor,
Inc. (4)
(8) Not applicable.
(9)(a) Form of Custodian Contract between Registrant and State Street
Bank and Trust Company dated October 10, 2001 - filed as Exhibit
(g) in Part C, Item 23(b) of Post-Effective Amendment No. 56 to
the Registration Statement on Form N-1A of Columbia Funds Trust
II (filed under former name Liberty Funds Trust II) (File Nos.
2-66976 and 811-3009), filed with the Commission on or about
October 26, 2001, and is hereby incorporated by reference and
made a part of this Registration Statement.
(9)(b) Appendix A to Custodian Contract between Registrant and State
Street
Corporation (formerly named State Street Bank and Trust
Company)- filed as Exhibit (j)(2) in part C, Item 24(2) of
Post-Effective Amendment No. 6 to the Registration Statement on
Form N-2 of Columbia Floating Rate Fund (File Nos. 333-51466 &
811-8953), filed with the Commission on or about December 17,
2003, and is hereby incorporated by reference and made a part of
this Registration Statement.
(9)(c) 12b-1 Plan Implementing Agreement between the Registrant and
Columbia Funds Distributor, Inc. dated June 1, 1999, as amended
May 30, 2000. (5)
(9)(d) Appendix 1 of 12b-1 Plan Implementing Agreement Dated April 14,
2003. (6)
(10) Rule 12b-1 Distribution Plan dated June 1, 1999, as amended May
30, 2000 and April 14, 2003. (6)
(11)(a) Opinion of Ropes & Gray LLP - filed herewith
(11)(b) Consent of Ropes & Gray LLP - filed herewith
(12) Opinion of Ropes & Gray LLP - to be filed by amendment
(13)(a) Amended and Restated Pricing and Bookkeeping Agreement between
the Registrant and Columbia Management Advisors, Inc. (6)
(13)(b) Joinder and Release Agreement with respect to transfer Agency
Agreement dated as of January 3, 1995 among the Liberty variable
Investment Trust, Liberty Investment Services, Inc. and Columbia
Funds Services, Inc. (formerly named Liberty Funds Services,
Inc.) (including form of Transfer Agency Agreement and Amendment
No. 1 thereto). (4)
(13)(c) Amendment No. 2 to Transfer Agency Agreement dated May 1, 1995.
(4)
(13)(b) Amendment No. 3 to Transfer Agency Agreement dated November 15,
1997. (4)
(13)(d) Amendment No. 4 to Transfer Agency Agreement dated April 14,
2003. (6)
(13)(e) Form of Participation Agreement. (5)
(14) Consent of Independent Registered Public Accounting Firm -
filed herewith
(15) Not applicable.
(16) Power of Attorney - Filed herewith.
(17) Not Applicable.
**************************
1. Incorporated by reference to Post-Effective Amendment No. 23 to the
Registrant's registration statement on Form N-1A filed June 1, 2000.
2. Incorporated by reference to Post-Effective Amendment No. 33 to the
Registrant's registration statement on Form N-1A filed May 1, 2005.
3. Incorporated by reference to Post-Effective Amendment No. 31 to the
Registrant's registration statement on Form N-1A filed April 20, 2004.
4. Incorporated by reference to Post-Effective Amendment No. 17 to the
Registrant's registration statement on Form N-1A filed April 16, 1999.
5. Incorporated by reference to Post-Effective Amendment No. 22 to the
Registrant's registration statement on Form N-1A filed May 30, 2000.
6. Incorporated by reference to Post-Effective Amendment No. 29 to the
Registrant's registration statement on Form N-1A filed April 11, 2003.
Item 17. Undertakings
(1) The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part
of this registration statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the
applicable registration form for the reofferings by persons who may be
deemed underwriters, in addition to the information called for by the other
items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed under
paragraph above will be filed as a part of an amendment to the registration
statement and will not be used until the amendment is effective, and that,
in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the
securities offered therein, and the offering of the securities at that time
shall be deemed to be the initial bona fide offering of them.
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the Registrant, Liberty Variable
Investment Trust, in the City of Boston and The Commonwealth of Massachusetts,
on the 21st day of December, 2005.
LIBERTY VARIABLE INVESTMENT TRUST
By: /s/ Christopher L. Wilson
----------------------------
Name: Christopher L. Wilson
Title: President
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in their capacities and on
the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Christopher L. Wilson
- ---------------------------
Christopher L. Wilson President (Chief Executive December 12, 2005
Officer)
/s/ J. Kevin Connaughton
- ---------------------------
J. Kevin Connaughton Treasurer (Principal December 21, 2005
Financial Officer)
/s/ Michael G. Clarke
- ---------------------------
Michael G. Clarke Chief Accounting Officer December 21, 2005
(Principal Accounting
Officer)
/s/ Douglas A. Hacker*
- ---------------------------
Douglas A. Hacker Trustee December 21, 2005
/s/ Janet Langford Kelly*
- ---------------------------
Janet Langford Kelly Trustee December 21, 2005
/s/ Richard W. Lowry*
- ---------------------------
Richard W. Lowry Trustee December 21, 2005
/s/ William E. Mayer*
- ---------------------------
William E. Mayer Trustee December 21, 2005
/s/ Charles R. Nelson*
- ---------------------------
Charles R. Nelson Trustee December 21, 2005
/s/ John J. Neuhauser*
- ---------------------------
John J. Neuhauser Trustee December 21, 2005
/s/ Patrick J. Simpson*
- ---------------------------
Patrick J. Simpson Trustee December 21, 2005
/s/ Thomas E. Stitzel*
- ---------------------------
Thomas E. Stitzel Trustee December 21, 2005
/s/ Thomas C. Theobald*
- ---------------------------
Thomas C. Theobald Trustee December 21, 2005
/s/ Anne-Lee Verville*
- ---------------------------
Anne-Lee Verville Trustee December 21, 2005
/s/ Richard L. Woolworth*
- ---------------------------
Richard L. Woolworth Trustee December 21, 2005
*By: /s/ J. Kevin Connaughton
-------------------------,
Attorney-in-Fact
December 21, 2005
INDEX TO EXHIBITS
Exhibit Exhibit Name
- ------- -------------
11(a). Opinion of Ropes & Gray LLP.
11(b) Consent of Ropes & Gray LLP
14. Consent of Independent Registered Public Accounting Firm
16. Power of Attorney