LIBERTY FLOATING RATE FUND              PROSPECTUS, JANUARY 1, 2002

CLASS A, B AND C SHARES


Advised by Stein Roe & Farnham Incorporated




TABLE OF CONTENTS


                                                                   
Prospectus Summary ................................................            4

Fund Expenses .....................................................            8

Financial Highlights ..............................................           10

The Fund ..........................................................           12

Use of Proceeds ...................................................           12

Investment Objectives and Policies ................................           12

How the Portfolio Invests .........................................           13

Principal Risks ...................................................           21

Other Investment Practices ........................................           25

Distributions and Income Taxes ....................................           29

Management of the Fund ............................................           32

How to Buy Shares .................................................           34

Multiple Share Classes ............................................           35

Periodic Repurchase Offers ........................................           38

Net Asset Value ...................................................           41

Performance Information ...........................................           42

Organization and Description of Shares ............................           44

Master Fund/Feeder Fund:
Structure and Risk Factors ........................................           45

Shareholder Reports ...............................................           46

Financial Statements ..............................................           46

Statement of Additional Information Table of Contents .............   Back Cover





Although these securities have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.

- ---------------------------
 Not FDIC  May Lose Value
          -----------------
 Insured  No Bank Guarantee
- ---------------------------

PROSPECTUS JANUARY 1, 2002

STEIN ROE MUTUAL FUNDS
LIBERTY FLOATING RATE FUND
CLASS A, B AND C SHARES


Liberty Floating Rate Fund ("Fund") is a non-diversified, closed-end management
investment company that is continuously offered.


Investment Objective. The Fund's investment objective is to provide a high level
of current income, consistent with preservation of capital. The Fund seeks to
achieve its objective by investing its net investable assets in Stein Roe
Floating Rate Limited Liability Company ("Portfolio"), a non-diversified,
closed-end management investment company, which has the same investment
objective as the Fund, rather than investing directly in and managing its own
investment portfolio.

Under normal market conditions, the Portfolio invests at least 80% of its net
assets (plus any borrowings for investment purposes) in adjustable rate senior
loans ("Senior Loans"), the interest rates of which float or vary periodically
based upon a benchmark indicator of prevailing interest rates. Senior Loans are
business loans that have a senior right to payment to most other debts of the
borrower. Senior Loans are often secured by specific assets of the borrower,
although the Portfolio may also invest in Senior Loans that are not secured by
any collateral.




                    Price to Public(1)   Maximum Sales Load(2)   Proceeds to Fund(3)
                                                        
Per Class A Share   $9.64                $0.34                   $9.30
Per Class B Share   $9.30                None                    $9.30
Per Class C Share   $9.30                None                    $9.30


(1)   The shares are offered at a price equal to net asset value, or in the case
      of Class A shares, net asset value plus an initial sales charge. The
      shares are offered continuously. The minimum initial purchase is $2,500.
      No arrangements have been made to place the funds in an escrow, trust or
      similar arrangement. As of November 30, 2001, net asset value per share of
      each share class of the Fund was $9.30.

(2)   The maximum initial sales load on Class A shares is 3.50% of the public
      offering price. Class B and Class C shares are not subject to an initial
      sales load but are subject to an early withdrawal charge. Class A, B and C
      shares are subject to a distribution fee and a service fee. Liberty Funds
      Distributor, Inc. ("Distributor") will pay all sales commissions to
      authorized dealers from its own assets.

(3)   Assumes the sale of all shares registered hereby.

Periodic Repurchase Offers. To provide liquidity to shareholders, the Fund will
make quarterly repurchase offers ("Repurchase Offer") for 5% to 25% of its
outstanding shares. For each Repurchase Offer, it is anticipated that each
Repurchase Request Deadline will be on the 15th day in each of the months of
March, June, September and December, or if the 15th day is not a business day,
the next business day. It is anticipated that normally the Repurchase Pricing
Date will be the same date as the Repurchase Request Deadline, and if so, the
Repurchase Request Deadline will be set for a time no later than the close of
the NYSE on such date. The Fund has determined that the Repurchase Pricing Date
may occur no later than the 14th day after the Repurchase Request Deadline, or
the next business day if the 14th day is not a business day. The


                                       2

Fund will repay a Repurchase Offer no later than seven days after the Repurchase
Pricing Date. (See "Periodic Repurchase Offers.")

Not Exchange Listed. The Fund does not intend to list the shares on any national
securities exchange. SHARES OF THE FUND HAVE NO HISTORY OF PUBLIC TRADING AND
THERE IS NOT EXPECTED TO BE ANY SECONDARY TRADING MARKET IN THE SHARES. An
investment in the shares should be considered illiquid. (See "Principal Risks.")

INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS, INCLUDING THE POSSIBLE LOSS OF
SOME OR ALL OF THE PRINCIPAL INVESTMENT AND RISKS ASSOCIATED WITH SECURITIES
RATED BELOW INVESTMENT GRADE (OFTEN REFERRED TO AS "JUNK"). (SEE "PRINCIPAL
RISKS.")

The Prospectus sets forth concisely the information that a prospective investor
should know before investing in Class A, B or C shares of the Fund. Please read
and retain this Prospectus for future reference. A Statement of Additional
Information regarding the Fund dated January 1, 2002, has been filed with the
Securities and Exchange Commission ("SEC") and can be obtained without charge by
calling 800-426-3750. A table of contents to the Statement of Additional
Information is located on the last page of this Prospectus. This Prospectus
incorporates by reference the entire Statement of Additional Information
(together with any supplement to it). The Statement of Additional Information
and other related materials are available at the SEC's internet web site
(http://www.sec.gov).

The Fund's investment advisor is Stein Roe & Farnham Incorporated ("Stein Roe").
The address of the Fund is One Financial Center, Boston, MA 02111.

This prospectus applies to the offering of shares of beneficial interest of the
Fund, which may be continuously issued and sold from time to time by the Fund
through the Distributor, as distributor and principal underwriter, and through
your financial advisor. (See "How to Buy Shares.")

The Fund's Class A shares are subject to a front-end sales charge and to a
distribution fee and other expenses. The Fund's Class B shares will not be
subject to a front-end sales charge, but will be subject to a declining early
withdrawal charge ("EWC") over a five-year period and a distribution fee, as
well as other expenses. Class B shares will convert automatically to Class A
shares eight years from the date of purchase. The Fund's Class C shares will not
be subject to a front-end sales charge, but will be subject to an EWC of 1%
during the first year a shareholder owns Class C shares and a distribution fee,
as well as other expenses. The Fund also offers an additional class of shares,
Class Z shares, exclusively to certain institutional and other investors. Class
Z shares are made available through a separate prospectus provided to eligible
institutional and other investors. The Fund may add additional classes of shares
in the future.

THE FUND HAS RECEIVED EXEMPTIVE RELIEF FROM THE SEC WITH RESPECT TO THE FUND'S
DISTRIBUTION FEE ARRANGEMENTS, EWCS, AND MULTI-CLASS STRUCTURE. AS A CONDITION
OF SUCH RELIEF, THE FUND WILL BE REQUIRED TO COMPLY WITH CERTAIN REGULATIONS
THAT WOULD NOT OTHERWISE BE APPLICABLE TO THE FUND.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY.


                                       3

                               PROSPECTUS SUMMARY

This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.

THE FUND. The Fund is a continuously offered non-diversified, closed-end
      management investment company, organized as a Massachusetts business
      trust. The Fund invests all of its net investable assets in Stein Roe
      Floating Rate Limited Liability Company (the "Portfolio") under a
      master/feeder structure. The Portfolio is a non-diversified closed-end
      management investment company organized as a Delaware limited liability
      company.

      The Fund intends to offer its shares continuously through the Distributor,
      as principal underwriter, and through financial advisors at a price equal
      to the next determined net asset value per share. The minimum initial
      investment is $2,500 ($25 for individual retirement accounts) and the
      minimum subsequent investment is $50. The Fund reserves the right to
      change the investment minimums and to refuse a purchase order for any
      reason.

CLASSES OF SHARES. The Fund offers three classes of shares in this prospectus,
      with each class having its own sales charge and expense structure. Each
      class has distinct advantages and disadvantages for different investors.
      (See "Multiple Share Classes.")

INVESTMENT OBJECTIVE. The investment objective of the Fund and of the Portfolio
      is to provide a high level of current income, consistent with preservation
      of capital. There can be no assurance that the Portfolio or the Fund will
      achieve its investment objective.

      The Portfolio seeks to achieve the objective by investing at least 80% of
      its net assets (plus any borrowings for investment purposes) in a
      portfolio of Senior Loans to corporations, partnerships and other entities
      ("Borrowers") that operate in a variety of industries and geographic
      regions (including domestic and foreign entities).

INVESTMENT POLICIES. Under normal market conditions, at least 80% of the
      Portfolio's net assets (plus any borrowings for investment purposes) will
      be invested in Senior Loans of domestic Borrowers or foreign Borrowers (so
      long as Senior Loans to such foreign Borrowers are U.S. dollar denominated
      and payments of interest and repayments of principal pursuant to such
      Senior Loans are required to be made in U.S. dollars). Although most
      Senior Loans are secured, the Portfolio may invest up to 20% of its total
      assets in interests in Senior Loans that are not secured by any
      collateral. During normal market conditions, the Portfolio may invest up
      to 20% of its total assets (including assets maintained by the Portfolio
      as a reserve against any additional loan commitments) in (i) high quality,
      short-term debt securities with remaining maturities of one year or less
      and (ii) warrants, equity securities and, in limited circumstances, junior
      debt securities acquired in connection with the Portfolio's investments in
      Senior Loans.

      Any amount less than 25% of total assets of the Fund or Portfolio (taken
      at current value) may be invested in Senior Loans to Borrowers and
      securities of other issuers in any one industry. However, the Fund or
      Portfolio may invest 25% or more of its total assets in securities the
      issuer of which is deemed to be in the financial services industry, which
      includes commercial banks, thrift institutions, insurance


                                       4


      companies and finance companies. The Fund may not, however, invest 25% or
      more of its total assets in Senior Loans to Borrowers in the financial
      services industry and securities of other issuers in the financial
      services industry.  Accordingly, the Fund or Portfolio may be
      more at risk to any single economic, political, or regulatory occurrence
      affecting such industries.

HOW THE FUND OR PORTFOLIO INVESTS. Senior Loans generally are arranged through
      private negotiations between a Borrower and several financial institutions
      ("Lenders") represented in each case by one or more such Lenders acting as
      agent ("Agent") of the several Lenders. On behalf of the several Lenders,
      the Agent is primarily responsible for negotiating the loan agreement
      ("Loan Agreement") that establishes the relative terms and conditions of
      the Senior Loan and rights of the Borrower and the several Lenders. The
      Fund or Portfolio may invest all or substantially all of its assets in
      Senior Loans or other securities that are rated below investment grade, or
      in comparable unrated securities. These securities are commonly referred
      to as high-yield, high-risk or "junk debt."  Senior Loans in which the
      Portfolio will purchase interests generally pay interest at rates that are
      periodically redetermined by reference to a base lending rate plus a
      premium. The Fund or Portfolio may invest in participations
      ("Participations") in Senior Loans, may purchase assignments
      ("Assignments") of portions of Senior Loans from third parties, and may
      act as one of the group of Lenders originating a Senior Loan
      ("Primary Lender").

      Stein Roe expects the Portfolio's policy of acquiring interests in
      floating or variable rate Senior Loans to minimize the fluctuations in net
      asset value as a result of changes in interest rates. However, the Fund is
      not a money market fund and its net asset value will fluctuate.

PRINCIPAL RISKS. You should consider the following risk considerations before
      investing in the Fund. As described below, the risks could cause you to
      lose money as a result of investing in the Fund. See "Principal Risks" in
      the Prospectus for more detailed information.

      Non-Payment Risk. Senior Loans, like other corporate debt obligations, are
      subject to the risk of non-payment of scheduled interest or principal.
      Such non-payment would result in a reduction of income to the Fund, a
      reduction in the value of the Senior Loan experiencing non-payment, and a
      potential decrease in the net asset value of the Fund.

      Restrictions on Resale of Senior Loans. Senior Loans, at present,
      generally are not readily marketable and may be subject to restrictions on
      resale. As a result, the ability of the Portfolio to dispose of its
      investments in a timely fashion and at a fair price may be restricted.

      Ongoing Monitoring. On behalf of the several Lenders, the Agent generally
      will be required to administer and manage the Senior Loans and, with
      respect to collateralized Senior Loans, to service or monitor the
      collateral.

      Limited Information. The types of Senior Loans in which the Portfolio will
      invest historically have not been rated by a nationally recognized
      statistical rating organization, have not been registered with the SEC or
      any state securities commission, and have not been listed on any national
      securities exchange. Although the Portfolio will generally have access to
      financial and other information made available to the Lenders in
      connection with Senior Loans, the amount of public information available
      with respect to Senior Loans will generally be less extensive than that
      available for rated, registered or


                                       5


      exchange listed securities. As a result, the Portfolio is more dependent
      on the analytical ability of Stein Roe.

      Below Investment Grade Securities. The Portfolio may invest all or
      substantially all of its assets in Senior Loans or other securities that
      are rated below investment grade, or in comparable unrated securities.
      These securities are commonly referred to as high-yield, high-risk debt or
      "junk debt." The purchase of such Senior Loans exposes the Fund to
      financial, market, and interest-rate risks and greater credit risks than
      would the purchase of higher-rated Senior Loans. Such investments are also
      likely to result in increased fluctuation in the Fund's net asset value,
      particularly in response to economic downturns.

      Investments in Non-U.S. Issuers. Investment in non-U.S. issuers involves
      special risks, including that non-U.S. issuers may be subject to less
      rigorous accounting and reporting requirements than are U.S. issuers, less
      rigorous regulatory requirements, differing legal systems and laws
      relating to creditors' rights, the potential inability to enforce legal
      judgments, and the potential for political, social and economic
      adversities.

      Investments in Equity Securities. To the extent that the Portfolio invests
      in equity securities, the value of its portfolio will be affected by
      changes in the stock markets. The stock market can be volatile and stock
      prices can fluctuate drastically from day-to-day. This market risk will
      affect the Fund's net asset value, which will fluctuate as the value of
      the securities held by the Portfolio changes.

      Financial Services Industry Concentration. The financial services
      industries are subject to extensive government regulation which can limit
      both the amounts and types of loans and other financial commitments they
      can make, and the interest rates and fees they can charge. Profitability
      is largely dependent on the availability and cost of capital funds, and
      can fluctuate significantly when interest rates change. Credit losses
      resulting from financial difficulties of borrowers can negatively affect
      the financial services industries. The financial services industries are
      currently undergoing relatively rapid change as existing distinctions
      between financial service segments become less clear.

      Prepayment Risk. Borrowers may pay back principal before the scheduled due
      date. Borrowers may find it advantageous to prepay principal due to a
      decline in interest rates or an excess in cash flow. Such prepayments may
      require the Portfolio to replace a Senior Loan with a lower-yielding
      security. This may adversely affect the distributions on the Fund's
      shares.

      Legislation; Restrictions. To the extent that legislation or state or
      federal regulators impose additional requirements or restrictions with
      respect to the ability of financial institutions to make loans in
      connection with highly leveraged transactions, the availability of Senior
      Loan interests for investment by the Portfolio may be adversely affected.

      Repurchase Offer Risks. The Fund, as a fundamental policy, will make
      quarterly repurchases for 5% to 25% of shares outstanding at net asset
      value. (See "Periodic Repurchase Offers" below for more information.)
      However, shares are less liquid than shares of funds that trade on a stock
      exchange, and Class B and Class C shareholders who offer for repurchase
      shares held for less than five years and one year, respectively, will pay
      an EWC. (See "How to Buy Shares.") Under limited circumstances, the Fund
      may


                                       6

      suspend or postpone a quarterly repurchase offer -- the Fund must meet
      certain regulatory requirements to do so. There is no guarantee that
      shareholders will be able to sell all of their shares that they desire to
      sell in a quarterly repurchase offer.

      Closed-End Fund Risks. The Fund is a closed-end investment company
      designed primarily for long-term investors and not as a trading vehicle.
      The Fund does not intend to list its shares for trading on any national
      securities exchange. There is not expected to be any secondary trading
      market in the shares and the shares should be considered illiquid. The
      shares are, therefore, not readily marketable. The shares of closed-end
      investment companies often trade at a discount from their net asset values
      and, in the unlikely event that a secondary market for the shares were to
      develop, the shares likewise may trade at a discount from net asset value.

      Non-Diversification Risk. The Portfolio is not subject to the general
      limitations under the Investment Company Act of 1940 ("1940 Act") that,
      for 75% of its total assets, it not invest more than 5% of its total
      assets in the securities of a single issuer. The Portfolio does not intend
      to invest more than 5% of the value of its assets in Senior Loans of a
      single Borrower. To the extent the Portfolio invests a relatively high
      percentage of its assets in obligations of a limited number of Borrowers,
      it will be more susceptible than a more widely diversified investment
      company to the consequences of any single corporate, economic, political
      or regulatory occurrence.

DISTRIBUTIONS. Income dividends are normally declared each business day, paid
      monthly, and confirmed at least quarterly. Capital gains, if any, are
      distributed at least annually, usually in December. Income dividends and
      capital gains distributions may be received in cash or reinvested in
      additional full and fractional shares of the Fund.

INVESTMENT ADVISOR. Stein Roe & Farnham Incorporated.

DISTRIBUTOR. Liberty Funds Distributor, Inc.

PERIODIC REPURCHASE OFFERS. The Fund has adopted a fundamental policy to offer
      each calendar quarter to repurchase a specified percentage (between 5% and
      25%) of the shares then outstanding at its net asset value. Such
      repurchase offers are referred to as a Repurchase Offer. Repurchase Offers
      are scheduled to occur on the 15th day (or the next business day if the
      15th is not a business day) in the months of March, June, September, and
      December. (See "Periodic Repurchase Offers.")





                                       7

                                  FUND EXPENSES

The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
Class A, B, or C shares of the Fund.



SHAREHOLDER TRANSACTION EXPENSES(1)             Class A    Class B(4)    Class C
                                                -------    ----------    -------
                                                                
Maximum Sales Load Imposed                       3.50%        None        None
   (as a percentage of offering price)......
Sales Load Imposed on Reinvested Dividends..     None         None        None
Early Withdrawal Charge(2)..................     None         3.25%       1.00%
Exchange Fee................................     None         None        None

ANNUAL EXPENSES (as a percentage of average
net assets attributable to common shares)
Management Fee (%)(3).......................     0.65         0.65        0.65
Distribution and Service Fees (%)(4)........     0.35         0.70        0.85
Other Expenses (%) .........................     0.33         0.33        0.33
Total Annual Expenses (%)(5)................     1.33         1.68        1.83


(1) Financial advisors may independently charge additional fees for shareholder
    transactions or for advisory services. Please see their materials for
    details.

(2) The maximum EWC on Class B shares applies for repurchases during the first
    year. The charge is 3.25% for shares submitted and accepted for repurchase
    during the first year after each purchase, 3.00% during the second year,
    2.00% during the third year, 1.50% during the fourth year, and 1.00% during
    the fifth year. There is no EWC on Class B shares thereafter. The EWC on
    Class C shares is 1.00% within the first year from each purchase. There is
    no EWC on Class C shares thereafter.

(3) Management fees includes both the management fee and the administrative fee
    charged to the Fund. Stein Roe receives a management fee of 0.45% from the
    Portfolio and an administrative fee of 0.20% from the Fund.

(4) Class B shares will automatically convert to Class A shares eight years
    after purchase.

(5) Stein Roe has voluntarily agreed to waive advisory fees and reimburse the
    Fund for certain expenses (exclusive of distribution and service fees,
    brokerage commissions, interest, taxes and extraordinary expenses, if any)
    will not exceed 0.80%. As a result, the actual Management Fee for each share
    class would be 0.47% and Total Annual Expenses for Class A, B and C shares
    would be 1.15%, 1.50% and 1.65%, respectively. This arrangement may be
    modified or terminated by Stein Roe at any time.

Service and distribution fees include an asset-based sales charge -- as a
result, if you hold your shares for a long period of time, then you may pay more
than the economic equivalent of the maximum front-end sales charges permitted by
the National Association of Securities Dealers, Inc. (See "Multiple Share
Classes.")


                                       8

EXAMPLE. This Example helps you compare the cost of investing in the Fund to the
cost of investing in other mutual funds. The Example assumes that (i) you invest
$1,000 in the Fund, (ii) your investment has a 5% return each year, (iii)
operating expenses remain the same, (iv) all income dividends and capital gains
distributions are reinvested in additional shares. Your actual costs may be
higher or lower because in reality Fund returns and other expenses change.




Class                                1 year   3 years   5 years   10 years
- -----                                ------   -------   -------   --------
                                                      
Class A                               $ 48     $ 76      $105       $190
Class B*: did not sell your shares    $ 17     $ 53      $ 91       $189
          sold all your shares at
            the end of the period     $ 50     $ 73      $101       $189
Class C:  did not sell your shares    $ 19     $ 58      $ 99       $215
          sold all your shares at
            the end of the period     $ 29     $ 58      $ 99       $215


- ----------
*Class B shares convert to Class A shares after eight years. The 10-year expense
example for Class B shares reflects Class B share expenses for eight years and
Class A expenses for two years.



                                       9

                              FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance. Information is shown for the Fund's Class A, B and C
shares fiscal years since inception, which run from September 1 to August 31,
unless otherwise indicated. Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that you
would have earned (or lost) on an investment in the Fund (assuming reinvestment
of all dividends and distributions). This information has been derived from the
Fund's financial statements which have been audited by PricewaterhouseCoopers
LLP, independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's annual report. You can request a free
annual report by calling 800-422-3737.





                                                   YEAR ENDED AUGUST 31, 2001
                                                   CLASS A   CLASS B   CLASS C
                                                              
Net asset value, Beginning of period ($)            10.00     10.00     10.00

INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income(a)                             0.81      0.77      0.76
Net realized and unrealized gain (loss)
   allocated from Portfolio                         (0.37)    (0.37)    (0.37)
                                                   -------   -------   -------
Total from Investment Operations                     0.44      0.40      0.39
                                                   -------   -------   -------

LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ($):
From net investment income                          (0.82)    (0.78)    (0.77)
From net realized gains                              (b)       (b)       (b)
Total Distributions Declared to Shareholders        (0.82)    (0.78)    (0.77)

- --------------------------------------------------------------------------------
Net asset value, End of period ($)                   9.62      9.62      9.62
- --------------------------------------------------------------------------------

Total return (%)(c)(d)                               4.56      4.19      4.04

RATIOS TO AVERAGE NET ASSETS (%):
Expenses                                             1.15      1.50      1.65
Net investment income                                8.28      7.93      7.78
Waiver/reimbursement                                 0.18      0.18      0.18
Net assets at End of period (000)($)               138,058   195,891   184,399


(a) Per share data was calculated using average shares outstanding during the
    period.
(b) Rounds to less than $0.01.
(c) Had Stein Roe not waived or reimbursed a portion of expenses, total return
    would have been reduced.
(d) Total return at net asset value assuming all distributions reinvested and no
    initial sales charge or early withdrawal charge.


                                       10




                                       11




                                                  PERIOD ENDED AUGUST 31, 2000(A)
                                                    CLASS A   CLASS B   CLASS C
                                                               
Net asset value, Beginning of period($)              10.05     10.05     10.05


INCOME FROM INVESTMENT OPERATIONS
Net investment income(b)
                                                      0.71      0.67      0.66
Net realized and unrealized gain (loss)
   allocated from Portfolio                          (0.05)    (0.05)    (0.05)
Total from Investment Operations
                                                      0.66      0.62      0.61

LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS($):
From net investment income                           (0.71)    (0.67)    (0.66)
From net realized gains                               (c)       (c)       (c)
Total Distributions Declared to Shareholders         (0.71)    (0.67)    (0.66)

- ---------------------------------------------------------------------------------
Net asset value, End of period($)                    10.00     10.00     10.00
- ---------------------------------------------------------------------------------

Total return (%)(d)(e)(f)                             6.79      6.35      6.20

RATIOS TO AVERAGE NET ASSETS (%):
Expenses(g)                                           1.15      1.50      1.65
Net investment income(g)                              8.53      8.18      8.03
Waiver/reimbursement(g)                               0.13      0.13      0.13
Net assets at End of period (000)($)                147,209    83,695    91,664


(a) Class A, B and C shares were initially offered on November 2, 1999. Per
    share data reflects activity from that date.
(b) Per share data was calculated using average shares outstanding during the
    period.
(c) Rounds to less than $0.01.
(d) Had Stein Roe not waived or reimbursed a portion of expenses, total return
    would have been reduced.
(e) Total return at net asset value assuming all distributions reinvested and no
    initial sales charge or early withdrawal charge.
(f) Not annualized.
(g) Annualized.


                                       12

                                    THE FUND

The Fund is a non-diversified, closed-end management investment company
organized as a Massachusetts business trust on August 13, 1998, and managed by
the Board of Trustees. The Fund is engaged in a continuous public offering of
the shares at the next determined net asset value per share. The Fund's
principal office is located at One Financial Center, Boston, MA 02111 and its
telephone number is 800-345-6611.

                                 USE OF PROCEEDS

The net proceeds from the sale of the shares offered hereby will be invested
typically within 30 days after receipt, in accordance with the Fund's investment
objective and policies. Pending investment by the Portfolio, the proceeds may be
invested in high quality, short-term securities, and the Portfolio may not
achieve its objective during this time. The offering expenses in connection with
the registration of 20,000,000 Class A shares, 15,000,000 Class B shares and
20,000,000 Class C shares were $251,829.40.

                        INVESTMENT OBJECTIVE AND POLICIES

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide a high level
of current income, consistent with preservation of capital. The Fund's
investment objective is a non-fundamental policy, which means that the Board of
Trustees can change it without shareholder approval. Rather than invest in
securities directly, the Fund seeks to achieve its investment objective by using
the "master fund/feeder fund" structure. Under that structure, the Fund and
other investment companies with the same investment objective invest their
assets in another investment company having the same investment objective and
substantially the same investment policies as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and reduce costs. The
Fund's investment experience will correspond directly to the investment
experience of the Portfolio.

The Fund invests substantially all of its net investable assets in the
Portfolio. The Portfolio seeks to achieve its objective by investing at least
80% of its net assets (plus any borrowings for investment purposes) in a
professionally managed portfolio of interests in Senior Loans to Borrowers that
operate in a variety of industries and geographic regions (including domestic
and foreign entities). Although the Portfolio's net asset value per share will
vary, the Portfolio's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize the fluctuations in the Fund's net asset
value per share as a result of changes in interest rates. The Fund's net asset
value may be affected by various factors, including changes in the credit
quality of Borrowers with respect to Senior Loan interests in which the
Portfolio invests.

An investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Portfolio or the Fund will achieve its investment objective. The Fund is
appropriate for investors seeking a high level of current income consistent with
capital preservation.

POLICIES. Under normal market conditions, the Portfolio will invest at least 80%
of its net assets (plus any borrowings for investment purposes) (either as a
Primary Lender or as a purchaser of an Assignment or Participation) in Senior
Loans of domestic Borrowers or foreign Borrowers (so long as Senior Loans to
such foreign Borrowers are U.S. dollar denominated and payments of


                                       13

interest and repayments of principal pursuant to such Senior Loans are required
to be made in U.S. dollars). Although most Senior Loans are collateralized, the
Portfolio may invest up to 20% of its total assets (valued at time of
investment) in Senior Loans that are not secured by any collateral.

During normal market conditions, the Portfolio may invest up to 20% of its total
assets (including assets maintained by the Portfolio as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and junior debt securities acquired in connection with the
Portfolio's investments in Senior Loans. Such high quality, short-term
securities may include commercial paper rated at least Baa, P-3 or higher by
Moody's Investors Service, Inc. ("Moody's") or BBB, A-3 or higher by Standard &
Poor's ("S&P") (or if unrated, determined by Stein Roe to be of comparable
quality), interests in short-term loans and short-term loan participations of
Borrowers having short-term debt obligations rated or a short-term credit rating
at least in such rating categories (or having no such rating, determined by
Stein Roe to be of comparable quality), certificates of deposit and bankers'
acceptances and securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. Such high quality, short-term securities may pay
interest at rates that are periodically redetermined or may pay interest at
fixed rates.

                            HOW THE PORTFOLIO INVESTS

SENIOR LOANS. Senior Loans generally are arranged through private negotiations
between a Borrower and Lenders represented in each case by one or more Agents of
the several Lenders. On behalf of the several Lenders, the Agent, which is
frequently a commercial bank or other entity that originates the Senior Loan and
the person that invites other parties to join the lending syndicate, will be
primarily responsible for negotiating the Loan Agreement that establishes the
relative terms, conditions and rights of the Borrower and the several Lenders.
In larger transactions it is common to have several Agents; however, generally
only one such Agent has primary responsibility for documentation and
administration of a Senior Loan.

In a typical Senior Loan, the Agent administers the terms of the Loan Agreement
and is responsible for the collection of principal and interest and fee payments
from the Borrower and the apportionment of those payments to the credit of all
Lenders that are parties to the Loan Agreement. The Portfolio generally will
rely on the Agent to collect its portion of the payments on a Senior Loan.
Furthermore, the Portfolio will rely on the Agent to use appropriate creditor
remedies against the Borrower. Typically, under a Loan Agreement, the Agent is
given broad discretion in monitoring the Borrower's performance under the Loan
Agreement and is obligated to use only the same care it would use in the
management of its own property. Upon an event of default, the Agent typically
will act to enforce the Loan Agreement after instruction from Lenders holding a
majority of the Senior Loan. The Borrower compensates the Agent for the Agent's
services. This compensation may include special fees paid on structuring and
funding the Senior Loan and other fees paid on a continuing basis. The typical
practice of an Agent in relying exclusively or primarily on reports from the
Borrower may involve a risk of fraud by the Borrower.

It is anticipated that the proceeds of the Senior Loans in which the Portfolio
will acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. Senior Loans have the most senior position in a Borrower's capital


                                       14

structure, although some Senior Loans may hold an equal ranking with other
senior securities and certain other obligations of the Borrower. The capital
structure of a Borrower may include Senior Loans, senior and junior subordinated
debt (which may include "junk debt"), preferred stock and common stock issued by
the Borrower, typically in descending order of seniority with respect to claims
on the Borrower's assets. Senior and junior subordinated debt is collectively
referred to in this Prospectus as "junior debt securities." Senior Loans
generally are secured by specific collateral, which may include guarantees from
certain affiliates of the Borrower.

To the extent that the Portfolio invests a portion of its assets in Senior Loans
that are not secured by specific collateral, the Portfolio will not enjoy the
benefits associated with collateralization with respect to such Senior Loans and
such Senior Loans may pose a greater risk of nonpayment of interest or loss of
principal than do collateralized Senior Loans. As discussed below, the Portfolio
may also acquire warrants, equity securities and junior debt securities issued
by the Borrower or its affiliates as part of a package of investments in the
Borrower or its affiliates. Warrants, equity securities, and junior debt
securities will not be treated as Senior Loans and thus assets invested in such
securities will not count toward the 80% of the Portfolio's net assets (plus any
borrowings for investment purposes) that normally will be invested in Senior
Loans. The Portfolio may acquire interests in warrants, other equity securities
or junior debt securities through a negotiated restructuring of a Senior Loan or
in a bankruptcy proceeding of the Borrower.

In order to borrow money pursuant to a collateralized Senior Loan, a Borrower
will typically, for the term of the Senior Loan, pledge as collateral assets,
including but not limited to, accounts receivable, inventory, buildings, other
real estate, trademarks, franchises and common and preferred stock in its
subsidiaries. In addition, in the case of some Senior Loans, there may be
additional collateral pledged in the form of guarantees by and/or securities of
affiliates of the Borrowers. In certain instances, a collateralized Senior Loan
may be secured only by stock in the Borrower or its subsidiaries. Collateral may
consist of assets that are not readily liquidated, and there is no assurance
that the liquidation of such assets would satisfy fully a Borrower's obligations
under a Senior Loan. Similarly, in the event of bankruptcy proceedings involving
the Borrower, the Lenders may be delayed or prevented from liquidating
collateral or may choose not to do so as part of their participation in a plan
of reorganization of the Borrower.

Loan Agreements may also include various restrictive covenants designed to limit
the activities of the Borrower in an effort to protect the right of the Lenders
to receive timely payments of interest on and repayment of principal of the
Senior Loans. Restrictive covenants may include mandatory prepayment provisions
related to excess cash flows and typically include restrictions on dividend
payments, specific mandatory minimum financial ratios, limits on total debt and
other financial tests. Breach of such a covenant, if not waived by the Lenders,
is generally an event of default under the applicable Loan Agreement and may
give the Lenders the right to accelerate principal and interest payments. Stein
Roe will consider the terms of restrictive covenants in deciding whether to
invest in Senior Loans for the Portfolio's investment portfolio. When the
Portfolio holds a Participation in a Senior Loan, it may not have the right to
vote to waive enforcement of a restrictive covenant breached by a Borrower.
Lenders voting in connection with a potential waiver of a restrictive covenant
may have interests different from those of the Portfolio and such Lenders will
not consider the interests of the Portfolio in connection with their votes.

Senior Loans in which the Portfolio will invest generally pay interest at rates
that are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates


                                       15

generally are the prime or base lending ("Prime Rate") rate offered by one or
more major United States banks or other standard lending rates used by
commercial lenders, such as the London Inter-Bank Offered Rate ("LIBOR") or the
certificate of deposit ("CD") rate. LIBOR, as provided for in Loan Agreements,
is an average of the interest rates quoted by several designated banks as the
rates at which such banks would offer to pay interest to major financial
institutional depositors in the London interbank market on U.S. dollar
denominated deposits for a specified period of time. The CD rate, as generally
provided for in Loan Agreements, is the average rate paid on large certificates
of deposit traded in the secondary market. Senior Loans traditionally have been
structured so that Borrowers pay higher premiums when they elect LIBOR, in order
to permit Lenders to obtain generally consistent yields on Senior Loans,
regardless of whether Borrowers select the LIBOR option, or the Prime Rate
option. In recent years, however, the differential between the lower LIBOR base
rates and the higher Prime Rate base rates prevailing in the commercial bank
markets has widened to the point where the higher margins paid by Borrowers for
LIBOR pricing options do not currently outweigh the differential between the
Prime Rate and the LIBOR rate. Consequently, Borrowers have increasingly
selected the LIBOR-based pricing option, resulting in a yield on Senior Loans
that is consistently lower than the yield available from the Prime Rate-based
pricing option. This trend will significantly limit the ability of the Fund to
achieve a net return to shareholders that consistently approximates the average
published Prime Rate of leading U.S. banks.

PRIMARY LENDER TRANSACTIONS, ASSIGNMENTS, AND PARTICIPATIONS. The Portfolio may
invest in Participations in Senior Loans, may purchase Assignments of portions
of Senior Loans from third parties and may act as one of the group of Primary
Lenders.

The Portfolio may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Portfolio
with respect to Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Portfolio has taken measures that it believes
significantly reduce its exposure to risks associated with Participations, the
Portfolio may be more susceptible than an investment company that does not
invest in Participations in Senior Loans to any single economic, political or
regulatory occurrence affecting these industries. Persons engaged in these
industries may be more susceptible than are persons engaged in some other
industries to, among other things, fluctuations in interest rates, changes in
the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.

Participation by the Portfolio in a Lender's portion of a Senior Loan typically
will result in the Portfolio having a contractual relationship only with such
Lender, not with the Borrower. As a result, the Portfolio may have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of payments from the Borrower. In connection with purchasing
Participations, the Portfolio generally will have no right to enforce compliance
by the Borrower with the terms of the Loan Agreement, nor any rights with
respect to any funds acquired by other Lenders through set-off against the
Borrower, and the Portfolio may not directly benefit from the collateral
supporting the Senior Loan in which it has purchased the Participation. As a
result, the Portfolio may assume the credit risk of both the Borrower and the
Lender selling the Participation. In the event of the insolvency of the Lender
selling a Participation, the Portfolio may be treated as a general creditor of
the Lender, and may not benefit from any set-off between the Lender and the
Borrower. In an effort to minimize such risks, the Portfolio will only acquire
Participations if the


                                       16

Lender selling the Participation, and any other institution interpositioned
between the Portfolio and the Lender, (i) at the time of investment has
outstanding debt or deposit obligations rated investment grade (BBB or A-3 or
higher by S&P or Baa or P-3 or higher by Moody's) or, if unrated, determined by
Stein Roe to be of comparable quality and (ii) has entered into an agreement
that provides for the holding of payments on the Senior Loan for the benefit of,
or the prompt disbursement of payments to, the Portfolio. Long-term debt rated
BBB by S&P is regarded by S&P as having adequate capacity to pay interest and
repay principal and debt rated Baa by Moody's is regarded by Moody's as a medium
grade obligation; i.e., it is neither highly protected nor poorly secured. The
Portfolio ordinarily will purchase a Participation only if, at the time of the
purchase, the Portfolio believes that the party from whom it is purchasing the
Participation is retaining an interest in the underlying Senior Loan. In the
event that the Portfolio does not so believe, it will only purchase a
Participation if, in addition to the requirements set forth above, the party
from whom the Portfolio is purchasing such Participation (i) is a bank, a member
of a national securities exchange or other entity designated in the 1940 Act as
qualified to serve as a custodian for a registered investment company and (ii)
has been approved as a custodian by the Board of the Portfolio.

The Portfolio may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender.

When the Portfolio is a Primary Lender, it will have a direct contractual
relationship with the Borrower, may enforce compliance by the Borrower with the
terms of the Loan Agreement and may under contractual arrangements among the
Lenders have rights with respect to any funds acquired by other Lenders through
set-off. A Lender also has full voting and consent rights under the applicable
Loan Agreement. Action subject to Lender vote or consent generally requires the
vote or consent of the holders of a majority or some greater specified
percentage of the outstanding principal amount of the Senior Loan. Certain
decisions, such as reducing the amount or increasing the time for payment of
interest on or repayment of principal of a Senior Loan, or releasing collateral
therefor, frequently require the unanimous vote or consent of all Lenders
affected. When the Portfolio is a Primary Lender originating a Senior Loan it
may share in a fee paid by the Borrower to the Primary Lenders. The Portfolio
will never act as the Agent, originator, or principal negotiator or
administrator of a Senior Loan.

The Portfolio will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to the Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by Stein Roe to be of comparable quality.

Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should an Agent, Lender or any other interpositioned
institution with respect to an Assignment interpositioned between the Portfolio
and the Borrower become insolvent or enter FDIC receivership or bankruptcy, any
interest in the Senior Loan of any such interpositioned institution and any loan
payment held by any such interpositioned institution for the benefit of the
Portfolio should not be included in the estate of such interpositioned
institution. If, however, any such amount were included in such interpositioned
institution's estate, the Portfolio would incur certain costs and delays in
realizing


                                       17

payment or could suffer a loss of principal or interest. In such event, the
Portfolio could experience a decrease in net asset value.

PORTFOLIO MATURITY. The Portfolio is not subject to any restrictions with
respect to the maturity of Senior Loans held in its portfolio. It is currently
anticipated that the Portfolio's assets invested in Senior Loans will consist of
Senior Loans with stated maturities of between three and ten years, inclusive,
and with rates of interest that are redetermined either daily, monthly,
quarterly, semiannually or annually. Investment in Senior Loans with longer
interest rate redetermination periods may increase fluctuations in the
Portfolio's net asset value as a result of changes in interest rates. The Senior
Loans in the Portfolio's investment portfolio will at all times have a
dollar-weighted average days to reset until the next interest rate
redetermination of 90 days or less. As a result, as short-term interest rates
increase, interest payable to the Portfolio from its investments in Senior Loans
should increase, and as short-term interest rates decrease, interest payable to
the Portfolio from its investments in Senior Loans should decrease. The amount
of time required to pass before the Portfolio will realize the effects of
changing short-term market interest rates on its portfolio will vary with the
dollar-weighted average time until the next interest rate redetermination on the
Senior Loans in the investment portfolio. The Portfolio may utilize certain
investment practices to, among other things, shorten the effective interest rate
redetermination period of Senior Loans in its portfolio. In such event, the
Portfolio will consider such shortened period to be the interest rate
redetermination period of the Senior Loan; provided, however, that the Portfolio
will not invest in Senior Loans that permit the Borrower to select an interest
rate redetermination period in excess of one year. Because most Senior Loans in
the investment portfolio will be subject to mandatory and/or optional prepayment
and there may be significant economic incentives for a Borrower to prepay its
loans, prepayments of Senior Loans in the Portfolio's investment portfolio may
occur. Accordingly, the actual remaining maturity of the Portfolio's investment
portfolio invested in Senior Loans may vary substantially from the average
stated maturity of the Senior Loans held in the Portfolio's investment
portfolio.

NET ASSET VALUE FLUCTUATION. When prevailing interest rates decline, the value
of a portfolio invested in fixed-rate obligations can be expected to rise.
Conversely, when prevailing interest rates rise, the value of a portfolio
invested in fixed-rate obligations can be expected to decline. Although the
Fund's net asset value will vary, Stein Roe expects the Portfolio's policy of
acquiring interests in floating or variable rate Senior Loans to minimize
fluctuations in net asset value as a result of changes in interest rates.
Accordingly, Stein Roe expects the value of the investment portfolio to
fluctuate significantly less than a portfolio of fixed-rate, longer term
obligations as a result of interest rate changes. However, changes in prevailing
interest rates can be expected to cause some fluctuation in the Fund's net asset
value. In addition to changes in interest rates, various factors, including
defaults by or changes in the credit quality of Borrowers, will also affect the
Fund's net asset value. A default or serious deterioration in the credit quality
of a Borrower could cause a prolonged or permanent decrease in the Fund's net
asset value.

DEBT RESTRUCTURING. The Portfolio may purchase and retain in its portfolio an
interest in a Senior Loan to a Borrower that has filed for protection under the
federal bankruptcy laws or has had an involuntary bankruptcy petition filed
against it by its creditors. Stein Roe's decision to purchase or retain such an
interest will depend on its assessment of the suitability of such investment for
the Portfolio, the Borrower's ability to meet debt service on Senior Loan
interests, the likely duration, if any, of a lapse in the scheduled repayment of
principal, and prevailing


                                       18

interest rates. At times, in connection with the restructuring of a Senior Loan
either outside of bankruptcy court or in the context of bankruptcy court
proceedings, the Portfolio may determine or be required to accept equity
securities or junior debt securities in exchange for all or a portion of a
Senior Loan interest. Depending upon, among other things, Stein Roe's evaluation
of the potential value of such securities in relation to the price that could be
obtained by the Portfolio at any given time upon sale thereof, the Portfolio may
determine to hold such securities in its portfolio. Any equity security or
junior debt security held by the Portfolio will not be treated as a Senior Loan
and thus will not count toward the 80% of assets that normally will be invested
in Senior Loans.

BORROWER CREDIT RATINGS. The Portfolio may invest in the lowest rated loans, but
does not intend to invest more than 5% of its assets in Senior Loans rated below
B- or B3 by S&P or Moody's.  The Portfolio  may invest a substantial  portion of
its assets in Senior Loans to Borrowers having outstanding debt securities rated
below  investment   grade  by  a  nationally   recognized   statistical   rating
organization  (or unrated but of comparable  quality to such  securities).  Debt
securities rated below  investment grade (or unrated but of comparable  quality)
commonly are referred to as "junk debt." The Portfolio will invest only in those
Senior Loans with respect to which the  Borrower,  in the judgment of Stein Roe,
demonstrates one or more of the following characteristics:  sufficient cash flow
to service  debt;  adequate  liquidity;  successful  operating  history;  strong
competitive   position;   experienced   management;   and,   with   respect   to
collateralized  Senior  Loans,  collateral  coverage  that equals or exceeds the
outstanding  principal  amount of the Senior Loan.  In addition,  Stein Roe will
consider, and may rely in part, on the analyses performed by the Agent and other
Lenders,  including  such  persons'  determinations  with respect to  collateral
securing a Senior Loan.

FEES. The Portfolio may be required to pay or may receive various fees and
commissions in connection with purchasing, selling and holding interests in
Senior Loans. The fees normally paid by Borrowers may include three types:
facility fees, commitment fees and prepayment penalties. Facility fees are paid
to the Lenders upon origination of a Senior Loan. Commitment fees are paid to
Lenders on an ongoing basis based upon the undrawn portion committed by the
Lenders of the underlying Senior Loan. Lenders may receive prepayment penalties
when a Borrower prepays all or part of a Senior Loan. The Portfolio will receive
these fees directly from the Borrower if the Portfolio is a Primary Lender, or,
in the case of commitment fees and prepayment penalties, if the Portfolio
acquires an interest in a Senior Loan by way of Assignment. Whether or not the
Portfolio receives a facility fee from the Lender in the case of an Assignment,
or any fees in the case of a Participation, depends upon negotiations between
the Portfolio and the Lender selling such interests. When the Portfolio is an
assignee, it may be required to pay a fee, or forgo a portion of interest and
any fees payable to it, to the Lender selling the Assignment. Occasionally, the
assignor will pay a fee to the Portfolio based on the portion of the principal
amount of the Senior Loan that is being assigned. A Lender selling a
Participation to the Portfolio may deduct a portion of the interest and any fees
payable to the Portfolio as an administrative fee prior to payment thereof to
the Portfolio. The Portfolio may be required to pay over or pass along to a
purchaser of an interest in a Senior Loan from the Portfolio a portion of any
fees that the Portfolio would otherwise be entitled to.

PREPAYMENTS. Pursuant to the relevant Loan Agreement, a Borrower may be required
in certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
In the event that like-yielding loans are not available in the marketplace,
Stein Roe believes that the prepayment of and subsequent


                                       19

reinvestment by the Portfolio in Senior Loans could have a materially adverse
impact on the yield on the Portfolio's investment portfolio. Prepayments may
have a beneficial impact on income due to receipt of prepayment penalties, if
any, and any facility fees earned in connection with reinvestment.

COMMITMENTS TO MAKE ADDITIONAL PAYMENTS. A Lender may have certain obligations
pursuant to a Loan Agreement, which may include the obligation to make
additional loans in certain circumstances. Such circumstances may include,
without limitation, obligations under revolving credit facilities and facilities
that provide for further loans to Borrowers based upon compliance with specified
financial requirements. The Portfolio currently intends to reserve against any
such contingent obligation by segregating a sufficient amount of cash, liquid
securities and liquid Senior Loans. The Portfolio will not purchase interests in
Senior Loans that would require the Portfolio to make any such additional loans
if the aggregate of such additional loan commitments would exceed 20% of the
Portfolio's total assets or would cause the Portfolio to fail to meet the
diversification requirements set forth under the heading "Investment
Restrictions" in the Statement of Additional Information.

BRIDGE FINANCING. The Portfolio may acquire interests in Senior Loans that are
designed to provide temporary or "bridge" financing to a Borrower pending the
sale of identified assets or the arrangement of longer-term loans or the
issuance and sale of debt obligations. A Borrower's use of a bridge loan
involves a risk that the Borrower may be unable to locate permanent financing to
replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.

OTHER SECURITIES. The Portfolio will acquire warrants, equity securities and
junior debt securities only as are incident to the purchase or intended purchase
of interests in collateralized Senior Loans. The Portfolio generally will
acquire interests in warrants, equity securities and junior debt securities only
when Stein Roe believes that the relative value being given by the Portfolio in
exchange for such interests is substantially outweighed by the potential value
of such instruments. Investment in warrants, equity securities and junior debt
securities entail certain risks in addition to those associated with investments
in Senior Loans. Warrants and equity securities have a subordinate claim on a
Borrower's assets as compared with debt securities, and junior debt securities
have a subordinate claim on such assets as compared with Senior Loans. As such,
the values of warrants and equity securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are the values of many debt securities. The values of
warrants, equity securities and junior debt securities may be more volatile than
those of Senior Loans and thus may have an adverse impact on the ability of the
Portfolio to minimize fluctuations in its net asset value. (See "Principal
Risks.")

DEFENSIVE INVESTMENT POLICY. If Stein Roe determines that market conditions
temporarily warrant a defensive investment policy, the Portfolio may (but is not
required to) invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and high quality,
short-term debt securities. The Portfolio may also lend its portfolio securities
to other parties and may enter into repurchase and reverse repurchase agreements
for securities, subject to certain restrictions. For further discussion of the
Portfolio's investment objective and policies and its investment practices and
the associated considerations, see "Other Investment Practices."



                                       20

FUNDAMENTAL RESTRICTIONS AND POLICIES. Each of the Portfolio and the Fund has
adopted certain fundamental investment restrictions and policies which may not
be changed unless authorized by a shareholder vote. These are set forth in the
Statement of Additional Information. Among these fundamental restrictions, the
Portfolio and the Fund may not purchase any security if, as a result of the
purchase, 25% or more of the Fund's or the Portfolio's total assets (taken at
current value) would be invested in the securities of Borrowers and other
issuers having their principal business activities in the same industry (the
electric, gas, water and telephone utility industries being treated as separate
industries for the purpose of this restriction). However, the Fund may invest
25% or more of its total assets in securities the issuer of which is deemed to
be in the financial institutions industry, which includes commercial banks,
thrift institutions, insurance companies and finance companies. The Fund may
not, however, invest 25% or more of its total assets in Senior Loans to
Borrowers in the financial services industry and securities of other
issuers in the financial services industry.  There is no
limitation with respect to obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities. Except for the
fundamental restrictions and policies set forth as such in the Statement of
Additional Information, the Portfolio's and the Fund's investment objective and
policies are not fundamental policies and accordingly may be changed by the
Board without obtaining the approval of shareholders.

                                 PRINCIPAL RISKS

You should consider the following Principal Risks before investing in the Fund.
As described below, these risks could cause you to lose money as a result of
investing in the Fund. The Fund and the Portfolio are both closed-end investment
companies. The Fund is designed primarily for long-term investors and not as a
trading vehicle.

NON-PAYMENT. Senior Loans, like other corporate debt obligations, are subject to
the risk of non-payment of scheduled interest or principal. Non-payment would
result in a reduction of income to the Portfolio, a reduction in the value of
the Senior Loan experiencing non-payment and a potential decrease in the net
asset value of the Portfolio. The Portfolio generally will invest in
collateralized Senior Loans only if Stein Roe believes the value of the
collateral, which may include guarantees, exceeds the principal amount of the
Senior Loan at the time of initial investment. However, there can be no
assurance that the liquidation of any collateral would satisfy the Borrower's
obligation in the event of non-payment of scheduled interest or principal
payments, or that such collateral could be readily liquidated. Moreover, as a
practical matter, most Borrowers cannot satisfy their debts by selling their
assets. Borrowers pay their debts from the cash flow they generate. This is
particularly the case for Borrowers that are highly leveraged. Many of the
Senior Loans purchased by the Portfolio will be to highly leveraged Borrowers.
If the Borrower's cash flow is insufficient to pay its debts as they come due,
the Borrower is far more likely to seek to restructure its debts than it is to
sell off assets to pay its Senior Loans. Borrowers may try to restructure their
debts either by seeking protection from creditors under Chapter 11 of the
federal Bankruptcy Code or negotiating a work out. In the event of bankruptcy of
a Borrower, the Portfolio could experience delays or limitations with respect to
its ability to realize the benefits of the collateral securing a Senior Loan. To
the extent that a Senior Loan is collateralized by stock in the Borrower or its
subsidiaries, such stock may lose all or substantially all of its value in the
event of bankruptcy of the Borrower. The Agent generally is responsible for
determining that the Lenders have obtained a perfected security interest in the
collateral securing the Senior Loan. If a Borrower files for protection from
creditors under Chapter 11 of the Bankruptcy Code, the Code will impose an
automatic stay that prohibits the Agent from liquidating collateral. The Agent
may ask the bankruptcy court to lift the stay. As a practical matter, the court
is unlikely to lift the stay if it concludes that the Borrower has a chance to
emerge from the reorganization proceedings and the collateral is likely to hold
most of its value.


                                       21

If the Lenders have a good security interest, the Senior Loan will be treated as
a separate class in the reorganization proceedings and will retain a priority
interest in the collateral. Chapter 11 reorganization plans typically are the
product of negotiation among the Borrower and the various creditor classes.
Successful negotiations may require the Lenders to extend the time for
repayment, change the interest rate or accept some consideration in the form of
junior debt or equity securities. A work out outside of bankruptcy may produce
similar concessions by senior lenders.

Some Senior Loans in which the Portfolio may invest are subject to the risk that
a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such Senior Loans to current or future indebtedness of the Borrower
or take other action detrimental to the holders of Senior Loans, such as the
Portfolio, including, under certain circumstances, invalidating such Senior
Loans. Lenders commonly have certain obligations pursuant to the Loan Agreement,
which may include the obligation to make additional loans or release collateral
in certain circumstances.

RESTRICTIONS ON RESALE. Senior Loans, at present, generally are not readily
marketable and may be subject to restrictions on resale. Interests in Senior
Loans generally are not listed on any national securities exchange or automated
quotation system and no active market may exist for many of the Senior Loans in
which the Portfolio may invest. To the extent that a secondary market may exist
for certain of the Senior Loans in which the Portfolio invests, such market may
be subject to irregular trading activity, wide bid/ask spreads and extended
trade settlement periods. The Portfolio has no limitation on the amount of its
assets that may be invested in Senior Loans that are not readily marketable or
are subject to restrictions on resale. Because a substantial portion of the
Portfolio's assets may be invested in Senior Loan interests, the ability of the
Portfolio to dispose of its investments in a timely fashion and at a fair price
may be restricted, and the Portfolio and shareholders may suffer capital losses
as a result. However, many of the Senior Loans in which the Portfolio expects to
purchase interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in Stein Roe's opinion, enhance
the relative liquidity of such interests. The risks associated with illiquidity
are particularly acute in situations where the Portfolio's operations require
cash, such as when the Fund makes a Repurchase Offer for its shares, and may
result in borrowing to meet short-term cash requirements.

ONGOING MONITORING. On behalf of the several Lenders, the Agent generally will
be required to administer and manage the Senior Loans and, with respect to
collateralized Senior Loans, to service or monitor the collateral. In this
connection, the valuation of assets pledged as collateral will reflect market
value and the Agent may rely on independent appraisals as to the value of
specific collateral. The Agent, however, may not obtain an independent appraisal
as to the value of assets pledged as collateral in all cases. The Portfolio
normally will rely primarily on the Agent (where the Portfolio is a Primary
Lender or owns an Assignment) or the selling Lender (where the Portfolio owns a
Participation) to collect principal of and interest on a Senior Loan.
Furthermore, the Portfolio usually will rely on the Agent (where the Portfolio
is a Primary Lender or owns an Assignment) or the selling Lender (where the
Portfolio owns a Participation) to monitor compliance by the Borrower with the
restrictive covenants in the Loan Agreement and notify the Portfolio of any
adverse change in the Borrower's financial condition or any declaration of
insolvency. Collateralized Senior Loans will frequently be secured by all assets
of the Borrower that qualify as collateral, which may include common stock of
the Borrower or its subsidiaries. Additionally, the terms of the Loan Agreement
may require the Borrower to pledge additional collateral to secure the Senior
Loan, and enable the Agent, upon proper authorization of the Lenders, to take
possession of and liquidate the collateral and to distribute the liquidation


                                       22

proceeds pro rata among the Lenders. If the terms of a Senior Loan do not
require the Borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Portfolio will be exposed to the
risk that the value of the collateral will not at all times equal or exceed the
amount of the Borrower's obligations under the Senior Loan. Lenders that have
sold Participation interests in such Senior Loan will distribute liquidation
proceeds received by the Lenders pro rata among the holders of such
Participations. Stein Roe will also monitor these aspects of the Portfolio's
investments and, where the Portfolio is a Primary Lender or owns an Assignment,
will be directly involved with the Agent and the other Lenders regarding the
exercise of credit remedies.

LIMITED INFORMATION. The types of Senior Loans in which the Portfolio will
invest historically have not been rated by a nationally recognized statistical
rating organization, have not been registered with the SEC or any state
securities commission, and have not been listed on any national securities
exchange. Although the Portfolio will generally have access to financial and
other information made available to the Lenders in connection with Senior Loans,
the amount of public information available with respect to Senior Loans will
generally be less extensive than that available for rated, registered or
exchange listed securities. As a result, the performance of the Portfolio and
its ability to meet its investment objective is more dependent on the analytical
ability of Stein Roe than would be the case for an investment company that
invests primarily in rated, registered or exchange listed securities.

To the extent that Senior Loans are rated, the Portfolio may invest in the
lowest rated loans, but does not intend to invest more than 5% of its assets in
Senior Loans rated below B- or B3 by S&P or Moody's or unrated Senior Loans
considered to be of comparable quality.

BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade are
commonly referred to as high-yield, high risk debt or "junk debt." They are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and interest payments. The prices of
high-yield securities have been found to be less sensitive to interest rate
changes than higher-rated investments, but more sensitive to adverse economic
downturns or individual corporate developments. A projection of an economic
downturn or of a period of rising interest rates, for example, could cause a
decline in the prices of high-yield securities.

The secondary market in which high-yield securities are traded is generally less
liquid than the market for higher-grade debt. Less liquidity in the secondary
trading market could adversely affect the price at which the Portfolio could
sell a high-yield Senior Loan, and could adversely affect the net asset value of
the Fund's shares. At times of less liquidity, it may be more difficult to value
high-yield Senior Loans because this valuation may require more research, and
elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available.

Investments in high-yield Senior Loans may result in greater net asset value
fluctuation than if the Portfolio did not make such investments.

There is no limit on the percentage of assets that may be invested in Senior
Loans and other securities that are rated below investment grade or that are
unrated but of comparable quality.

INVESTMENTS IN NON-U.S. ISSUERS. Investment in non-U.S. issuers involves special
risks, including that non-U.S. issuers may be subject to less rigorous
accounting and reporting


                                       23

requirements than are U.S. issuers, less rigorous regulatory requirements,
differing legal systems and laws relating to creditors' rights, the potential
inability to enforce legal judgments, and the potential for political, social
and economic adversities.

INVESTMENTS IN EQUITY SECURITIES. To the extent the Portfolio invests in equity
securities, the value of its portfolio will be affected by changes in the stock
markets, which may be the result of domestic or international political or
economic news, changes in interest rates, or changing investor sentiment. The
stock market can be volatile and stock prices can change substantially. The
equity securities of smaller companies are more sensitive to these changes than
those of larger companies. This market risk will affect the Fund's net asset
value, which will fluctuate as the value of the securities held by the Portfolio
changes. Not all stock prices change uniformly or at the same time and not all
stock markets move in the same direction at the same time. Other factors affect
a particular stock's prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.

FINANCIAL SERVICES INDUSTRY CONCENTRATION. The financial services industries are
subject to extensive government regulation which can limit both the amounts and
types of loans and other financial commitments they can make, and the interest
rates and fees they can charge. Profitability is largely dependent on the
availability and cost of capital funds, and can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties of
borrowers can negatively affect the financial services industries. Insurance
companies can be subject to severe price competition. The financial services
industries are currently undergoing relatively rapid change as existing
distinctions between financial service segments become less clear. For instance,
recent business combinations have included insurance, finance, and securities
brokerage under single ownership. Some primarily retail corporations have
expanded into securities and insurance industries. Moreover, the federal laws
generally separating commercial and investment banking recently have been
repealed.

PREPAYMENT RISK. Borrowers may pay back principal before the scheduled due date.
Borrowers may find it advantageous to prepay principal due to a decline in
interest rates or an excess in cash flow. Such prepayments may require the
Portfolio to replace a Senior Loan with a lower-yielding security. This may
adversely affect the distributions on the Fund's shares.

LEGISLATION; RESTRICTIONS. To the extent that legislation or state or federal
regulators impose additional requirements or restrictions with respect to the
ability of financial institutions to make loans in connection with highly
leveraged transactions, the availability of Senior Loan interests for investment
by the Portfolio may be adversely affected. In addition, such requirements or
restrictions may reduce or eliminate sources of financing for certain Borrowers.
Further, to the extent that legislation or federal or state regulators require
such institutions to dispose of Senior Loan interests relating to highly
leveraged transactions or subject such Senior Loan interests to increased
regulatory scrutiny, such financial institutions may determine to sell Senior
Loan interests in a manner that results in a price that, in the opinion of Stein
Roe, is not indicative of fair value. Were the Portfolio to attempt to sell a
Senior Loan interest at a time when a financial institution was engaging in such
a sale with respect to the Senior Loan interest, the price at which the
Portfolio could consummate such a sale might be adversely affected.

REPURCHASE OFFER RISKS. The Fund, as a fundamental policy, will make quarterly
repurchases for 5% to 25% of shares outstanding at net asset value. (See
"Periodic Repurchase Offers"


                                       24

below for more information.) However, shares are less liquid than shares of
funds that trade on a stock exchange, and Class B and Class C shareholders who
offer for repurchase shares held for less than five years and one year,
respectively, will pay an EWC. (See "How to Buy Shares.") Under limited
circumstances, the Fund may suspend or postpone a quarterly repurchase offer --
the Fund must meet certain regulatory requirements to do so. There is no
guarantee that shareholders will be able to sell all of their shares that they
desire to sell in a quarterly repurchase offer.

CLOSED-END FUND RISKS. The Fund is a closed-end investment company designed
primarily for long-term investors and not as a trading vehicle. The Fund does
not intend to list its shares for trading on any national securities exchange.
There is not expected to be any secondary trading market in the shares and the
shares should be considered illiquid. The shares are, therefore, not readily
marketable. The shares of closed-end investment companies often trade at a
discount from their net asset values and, in the unlikely event that a secondary
market for the shares were to develop, the shares likewise may trade at a
discount from net asset value.

NON-DIVERSIFICATION. The Portfolio has registered as a "non-diversified"
investment company so that, subject to its investment restrictions, it will be
able to invest more than 5% of the value of its assets in the obligations of any
single issuer, including Senior Loans of a single Borrower or Participations
purchased from a single Lender. (See "Investment Restrictions" in the Statement
of Additional Information.) The Portfolio does not intend, however, to invest
more than 5% of the value of its assets in interests in Senior Loans of a single
Borrower, and the Portfolio intends to limit its investments so as to comply
with the diversification requirements imposed by the Internal Revenue Code for
qualification as a "regulated investment company." To the extent the Portfolio
invests a relatively high percentage of its assets in obligations of a limited
number of issuers, the Portfolio will be more susceptible than a more widely
diversified investment company to the consequences of any single corporate,
economic, political or regulatory occurrence.

OTHER PRACTICES. The Portfolio may use various investment practices that involve
special considerations, including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed-delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Other Investment Practices."


                           OTHER INVESTMENT PRACTICES

Stein Roe may use some or all of the following investment practices when, in its
opinion, their use is appropriate. These investment practices involve certain
special risk considerations. Although Stein Roe believes that these investment
practices may further the investment objective, no assurance can be given that
the utilization of these investment practices will achieve that result.

STRUCTURED NOTES. The Portfolio may invest up to 5% of its total assets in
structured notes, including "total rate of return swaps" with rates of return
determined by reference to the total rate of return on one or more loans
referenced in such notes. The rate of return on the structured note may be
determined by applying a multiplier to the rate of total return on the
referenced loan or loans. Application of a multiplier is comparable to the use
of financial leverage, a speculative technique. Leverage magnifies the potential
for gain and the risk of loss, because a relatively


                                       25

small decline in the value of a referenced loan could result in a relatively
large loss in the value of a structured note. Structured notes are treated as
Senior Loans for purposes of the Portfolio's policy of normally investing at
least 80% of its assets in Senior Loans.

BORROWING. The Portfolio is authorized to borrow money for the purpose of
obtaining short-term liquidity in connection with Repurchase Offers for Fund
shares and for temporary, extraordinary or emergency purposes. The Portfolio may
enter into an agreement with a financial institution providing for an unsecured
discretionary credit facility, the proceeds of which may be used to finance, in
part, repurchases. (See "Periodic Repurchase Offers.") Under the requirements of
the 1940 Act, the Portfolio, immediately after any such borrowings, must have an
asset coverage of at least 300%. Asset coverage is the ratio which the value of
the total assets of the Portfolio, less all liabilities and indebtedness not
represented by senior securities (as that term is defined in the 1940 Act),
bears to the aggregate amount of any such borrowings by the Portfolio. The
rights of any lenders to the Portfolio to receive payments of interest on and
repayments of principal of borrowings will be senior to those of shareholders,
and the terms of any borrowings may contain provisions which limit certain
activities of the Portfolio, including the payment of dividends to shareholders
in certain circumstances. Further, the terms of any such borrowings may, and the
provisions of the 1940 Act do (in certain circumstances), grant lenders certain
voting rights in the event of default in the payment of interest or repayment of
principal. In the event that such provisions would impair the Portfolio's status
as a regulated investment company, the Portfolio, subject to its ability to
liquidate its relatively illiquid investments, intends to repay the borrowings.
Interest payments and fees incurred in connection with any borrowings will
reduce the amount of net income available for payment to shareholders.

INTEREST RATE SWAPS AND OTHER HEDGING TRANSACTIONS. The Portfolio may enter into
various interest rate hedging and risk management transactions. Certain of these
interest rate hedging and risk management transactions may be considered to
involve derivative instruments. A derivative is a financial instrument whose
performance is derived at least in part from the performance of an underlying
index, security or asset. The values of certain derivatives can be affected
dramatically by even small market movements, sometimes in ways that are
difficult to predict. There are many different types of derivatives with many
different uses. The Portfolio expects to enter into these transactions primarily
to seek to preserve a return on a particular investment or portion of its
portfolio, and may also enter into such transactions to seek to protect against
decreases in the anticipated rate of return on floating or variable rate Senior
Loans the Portfolio owns or anticipates purchasing at a later date, or for other
risk management strategies such as managing the effective dollar-weighted
average duration of the investment portfolio. In addition, the Portfolio may
also engage in hedging transactions, including entering into put and call
options, to seek to protect the value of its portfolio against declines in net
asset value resulting from changes in interest rates or other market changes.
Market conditions will determine whether and in what circumstances the Portfolio
would employ any hedging and risk management techniques. The Portfolio will not
engage in any of these transactions for speculative purposes and will use them
only as a means to hedge or manage the risks associated with assets held in, or
anticipated to be purchased for, the investment portfolio or obligations
incurred by the Portfolio. The successful utilization of hedging and risk
management transactions requires skills different from those needed in the
selection of Senior Loans. The Portfolio will incur brokerage and other costs in
connection with its hedging transactions.

The Portfolio may enter into interest rate swaps or purchase or sell interest
rate caps or floors. The Portfolio will not sell interest rate caps or floors
that it does not own. Interest rate swaps


                                       26

involve the exchange by the Portfolio with another party of their respective
obligations to pay or receive interest; e.g., an exchange of an obligation to
make floating rate payments for an obligation to make fixed rate payments. For
example, the Portfolio may seek to shorten the effective interest rate
redetermination period of a Senior Loan to a Borrower that has selected an
interest rate redetermination period of one year. The Portfolio could exchange
the Borrower's obligation to make fixed rate payments for one year for an
obligation to make payments that readjust monthly. In such event, the Portfolio
would consider the interest rate redetermination period of such Senior Loan to
be the shorter period.

The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest at the difference between the index and the predetermined rate on a
notional principal amount (the reference amount with respect to which interest
obligations are determined although no actual exchange of principal occurs) from
the party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
between the index and the predetermined rate on a notional principal amount from
the party selling such interest rate floor. The Portfolio will not enter into
swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Portfolio.

In circumstances in which Stein Roe anticipates that interest rates will
decline, the Portfolio might, for example, enter into an interest rate swap as
the floating rate payor or, alternatively, purchase an interest rate floor. In
the case of purchasing an interest rate floor, if interest rates declined below
the floor rate, the Portfolio would receive payments from its counterparty which
would wholly or partially offset the decrease in the payments it would receive
with respect to the portfolio assets being hedged. In the case where the
Portfolio purchases such an interest rate swap, if the floating rate payments
fell below the level of the fixed rate payment set in the swap agreement, the
Portfolio's counterparty would pay the Portfolio amounts equal to interest
computed at the difference between the fixed and floating rates over the
notional principal amount. Such payments would offset or partially offset the
decrease in the payments the Portfolio would receive with respect to floating
rate portfolio assets being hedged.

The successful use of swaps, caps and floors to preserve the rate of return on a
portfolio of Senior Loans depends on Stein Roe's ability to predict correctly
the direction and extent of movements in interest rates. Although Stein Roe
believes that use of the hedging and risk management techniques described above
will benefit the Portfolio, if Stein Roe's judgment about the direction or
extent of the movement in interest rates is incorrect, the Portfolio's overall
performance would be worse than if it had not entered into any such transaction.
For example, if the Portfolio had purchased an interest rate swap or an interest
rate floor to hedge against its expectation that interest rates would decline
but instead interest rates rose, the Portfolio would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor.

Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, Stein Roe and the Portfolio believe such obligations do not
constitute senior securities. The Portfolio will usually enter into interest
rate swaps on a net basis; i.e., where the two parties make net payments with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be accrued and an amount of


                                       27

cash or liquid securities having an aggregate net asset value at least equal to
the accrued excess will be maintained. If the Portfolio enters into a swap on
other than a net basis, the Portfolio will maintain the full amount of its
obligations under each such swap. Accordingly, the Portfolio does not treat
swaps as senior securities. The Portfolio may enter into swaps, caps and floors
with member banks of the Federal Reserve System, members of the New York Stock
Exchange ("NYSE") or other entities determined to be creditworthy by Stein Roe,
pursuant to procedures adopted and reviewed on an ongoing basis by the Board. If
a default occurs by the other party to such transactions, the Portfolio will
have contractual remedies pursuant to the agreements related to the transaction,
but such remedies may be subject to bankruptcy and insolvency laws that could
affect the Portfolio's rights as a creditor. The swap market has grown
substantially in recent years with a large number of banks and financial
services firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
Caps and floors are more recent innovations and they are less liquid than swaps.
There can be no assurance, however, that the Portfolio will be able to enter
into interest rate swaps or to purchase interest rate caps or floors at prices
or on terms Stein Roe believes are advantageous to the Portfolio. In addition,
although the terms of interest rate swaps, caps and floors may provide for
termination, there can be no assurance that the Portfolio will be able to
terminate an interest rate swap or to sell or offset interest rate caps or
floors that it has purchased.

New financial products continue to be developed and the Portfolio may invest in
any such products as may be developed to the extent consistent with its
investment objective and the regulatory and federal tax requirements applicable
to investment companies.

"WHEN-ISSUED" AND "DELAYED-DELIVERY" TRANSACTIONS. The Portfolio may also
purchase and sell interests in Senior Loans and other portfolio securities on a
"when-issued" and "delayed-delivery" basis. No income accrues to the Portfolio
on such Senior Loans in connection with such purchase transactions prior to the
date the Portfolio actually takes delivery of such Senior Loans. These
transactions are subject to market fluctuation; the value of the interests in
Senior Loans and other portfolio debt securities at delivery may be more or less
than their purchase price, and yields generally available on such Senior Loans
when delivery occurs may be higher or lower than yields on the Senior Loans
obtained pursuant to such transactions. Because the Portfolio relies on the
buyer or seller, as the case may be, to consummate the transaction, failure by
the other party to complete the transaction may result in the Portfolio missing
the opportunity of obtaining a price or yield considered to be advantageous.
When the Portfolio is the buyer in such a transaction, however, it will maintain
cash or liquid securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. The Portfolio will make commitments
to purchase such Senior Loans on such basis only with the intention of actually
acquiring these Senior Loans, but the Portfolio may sell such Senior Loans prior
to the settlement date if such sale is considered to be advisable. To the extent
the Portfolio engages in "when-issued" and "delayed-delivery" transactions, it
will do so for the purpose of acquiring Senior Loans for its investment
portfolio consistent with its investment objective and policies and not for the
purpose of investment leverage. No specific limitation exists as to the
percentage of the Portfolio's assets that may be used to acquire securities on a
"when-issued" or "delayed-delivery" basis.

REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements (a
purchase of, and a simultaneous commitment to resell, a financial instrument at
an agreed-upon price on an agreed-upon date) only with member banks of the
Federal Reserve System and member firms of the NYSE. When participating in
repurchase agreements, the Portfolio buys securities from a


                                       28

seller (e.g., a bank or brokerage firm) with the agreement that the seller will
repurchase the securities at a higher price at a later date. Such transactions
afford an opportunity for the Portfolio to earn a return on available liquid
assets at minimal market risk, although the Portfolio may be subject to various
delays and risks of loss if the counterparty is unable to meet its obligation to
repurchase. Under the 1940 Act, repurchase agreements are deemed to be
collateralized loans of money by the Portfolio to the counterparty. In
evaluating whether to enter into a repurchase agreement, Stein Roe will consider
carefully the creditworthiness of the counterparty. If the member bank or member
firm that is the party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to the Bankruptcy Code, the law regarding the rights
of the Portfolio is unsettled. The securities underlying a repurchase agreement
will be marked to market every business day so that the value of the collateral
is at least equal to the value of the loan, including the accrued interest
thereon, and Stein Roe will monitor the value of the collateral. No specific
limitation exists as to the percentage of the Portfolio's assets that may be
used to participate in repurchase agreements.

REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements with respect to debt obligations that could otherwise be sold by the
Portfolio. A reverse repurchase agreement is an instrument under which the
Portfolio may sell an underlying debt security and simultaneously obtain the
commitment of the purchaser (a commercial bank or a broker or dealer) to sell
the security back to the Portfolio at an agreed-upon price on an agreed-upon
date. The Portfolio will maintain cash or liquid securities in an amount
sufficient to cover its obligations with respect to reverse repurchase
agreements. The Portfolio receives payment for such securities only upon
physical delivery or evidence of book entry transfer by its custodian. SEC
regulations require either that securities sold by the Portfolio under a reverse
repurchase agreement be segregated pending repurchase or that the proceeds be
segregated on the Portfolio's books and records pending repurchase. Reverse
repurchase agreements could involve certain risks in the event of default or
insolvency of the other party, including possible delays or restrictions upon
the Portfolio's ability to dispose of the underlying securities. An additional
risk is that the market value of securities sold by the Portfolio under a
reverse repurchase agreement could decline below the price at which the
Portfolio is obligated to repurchase them. Reverse repurchase agreements will be
considered borrowings by the Portfolio and as such would be subject to the
restrictions on borrowing described in the Statement of Additional Information
under "Investment Restrictions." The Portfolio will not hold more than 5% of the
value of its total assets in reverse repurchase agreements as of the time the
agreement is entered into.

                         DISTRIBUTIONS AND INCOME TAXES

DISTRIBUTIONS. Income dividends are declared each business day, paid monthly,
and confirmed at least quarterly. Capital gains, if any, are distributed at
least annually, usually in December. Shares accrue dividends as long as they are
issued and outstanding (i.e., from the date net asset value is determined for
the purchase order to the Redemption Pricing Date of the Repurchase Offer in
which the shares are accepted for repurchase by the Fund).

Dividend payments are not guaranteed and may vary with each payment. The Fund
does not pay "interest" or guarantee any fixed rate of return.

If you do not indicate on your application your preferences for handling
distributions, the Fund will automatically reinvest all distributions in
additional shares of the Fund. You can choose one of the following options for
distributions when you open your account: (1) reinvest all


                                       29

distributions in additional shares of the Fund; (2) reinvest all distributions
in shares of another fund; (3) receive dividends in cash and reinvest capital
gains; or (4) receive all distributions in cash. Distributions of $10 or less
will automatically be reinvested in additional shares. If you elect to receive
distributions by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date, the
distribution will be reinvested in additional shares.

The Fund is authorized to borrow money subject to certain restrictions. (See
"Other Investment Practices.") Under the 1940 Act, the Fund may not declare any
dividend or other distribution on its shares unless the Fund has, at the time of
declaration, asset coverage of at least 300% of its aggregate indebtedness,
after deducting the amount of the distribution. This limitation may impair the
Fund's ability to maintain its qualification for taxation as a regulated
investment company.

INCOME TAXES. The Fund intends to satisfy those requirements relating to the
sources of its income, the distribution of its income, and the diversification
of its assets necessary to qualify for the special tax treatment afforded to
regulated investment companies under the Internal Revenue Code (the "Code") and
thereby be relieved of federal income or excise taxes to the extent that it
distributes its net investment income and net realized capital gains to
shareholders in accordance with the requirements imposed by the Code. For a
detailed discussion of tax issues pertaining to the Fund, see "Additional Income
Tax Considerations" in the Statement of Additional Information.

Your distributions will be taxable to you, under income tax law, whether
received in cash or reinvested in additional shares. For federal income tax
purposes, any distribution that is paid in January but was declared in October,
November or December of the prior calendar year is deemed paid in the prior
calendar year.

You will be subject to federal income tax at ordinary rates on income dividends
and distributions of net short-term capital gains. Distributions of net
long-term capital gains will be taxable to you as long-term capital gains
regardless of the length of time you have held your shares.

You will be advised annually as to the source of distributions for tax purposes.
If you are not subject to tax on your income, you will not be required to pay
tax on these amounts.

A shareholder who, pursuant to a Repurchase Offer, offers all of his or her
shares for repurchase (and is not considered to own any other shares pursuant to
attribution rules contained in the Code) may realize a taxable gain or loss
depending upon the shareholder's basis in the shares. Such gain or loss realized
on the disposition of shares (whether pursuant to a Repurchase Offer or in
connection with a sale or other taxable disposition of shares in a secondary
market) generally will be treated as long-term capital gain or loss if the
shares have been held as a capital asset for more than one year and as
short-term capital gain or loss if held as a capital asset for one year or less.
Net long-term capital gains realized upon the disposition of shares held longer
than five years and whose holding periods begin after December 31, 2000, will be
subject to a lower maximum capital gains tax rate than is currently available.
If shares are sold at a loss after being held for six months or less, the loss
will be treated as long-term -- instead of short-term -- capital loss to the
extent of any capital gain distributions received on those shares. All or a
portion of any loss realized on a sale or exchange of shares of the Fund will be
disallowed if the shareholder acquires other shares within 30 days before or
after the disposition. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.



                                       30

Different tax consequences may apply to shareholders whose shares are
repurchased (other than shareholders who do offer all of their shares for
repurchase described in the previous paragraph) and to shareholders who do not
offer their shares for repurchase in connection with the Repurchase Offer. For
example, if a shareholder offers for repurchase fewer than all his shares, the
proceeds received could be treated as a taxable dividend, a return of capital,
or capital gain depending on the portion of shares repurchased, the Fund's
earnings and profits, and the shareholder's basis in the repurchased shares.
Moreover, when fewer than all shares owned by a shareholder are repurchased
pursuant to a Repurchase Offer, there is a remote possibility that shareholders
whose shares are not repurchased may be considered to have received a deemed
distribution that is taxable to them in whole or in part. You may wish to
consult your tax advisor prior to offering your shares for repurchase.

BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
("backup withholding") from certain payments to a shareholder -- generally
distribution payments and redemption proceeds. Backup withholding may be
required if:

- - the shareholder fails to furnish its properly certified Social Security or
  other tax identification number;

- - the shareholder fails to certify that its tax identification number is correct
  or that it is not subject to backup withholding due to the underreporting of
  certain income;

- - the Internal Revenue Service ("IRS") informs the Fund that the shareholder's
  tax identification number is incorrect.

These certifications are contained in the application that you should complete
and return when you open an account. The Fund must promptly pay to the IRS all
amounts withheld. Therefore, it is usually not possible for the Fund to
reimburse you for amounts withheld. You may, however, claim the amount withheld
as a credit on your federal income tax return.

The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their tax advisors regarding the
specific federal and state tax consequences of purchasing, holding and disposing
of shares, as well as the effects of other state, local and foreign tax laws and
any proposed tax law changes.

                             MANAGEMENT OF THE FUND

BOARD OF TRUSTEES AND INVESTMENT ADVISOR. The Board of Trustees of the Fund has
overall management responsibility for the Fund; the Board of Managers of the
Portfolio has overall management responsibility for the Portfolio. See
"Management" in the Statement of Additional Information for the names of and
other information about the trustees, managers and officers. Since the Fund and
the Portfolio have the same Board members, they have adopted conflict of
interest procedures to monitor and address potential conflicts between the
interests of the Fund and the Portfolio.

The investment advisor, Stein Roe & Farnham Incorporated, One Financial Center,
Boston, MA 02111, is responsible for managing the investment portfolio of the
Portfolio and the business affairs of the Fund, subject to the direction of
their respective Boards. Stein Roe is registered as an investment advisor under
the Investment Advisers Act of 1940. Stein Roe is a direct wholly owned
subsidiary of Liberty Funds Group LLC ("LFG"),


                                       31

which is a direct wholly owned subsidiary of Fleet/Liberty Holdings, Inc., a
U.S. financial holding company, which is a direct wholly owned subsidiary of
Fleet National Bank, a national banking association, which in turn is a direct
wholly owned subsidiary of FleetBoston Financial Corporation, a U.S. financial
holding company. Stein Roe and its predecessor have advised and managed mutual
funds since 1949 and have been providing investment advisory services since
1932.

Stein Roe's mutual funds and institutional investment advisory businesses are
part of a larger business unit known as LFG that includes several separate legal
entities. LFG includes certain affiliates of Stein Roe, principally Colonial
Management Associates, Inc. ("Colonial"). Stein Roe and the LFG business unit
are managed by a single management team. Stein Roe, Colonial and the other LFG
entities also share personnel, facilities, and systems that may be used in
providing administrative or operational services to the Fund. Stein Roe and
Colonial are registered investment advisors. Stein Roe, Colonial and the other
entities that make up LFG are subsidiaries of FleetBoston Financial Corporation.

FEES AND EXPENSES. Stein Roe provides administrative services to the Fund and
the Portfolio and portfolio management services to the Portfolio. Stein Roe is
entitled to receive a monthly administrative fee from the Fund, computed and
accrued daily, based on an annual rate of 0.20% of average net assets and a
monthly management fee from the Portfolio, computed and accrued daily, based on
an annual rate of 0.45% of average net assets of the Portfolio. However, Stein
Roe may waive a portion of its fees.

Stein Roe provides office space and executive and other personnel to the Fund
and bears any sales or promotional expenses. The Fund pays all expenses other
than those paid by Stein Roe, including but not limited to printing and postage
charges, securities registration and custodian fees, and expenses incidental to
its organization.

PORTFOLIO MANAGERS. Brian W. Good and James R. Fellows, senior vice presidents
of Stein Roe, have been primarily responsible for the day-to-day management of
the Portfolio since the Fund and the Portfolio commenced operations. Mr. Fellows
and Mr. Good have been employed by Stein Roe since April 1998. Prior thereto,
Mr. Good was vice president and portfolio manager at Van Kampen American Capital
since 1989 and Mr. Fellows was vice president and senior credit analyst at Van
Kampen American Capital since 1988.

TRANSFER AGENT. Liberty Funds Services, Inc. ("Transfer Agent"), P.O. Box 1722,
Boston, MA 02105, a wholly owned subsidiary of LFG, is the agent of the Fund for
the transfer of shares, disbursement of dividends, and maintenance of
shareholder accounting records. Under a separate agreement, the Transfer Agent
also provides certain investor accounting services to the Portfolio.

DISTRIBUTOR. Fund shares are offered for sale through Liberty Funds Distributor,
Inc. ("Distributor"). The Distributor is a wholly owned indirect subsidiary of
LFG. The business address of the Distributor is One Financial Center, Boston, MA
02111.

CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02101, is the custodian of the Fund and the Portfolio and has custody of the
securities and cash. The custodian, among other things, attends to the
collection of principal and income and payment for and collection of proceeds of
securities bought and sold.


                                       32

                                HOW TO BUY SHARES

Your financial advisor can help you establish an appropriate investment
portfolio, buy shares, and monitor your investments. When the Fund receives your
purchase request in "good form," your shares will be bought at the next
calculated net asset value. "Good form" means that you placed your order with
your brokerage firm or your payment has been received and your application is
complete, including all necessary signatures.

Outlined below are various ways you can purchase shares:



METHOD               INSTRUCTIONS

                  
Through your         Your financial advisor can help you establish your account
financial advisor    and buy Fund shares on your behalf. Your financial advisor
                     may charge you fees for executing the purchase for you.
- --------------------------------------------------------------------------------
By check             For new accounts, send a completed application and check
(new account)        made payable to the Fund to the transfer agent, Liberty
                     Funds Services, Inc., P.O. Box 1722, Boston, MA 02105-1722.
- --------------------------------------------------------------------------------
By check             For existing accounts, fill out and return the additional
(existing account)   investment stub included in your quarterly statement, or
                     send a  letter of instruction, including your Fund name and
                     account number with a check made payable to the Fund to
                     Liberty Funds Services, Inc., P.O. Box 1722, Boston, MA
                     02105-1722.
- --------------------------------------------------------------------------------
By exchange          You or your financial advisor may acquire shares for your
                     account by exchanging shares you own in one fund for shares
                     of the same class of the Fund at no additional cost. There
                     may be an additional charge if exchanging from a money
                     market fund. To exchange by telephone, call 800-422-3737.
- --------------------------------------------------------------------------------
By wire              You may purchase shares by wiring money from your bank
                     account to your Fund account. To wire funds to your Fund
                     account, call 800-422-3737 to obtain a control number and
                     the wiring instructions.
- --------------------------------------------------------------------------------
By electronic        You may purchase shares by electronically transferring
funds transfer       money from your bank account to your Fund account by
                     calling 800-422-3737. An electronic funds transfer may take
                     up to two business days to settle and be considered in
                     "good form." You must set up this feature prior to your
                     telephone request. Be sure to complete the appropriate
                     section of the application.
- --------------------------------------------------------------------------------
Automatic            You can make monthly or quarterly investments automatically
investment plan      from your bank account to your Fund account. You can select
                     a pre-authorized amount to be sent via electronic funds
                     transfer. Be sure to complete the appropriate section of
                     the application for this feature.
- --------------------------------------------------------------------------------
By dividend          You may automatically invest dividends distributed by
diversification      another fund into the same class of shares of the Fund at
                     no additional sales charge. To invest your dividends in
                     another fund, call 800-422-3737.


INVESTMENT MINIMUMS
Initial Investment......$2,500
Subsequent Investments.....$50
Automatic Investment Plan..$50
Retirement Plans...........$25



                                       33

The Fund reserves the right to change these investment minimums. The Fund also
reserves the right to refuse a purchase order for any reason, including if it
believes that doing so would be in the best interest of the Fund and its
shareholders.

                             MULTIPLE SHARE CLASSES

CHOOSING A SHARE CLASS. The Fund offers three classes of shares in this
prospectus -- Class A, B and C. Each share class has its own sales charge and
expense structure. Determining which share class is best for you depends on the
dollar amount you are investing and the number of years for which you are
willing to invest. Purchases of $1 million or more are automatically invested in
Class A shares. Based on your personal situation, your financial advisor can
help you decide which class of shares makes the most sense for you. The Fund
also offers Class Z shares, which are available only to institutional and other
investors through a separate prospectus.

SALES CHARGES. You may be subject to an initial sales charge when you purchase
or an early withdrawal charge ("EWC") when you offer your shares for repurchase.
These sales charges are described below. In certain circumstances, these sales
charges are waived, as described below and in the Statement of Additional
Information.

CLASS A SHARES. Your purchases of Class A shares generally are at the public
offering price. This price includes a sales charge that is based on the amount
of your investment. The sales charge you pay on additional investments is based
on the amount of your additional purchase, plus the current value of your
account. The amount of the sales charge differs depending on the amount you
invest as shown in the table below. The table below also shows the commission
paid to the financial advisor firm on sales of Class A shares.



                                      AS A % OF                 % OF OFFERING
                                      THE PUBLIC   AS A % OF    PRICE PAID TO
                                       OFFERING       YOUR        FINANCIAL
         AMOUNT OF PURCHASE             PRICE      INVESTMENT   ADVISOR FIRM
                                                       
   Less than $100,000                    3.50         3.63          3.25
  ----------------------------------------------------------------------------
   $100,000 to less than $500,000        2.25         2.30          2.00
  ----------------------------------------------------------------------------
   $500,000 to less than $1,000,000      1.25         1.27          1.00
  ----------------------------------------------------------------------------
   $1,000,000 or more*                   0.00         0.00          0.50


* Class A shares bought without an initial sales charge in accounts aggregating
$1 million to $25 million at the time of purchase are subject to a 1.00%
contingent deferred sales charge ("CDSC") if the shares are sold within 18
months of the time of purchase. Subsequent Class A purchases that bring your
account value above $1 million are subject to a CDSC if redeemed within 18
months of the date of purchase. The 18 month period begins on the first day of
the month following each purchase. The CDSC does not apply to retirement plans
purchased through a fee-based program.


                                       34

CLASS A SHARES. For Class A share purchases of $1 million or more, financial
advisors receive a commission from the Distributor as follows:



                    AMOUNT PURCHASED                      COMMISSION %

                                                       
          First $3 million                                   1.00
         --------------------------------------------------------------
          $3 million to less than $5 million                 0.80
         --------------------------------------------------------------
          $5 million to less than $25 million                0.50
         --------------------------------------------------------------
          $25 million or more                                0.25*


      *Paid over 12 months but only to the extent the shares remain outstanding.

For Class A share purchases by participants in certain group retirement plans
offered through a fee-based program, financial advisors receive a 1.00%
commission from the Distributor on all purchases of less than $3 million.

REDUCED SALES CHARGES FOR LARGER INVESTMENTS. There are two ways for you to pay
a lower sales charge when purchasing Class A shares. The first is through Rights
of Accumulation. If the combined value of the Fund accounts in all classes
maintained by you, your spouse or your minor children reaches a discount level
(according to the above chart), your next purchase will receive the lower sales
charge. The second is by signing a Statement of Intent within 90 days of your
purchase. By doing so, you would be able to pay the lower sales charge on all
purchases by agreeing to invest a total of at least $100,000 within 13 months.
If your Statement of Intent purchases are not completed within 13 months, you
will be charged the applicable sales charge. In addition, certain investors may
purchase Class A shares at a reduced sales charge or net asset value, which is
the value of a Fund share excluding any sales charges. See "Programs for
Reducing or Eliminating Sales Charges" in the Statement of Additional
Information for a description of these situations.

CLASS B SHARES. Your purchases of Class B shares are at the Class B's net asset
value. Class B shares have no front-end sales charge, but carry an EWC that is
imposed only on shares sold prior to the completion of the periods shown in the
chart below. The EWC generally declines each year and eventually disappears over
time. Class B shares automatically convert to Class A shares after eight years.
The Distributor pays the financial advisor firm an up-front commission of 3.25%
on sales of Class B shares.



        HOLDING PERIOD AFTER PURCHASE    % DEDUCTED WHEN SHARES ARE SOLD

                                      
        Through first year                          3.25
       ------------------------------------------------------------------
        Through second year                         3.00
       ------------------------------------------------------------------
        Through third year                          2.00
       ------------------------------------------------------------------
        Through fourth year                         1.50
       ------------------------------------------------------------------
        Through fifth year                          1.00
       ------------------------------------------------------------------
        Longer than five years                      0.00


CLASS C SHARES. Your purchases of Class C shares are at Class C's net asset
value. Although Class C shares have no front-end sales charge, they carry an EWC
of 1% that is applied to shares sold within the first year after they are
purchased. After holding shares for one year, you may sell them at any time
without paying an EWC. Class C


                                       35

shares do not convert into Class A shares. The Distributor pays the financial
advisor firm an up-front commission of 1.00% on sales of Class C shares.

DISTRIBUTION AND SERVICE FEES. In addition to an EWC, each class of shares is
authorized under a distribution plan ("Plan") to use the assets attributable to
a class to finance certain activities relating to the distribution of shares to
investors. These include marketing and other activities to support the
distribution of the Class A, B, and C shares and the services provided to you by
your financial advisor. The Plan was approved and reviewed in a manner
consistent with Rule 12b-1 under the 1940 Act, which regulates the manner in
which an open-end investment company may directly or indirectly bear the
expenses of distributing its shares. Although the Fund is not an open-end
investment company, it has undertaken to comply with the terms of Rule 12b-1 as
a condition of a exemptive order under the 1940 Act to permit it to have a
multi-class structure, EWCs, and distribution fees.

Under the Plan, distribution and service fees paid by the Fund to the
Distributor may equal up to an annual rate of 0.35% of average daily net assets
attributable to Class A shares, 0.70% of average daily net assets attributable
to Class B shares, and 0.85% of average daily net assets attributable to Class C
shares, respectively. Since the distribution and service fees are payable
regardless of the Distributor's expenses, the Distributor may realize a profit
from the fees. The Plan authorizes any other payments by the Fund to the
Distributor and its affiliates to the extent that such payments might be
construed to be indirect financing of the distribution of Fund shares.

The trustees believe that the Plan could be a significant factor in the growth
and retention of Fund assets resulting in a more advantageous expense ratio and
increased investment flexibility which could benefit each class of Fund
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 Fund and
who 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 a vote of a
majority of the outstanding voting securities of the relevant class of shares
and all material amendments of the Plan must be approved by the trustees in the
manner provided in the foregoing sentence. The Plan may be terminated at any
time by a vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities of the relevant class of shares.
The continuance of the Plan will only be effective if the selection and
nomination of the Independent Trustees is effected by such Independent Trustees.

EARLY WITHDRAWAL CHARGES ("EWCS"). Certain investments in Class A, B and C
shares are subject to an EWC. You will pay the EWC only on shares you offer for
repurchase within a certain amount of time after purchase. The EWC generally
declines each year until there is no charge for shares repurchased. The EWC is
applied to the net asset value at the time of purchase or repurchase, whichever
is lower. For purposes of calculating the EWC, the start of the holding period
is the first day of the month following each purchase. Shares you purchase with
reinvested dividends or capital gains are not subject to an EWC. When shares are
repurchased, the Fund will automatically repurchase those shares not subject to
an EWC and then those you have held the longest. This policy helps reduce and
possibly eliminate the potential impact of the EWC. In certain circumstances,
EWCs may be waived, as described in the Statement of Additional Information.



                                       36

CONVERSION FEATURE. Class B shares will automatically convert to Class A shares
after eight years and after that date, Class B shares will no longer be subject
to the distribution fees applicable to Class B shares. Conversion will be on the
basis of the relative net asset values per share, without the imposition of any
sales charge, fee or other charge. The purpose of the conversion feature is to
relieve the holders of Class B shares from asset-based distribution expenses
applicable to such shares at such time as the Class B shares have been
outstanding for a duration sufficient for the Distributor to have been
substantially compensated for distribution-related expenses incurred in
connection with those shares. Class C shares do not convert to Class A shares.
Therefore, holders of Class C shares will continue to bear the asset-based
distribution fees on the Class C shares for as long as they hold such shares.

HOW TO EXCHANGE SHARES. Shareholders of the Fund whose shares are repurchased
during a Repurchase Offer may exchange those shares for shares of the same class
of a fund distributed by the Distributor at net asset value. Fund shareholders
will not be able to participate in this exchange privilege at any time other
than in connection with a Repurchase Offer. If your shares are subject to an
EWC, you will not be charged an EWC upon the exchange. However, when you sell
the shares acquired through the exchange, the shares sold may be subject to a
CDSC (a CDSC is the deferred sales charge applicable to the open-end Liberty
Funds) or EWC, depending upon when you originally purchased the shares you
exchanged. For purposes of computing the CDSC or EWC, the length of time you
have owned your shares will be computed from the date of your original purchase
and the applicable CDSC or EWC will be the CDSC or EWC of the original Fund.

Unless your account is part of a tax-deferred retirement plan, an exchange is a
taxable event. Therefore, you may realize a gain or a loss for tax purposes. The
Fund may terminate your exchange privilege if Stein Roe determines that your
exchange activity is likely to adversely impact its ability to manage the
Portfolio.

                           PERIODIC REPURCHASE OFFERS

The Board has adopted share repurchase policies as fundamental policies. Those
policies, which may not be changed without the vote of the holders of a majority
of the Fund's outstanding voting securities, provide that each calendar quarter,
the Fund intends to make a Repurchase Offer to repurchase a portion of the
outstanding shares from shareholders who request repurchases. The price of the
repurchases of shares normally will be the net asset value per share determined
as of the close of business (4 p.m., Eastern time) on the date the Repurchase
Offer ends or within a maximum of 14 days after the Repurchase Offer ends as
described below.

REPURCHASE PROCEDURE. At the beginning of each Repurchase Offer, shareholders
will be notified in writing about the Repurchase Offer, how they may request
that the Fund repurchase their shares and the deadline for shareholders to
provide their repurchase requests to the Distributor (the "Repurchase Request
Deadline"), which is the date the Repurchase Offer ends. The time between the
notification of the shareholders and the Repurchase Request Deadline may vary
from no more than six weeks to no less than three weeks. For each Repurchase
Offer, it is anticipated that each Repurchase Request Deadline will be on the
15th day in each of the months of March, June, September and December, or, if
the 15th day is not a business day, the next business day. The repurchase price
of the shares will be the net asset value as of the close of the NYSE on the
date on which the repurchase price of shares will be determined (the "Repurchase
Pricing Date"). It is anticipated that normally the Repurchase Pricing Date will
be the same date as the Repurchase Request Deadline, and if so, the Repurchase
Request Deadline will be set for a


                                       37

time no later than the close of the NYSE on such date. The Fund has determined
that the Repurchase Pricing Date may occur no later than the 14th day after the
Repurchase Request Deadline or the next business day if the 14th day is not a
business day.

The Board may establish other policies for repurchases of shares that are
consistent with the 1940 Act and other pertinent laws. Shares offered for
repurchase by shareholders by any Repurchase Request Deadline will be
repurchased subject to the aggregate repurchase amounts established for that
Repurchase Request Deadline. Repurchase proceeds will be paid to shareholders in
cash within seven days after each Repurchase Pricing Date. The end of the seven
days is referred to as the "Repurchase Payment Deadline."

Repurchase offers and the need to fund repurchase obligations may affect the
ability of the Fund to be fully invested, which may reduce returns. Moreover,
diminution in the size of the Fund through repurchases without offsetting new
sales may result in untimely sales of Senior Loans and a higher expense ratio
and may limit the ability of the Fund to participate in new investment
opportunities. The Fund may borrow to meet repurchase obligations, which entails
certain risks and costs (see "Borrowing"). The Fund may also sell Senior Loans
to meet repurchase obligations which, in certain circumstances, may adversely
affect the market for Senior Loans and reduce the Fund's value.

REPURCHASE AMOUNTS. The Board, in its sole discretion, will determine the number
of shares that the Fund will offer to repurchase (the "Repurchase Offer Amount")
for a given Repurchase Request Deadline. However, the Repurchase Offer Amount
will be at least 5% and no more than 25% of the total number of shares
outstanding on the Repurchase Request Deadline.

If shareholders offer for repurchase more than the Repurchase Offer Amount for a
given Repurchase Offer, the Fund may repurchase an additional amount of shares
of up to 2% of the shares outstanding on the Repurchase Request Deadline. If the
Fund determines not to repurchase more than the Repurchase Offer Amount, or if
the Fund determines to repurchase the additional 2% of the shares outstanding,
but Fund shareholders offer shares for repurchase in excess of that amount, the
Fund will repurchase the shares on a pro rata basis. The Fund may, however,
accept all shares offered for repurchase by shareholders who own less than 100
shares and who offer all their shares, before accepting on a pro rata basis
shares offered by other shareholders. In the event there is an oversubscription
of a Repurchase Offer, shareholders may be unable to liquidate all or a given
percentage of their investment in the Fund at net asset value during the
Repurchase Offer.

NOTICES TO SHAREHOLDERS. Notice of each quarterly Repurchase Offer (and any
additional discretionary repurchase offers) will be given to each beneficial
owner of shares between 21 and 42 days before each Repurchase Request Deadline.
The notice will contain information shareholders should consider in deciding
whether or not to offer their shares for repurchase. The notice will also
include detailed instructions on how to offer shares for repurchase. The notice
will state the Repurchase Offer Amount. The notice will also identify the dates
of the Repurchase Request Deadline, scheduled Repurchase Pricing Date, and
scheduled Repurchase Payment Deadline. The notice will describe the risk of
fluctuation in the net asset value between the Repurchase Request Deadline and
the Repurchase Pricing Date, if such dates do not coincide, and the possibility
that the Fund may use an earlier Repurchase Pricing Date than the scheduled
Repurchase Pricing Date under certain circumstances (if the scheduled Repurchase
Pricing Date is not the Repurchase Request Deadline). The notice will describe
(i) the procedures for shareholders to offer their shares for repurchase, (ii)
the procedures for the Fund to repurchase


                                       38

shares on a pro rata basis, (iii) the circumstances in which the Fund may
suspend or postpone a Repurchase Offer, and (iv) the procedures that will enable
shareholders to withdraw or modify their offers of shares for repurchase until
the Repurchase Request Deadline. The notice will set forth the net asset value
of the shares to be repurchased no more than seven days before the date of
notification, and how shareholders may ascertain the net asset value after the
notification date.

REPURCHASE PRICE. The current net asset value of the shares is computed daily.
The Board has determined that the time at which the net asset value will be
computed will be as of the close of regular session trading on the NYSE. You may
call 800-345-6611 to learn the net asset value per share. The notice of the
Repurchase Offer will also provide information concerning the net asset value
per share, such as the net asset value as of a recent date or a sampling of
recent net asset values, and a toll-free number for information regarding the
Repurchase Offer.

SUSPENSION OR POSTPONEMENT OF REPURCHASE OFFER. The Fund may suspend or postpone
a Repurchase Offer only: (a) if making or effecting the Repurchase Offer would
cause the Fund to lose its status as a regulated investment company under the
Internal Revenue Code; (b) for any period during which the NYSE or any market on
which the securities owned by the Fund are principally traded is closed, other
than customary weekend and holiday closings, or during which trading in such
market is restricted; (c) for any period during which an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable, or during which it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (d) for such other periods
as the SEC may by order permit for the protection of shareholders of the Fund.

LIQUIDITY REQUIREMENTS. The Fund and the Portfolio must maintain liquid assets
equal to their Repurchase Offer Amount from the time that the notice is sent to
shareholders until the Repurchase Pricing Date. The Fund and the Portfolio will
ensure that a percentage of their respective net assets equal to at least 100%
of the Repurchase Offer Amount consists of assets (a) that can be sold or
disposed of in the ordinary course of business at approximately the price at
which the Fund or the Portfolio, as applicable, has valued the investment within
the time period between the Repurchase Request Deadline and the Repurchase
Payment Deadline; or (b) that mature by the Repurchase Payment Deadline.

The Board of the Portfolio has adopted procedures that are reasonably designed
to ensure that the assets are sufficiently liquid so that the Fund and the
Portfolio can comply with the Repurchase Offer and the liquidity requirements
described in the previous paragraph. If, at any time, the Fund or the Portfolio
falls out of compliance with these liquidity requirements, their respective
Boards will take whatever action they deem appropriate to ensure compliance.

                                 NET ASSET VALUE

The purchase or redemption price of Fund shares is generally the net asset value
per share except for Class A share purchases at the public offering price. The
Fund determines the net asset value of each class of its shares as of the close
of regular session trading on the NYSE (currently 4 p.m., Eastern time) by
dividing the difference between the values of each class's assets less its
liabilities by the number of that class's shares outstanding. Net asset value
will not be determined on days when the NYSE is closed unless, in the judgment
of the Board of Trustees, the net asset value should be determined on any such
day, in which case the determination will be made at 4 p.m., Eastern time.


                                       39

The Senior Loans in which the Portfolio invests generally are not listed on any
securities exchange. Certain Senior Loans are traded by institutional investors
in an over-the-counter secondary market for Senior Loan obligations that has
developed over the past several years. This secondary market for those Senior
Loans generally is comparatively illiquid relative to markets for other fixed
income securities and no active trading market exists for many Senior Loans. In
determining net asset value, the Fund utilizes the valuations of Senior Loans
furnished to Stein Roe by an independent third-party pricing service. The
pricing service provider has no obligation to provide a valuation for a Senior
Loan if it believes that it cannot determine such a valuation. There can be no
assurance that the pricing service provider will continue to provide these
services or will provide a value for each Senior Loan held by the Portfolio.
However, Stein Roe believes that if the pricing service provider declines to
continue to act as such for the Portfolio, or does not provide values for a
significant portion of the Senior Loans held by the Portfolio, one or more
alternative independent third-party pricing service providers will be available
to provide comparable services on similar terms.

A pricing service provider typically values Senior Loans at the mean of the
highest bona fide bid and lowest bona fide ask prices when current quotations
are readily available. Senior Loans for which current quotations are not readily
available are valued at a fair value as determined by the pricing service
provider using a wide range of market data and other information and analysis,
including credit considerations considered relevant by the pricing service
provider to determine valuations. The procedures of any pricing service provider
and its valuations are reviewed by the officers of Stein Roe under the general
supervision of the Board. If Stein Roe believes that a value provided by a
pricing service provider does not represent a fair value as a result of
information, specific to that Senior Loan or Borrower or its affiliates, of
which Stein Roe believes that the pricing agent may not be aware, Stein Roe may
in its discretion value the Senior Loan subject to procedures approved by the
Board and reviewed on a periodic basis, and the Fund will utilize that price
instead of the price as determined by the pricing service provider. In addition
to such information, Stein Roe will consider, among other factors, (i) the
creditworthiness of the Borrower and (ii) the current interest rate, the period
until next interest rate reset and maturity of such Senior Loan interests in
determining a fair value of a Senior Loan. If the pricing service does not
provide a value for a Senior Loan or if no pricing service provider is then
acting, a value will be determined by Stein Roe in the manner described above.

It is expected that the Fund's net asset value will fluctuate as a function of
interest rate and credit factors. Although the Fund's net asset value will vary,
Stein Roe expects the Fund's policy of acquiring interests in floating or
variable rate Senior Loans to minimize fluctuations in net asset value as a
result of changes in interest rates. Accordingly, Stein Roe expects the value of
the investment portfolio to fluctuate significantly less than a portfolio of
fixed-rate, longer term obligations as a result of interest rate changes.

Other long-term debt securities for which market quotations are not readily
available are valued at fair value based on valuations provided by pricing
services approved by the Board, which may employ electronic data processing
techniques, including a matrix system, to determine valuations. The value of
interest rate swaps, caps, and floors will be determined in accordance with a
formula and then confirmed periodically by obtaining a quotation. Short-term
debt securities with remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains or losses. The
Board believes that the amortized cost represents a fair value for such
securities. Short-term debt securities with remaining maturities of more than 60
days for which market quotations are not readily available are valued by use of
a matrix prepared by Stein Roe based on quotations for comparable securities.
Other assets and securities


                                       40

held by the Fund for which these valuation methods do not produce a fair value
are valued by a method that the Board believes will determine a fair value.

                             PERFORMANCE INFORMATION

The Fund seeks to provide an effective yield that is higher than other
short-term instrument alternatives. From time to time, the Fund may include its
current and/or effective yield based on various specific time periods. Yields
will fluctuate from time to time and are not necessarily representative of
future results.

The current yield is calculated by annualizing the most recent monthly
distribution (i.e., multiplying the distribution amount by 365/31 for a 31 day
month) and dividing the product by the current maximum offering price.  The
effective yield is calculated by dividing the current yield by 365/31 and
adding 1.  The resulting quotient is then taken to the 365/31st power and
reduced by 1.  The result is the effective yield.  The Fund will calculate its
standardized 30-day yield in accordance with the SEC's formula, which is
described in the section "Investment Performance" in the Statement of
Additional Information.

On occasion, the Fund may compare its yield to: (a) LIBOR, quoted daily in the
Wall Street Journal; (b) the CD Rate as quoted daily in the Wall Street Journal
as the average of top rates paid by major New York banks on primary new issues
of negotiable CDs, usually on amounts of $1 million or more; (c) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. money center commercial banks; (d) one or more averages compiled by
Donoghue's Money Fund Report, a widely recognized independent publication that
monitors the performance of money market mutual funds; (e) the average yield
reported by the Bank Rate Monitor National Index(TM) for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas; (f) yield data published by
Lipper, Inc.; (g) the yield on an investment in 90-day Treasury bills on a
rolling basis, assuming quarterly compounding; or (h) the yield on an index of
loan funds comprised of all continually offered closed-end bank loan funds, as
categorized by Lipper (the "loan fund index"). In addition, the Fund may compare
the Prime Rate, the Donoghue's averages and the other yield data described above
to each other. Yield comparisons should not be considered indicative of the
Fund's yield or relative performance for any future period.

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper, Inc., Business Week, Forbes or other industry
publications.

The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per share on the last day of
such period. The Fund calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.


                                       41

When utilized by the Fund, distribution rate and compounded distribution rate
figures are based on historical performance and are not intended to indicate
future performance. Distribution rate, compounded distribution rate and net
asset value per share can be expected to fluctuate over time.

Advertisements and communications to present or prospective shareholders also
may cite a total return for any period. Total return is calculated by
subtracting the net asset value of a single purchase of shares at a given date
from the net asset value of those shares (assuming reinvestment of
distributions) on a later date. The difference divided by the original net asset
value is the total return. The Fund may include information about the total
return on the Loan Fund Index, and compare that to the total return of the Fund
and other indices.

In calculating the Fund's total return, all dividends and distributions are
assumed to be reinvested in additional shares of the Fund at net asset value.
Therefore, the calculation of the Fund's total return and effective yield
reflects the effect of compounding. The calculations of total return, current
yield and effective yield do not reflect the amount of any shareholder income
tax liability, which would reduce the performance quoted. If the Fund's fees or
expenses are waived or reimbursed, the Fund's performance will be higher.

Finally, the Fund may include information on the history of its net asset value
per share and the net asset value per share of the Loan Fund Index, including
comparisons between them, in advertisements and other material furnished to
present and prospective shareholders. Information about the performance of the
Fund or other investments is not necessarily indicative of future performance
and should not be considered representative of what an investor's yield or total
return may be in the future.

                     ORGANIZATION AND DESCRIPTION OF SHARES

The Fund is a Massachusetts business trust organized under an Agreement and
Declaration of Trust ("Declaration of Trust") dated August 13, 1998, which
provides that each shareholder shall be deemed to have agreed to be bound by the
terms thereof. The Declaration of Trust may be amended by a vote of either the
Fund's shareholders or its trustees. The Fund offers four classes of shares --
Class A, Class B, Class C and Class Z. Class Z shares are offered through a
separate prospectus to eligible investors.

Under Massachusetts law, shareholders of a Massachusetts business trust such as
the Fund could, in some circumstances, be held personally liable for unsatisfied
obligations of the trust. However, the Declaration of Trust provides that
persons extending credit to, contracting with, or having any claim against the
Fund shall look only to its assets for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the Fund shall have
no personal liability therefor. The Declaration of Trust requires that notice of
such disclaimer of liability be given in each contract, instrument or
undertaking executed or made on behalf of the Fund. Further, the Declaration of
Trust provides for indemnification of any shareholder against any loss and
expense arising from personal liability solely by reason of being or having been
a shareholder. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is believed to be remote, because it would be
limited to circumstances in which the disclaimer was inoperative and the Fund
was unable to meet its obligations.



                                       42

The shares are not, and are not expected to be, listed for trading on any
national securities exchange nor, to the Fund's knowledge, is there, or is there
expected to be, any secondary trading market in the shares.

Anti-Takeover Provisions in the Declaration of Trust. The Declaration of Trust
includes provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund. In addition, in the event a
secondary market were to develop in the shares, such provisions could have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices.

The Declaration of Trust requires the favorable vote of the holders of not less
than three-fourths of the outstanding shares then entitled to vote to authorize
certain transactions, unless at least three-fourths of the members of the Board
then in office and at least three-fourths of the non-interested trustees who
have acted in such capacities for at least 12 months (or since commencement of
operation if that period is less than 12 months) authorize such transaction and
then only a vote of the majority of the holders of the outstanding shares then
entitled to vote is required.

The Board has determined that the voting requirements described above, which are
greater than the minimum requirements under Massachusetts law or the 1940 Act,
are in the best interests of shareholders generally. Reference should be made to
the Declaration of Trust on file with the SEC for the full text of these
provisions.

STATUS OF SHARES. The Board of Trustees may classify or reclassify any issued or
unissued shares of the Fund into shares of any class by redesignating such
shares or by setting or changing in any one or more respects, from time to time,
prior to the issuance of such shares, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of repurchase of such shares. Any such
classification or reclassification will comply with the provisions of the 1940
Act.

As of November 30, 2001, the following shares of the Fund were outstanding:



      (1)               (2)               (3)                   (4)
                                                        Amount Outstanding
                       Amount     Amount held by Fund   Exclusive of Amount
Title of Class       Authorized    or for its Account      Shown Under(3)
                                               
Class A              Unlimited             0              14,430,542.826
Class B              Unlimited             0              20,840,620.003
Class C              Unlimited             0              18,759,609.801
Class Z              Unlimited             0               1,370,208.987




                                       43

               MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS

The Fund seeks to achieve its objective by investing all of its assets in a
Portfolio having an investment objective identical to that of the Fund. The
initial shareholder of the Fund approved this policy of permitting the Fund to
act as a feeder fund by investing in the Portfolio. Please refer to "Investment
Objective and Policies" for a description of the investment objectives,
policies, and restrictions of the Portfolio. The management and expenses of both
the Fund and the Portfolio are described under "Fund Expenses" and "Management
of the Fund -- Fees and Expenses." The Fund bears its proportionate share of
Portfolio expenses.

Stein Roe has provided investment management services in connection with other
mutual funds employing the master fund/feeder fund structure since 1991.

The common investment objective of the Fund and the Portfolio is non-fundamental
and may be changed without shareholder approval, subject, however, to at least
30 days' advance written notice to the Fund's shareholders. The fundamental
policies of the Fund, and the corresponding fundamental policies of the
Portfolio, can be changed only with shareholder approval.

If the Fund, as a Portfolio investor, is requested to vote on a proposed change
in a fundamental policy of the Portfolio or any other matter pertaining to the
Portfolio (other than continuation of the business of the Portfolio after
withdrawal of another investor), the Fund will solicit proxies from its
shareholders and vote its interest in the Portfolio for and against such matters
proportionately to the instructions to vote for and against such matters
received from the Fund's shareholders. The Fund will vote shares for which it
receives no voting instructions in the same proportion as the shares for which
it receives voting instructions. There can be no assurance that any matter
receiving a majority of votes cast by the Fund's shareholders will receive a
majority of votes cast by all Portfolio investors. If other investors hold a
majority interest in the Portfolio, they could have voting control over the
Portfolio.

In the event that the Portfolio's fundamental policies were changed so as to be
inconsistent with those of the Fund, the Board of the Fund would consider what
action might be taken, including changes to the Fund's fundamental policies,
withdrawal of the Fund's assets from the Portfolio and investment of such assets
in another pooled investment entity, or the retention of another investment
advisor. Any of these actions would require the approval of the Fund's
shareholders. The Fund's inability to find a substitute master fund or
comparable investment management could have a significant impact upon its
shareholders' investments. Any withdrawal of the Fund's assets could result in a
distribution in kind of Senior Loans (as opposed to a cash distribution) to the
Fund. Should such a distribution occur, the Fund would incur brokerage fees or
other transaction costs in converting such Senior Loans to cash. In addition, a
distribution in kind could result in a less diversified portfolio of the Fund
and could affect the liquidity of the Fund.

The Portfolio may permit other investment companies and/or other institutional
investors to invest, but members of the general public may not invest directly
in the Portfolio. Other investors in the Portfolio are not required to sell
their shares at the same public offering price as the Fund and could incur
different administrative fees, expenses, and sales commissions than the Fund.
Therefore, Fund shareholders might have different investment returns than
shareholders in another investment company that invests exclusively in the
Portfolio. Investment by such other investors in the Portfolio would provide
funds for the purchase of additional Senior Loans and


                                       44

would tend to reduce the Portfolio's operating expenses as a percentage of its
net assets. Conversely, large-scale redemptions by any such other investors in
the Portfolio could result in untimely liquidations of the Portfolio's Senior
Loans, loss of investment flexibility, and increases in the operating expenses
of the Portfolio as a percentage of its net assets. As a result, the Portfolio's
security holdings may become less diverse, resulting in increased risk.

Information regarding any other investors in the Portfolio may be obtained by
writing to Stein Roe Floating Rate Limited Liability Company, One Financial
Center, Boston, MA 02111 or by calling 800-426-3750. Stein Roe may provide
administrative or other services to one or more such investors.


                               SHAREHOLDER REPORTS

The Fund issues reports to its shareholders annually and semi-annually that
include financial information.


                              FINANCIAL STATEMENTS

The Fund will furnish without charge, when available, copies of its Annual
Report and any subsequent Semi-Annual Report to shareholders upon request to the
Fund, One Financial Center, Boston, MA 02111, toll-free 800-422-3737.







                                       45

                              TABLE OF CONTENTS OF
                       STATEMENT OF ADDITIONAL INFORMATION


                                                                           Page
                                                                        
The Fund .................................................................     2
Investment Policies ......................................................     2
Portfolio Investments and Strategies .....................................     3
Investment Restrictions ..................................................    12
Repurchase Offer Fundamental Policy ......................................    15
Management ...............................................................    16
Financial Statements .....................................................    24
Principal Shareholders ...................................................    25
Investment Advisory and Other Services ...................................    26
Distributor ..............................................................    29
Programs for Reducing or Eliminating Sales Charges .......................    31
Transfer Agent ...........................................................    35
Custodian ................................................................    35
Independent Accountants of the Fund and Portfolio ........................    36
Portfolio Transactions ...................................................    36
Additional Income Tax Considerations .....................................    42
Investment Performance ...................................................    42
Appendix -- Ratings ......................................................    45





- --------------------------------------------------------------------------------
                           [LIBERTY FUNDS LETTERHEAD]

761-01/305I-1201



LIBERTY FLOATING RATE FUND PROSPECTUS, JANUARY 1, 2002

CLASS Z SHARES


Advised by Stein Roe & Farnham Incorporated


Although these securities have been registered with the Securities and Exchange
Commission, the Commission has not approved or disapproved any shares offered in
this prospectus or determined whether this prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.


TABLE OF CONTENTS

                                                                   
Prospectus Summary ...............................................             3

Fund Expenses ....................................................             7

Financial Highlights .............................................             8

The Fund .........................................................             9

Use of Proceeds ..................................................             9

Investment Objectives and Policies ...............................             9

How the Portfolio Invests ........................................            10

Principal Risks ..................................................            18

Other Investment Practices .......................................            22

Distributions and Income Taxes ...................................            27

Management of the Fund ...........................................            29

How to Buy Shares ................................................            31

Multiple Share Classes ...........................................            32

Periodic Repurchase Offers .......................................            33

Net Asset Value ..................................................            35

Performance Information ..........................................            36

Organization and Description of Shares ...........................            38

Master Fund/Feeder Fund:

Structure and Risk Factors .......................................            39

Shareholder Reports ..............................................            41

Financial Statements .............................................            41

Statement of Additional Information

Table of Contents ................................................    Back Cover



- ------------------------------
Not FDIC     May Lose Value
            ------------------
Insured      No Bank Guarantee
- ------------------------------

PROSPECTUS   JANUARY 1,  2002

STEIN ROE MUTUAL FUNDS
LIBERTY FLOATING RATE FUND
CLASS Z SHARES

Liberty Floating Rate Fund ("Fund") is a non-diversified, closed-end management
investment company that is continuously offered.

Investment Objective. The Fund's investment objective is to provide a high level
of current income, consistent with preservation of capital. The Fund seeks to
achieve its objective by investing its net investable assets in Stein Roe
Floating Rate Limited Liability Company ("Portfolio"), a non-diversified,
closed-end management investment company, which has the same investment
objective as the Fund, rather than investing directly in and managing its own
investment portfolio.

Under normal market conditions, the Portfolio invests at least 80% of its net
assets (plus any borrowings for investment purposes) in adjustable rate senior
loans ("Senior Loans"), the interest rates of which float or vary periodically
based upon a benchmark indicator of prevailing interest rates. Senior Loans are
business loans that have a senior right to payment to most other debts of the
borrower. Senior Loans are often secured by specific assets of the borrower,
although the Portfolio may also invest in Senior Loans that are not secured by
any collateral.



                       Price to Public (1)    Sales      Proceeds to Fund (2)(3)
                                              Load
- --------------------------------------------------------------------------------
                                                
Per Class Z Share      $9.30                  None       $9.30


(1)  The net asset value per share of Class Z on November 30, 2001 was $9.30.

(2)  Liberty Funds Distributor, Inc. ("Distributor") will pay all distribution
     costs from its own assets.

(3)  Assumes the sale of all shares registered hereby.

Periodic Repurchase Offers. To provide liquidity to shareholders, the Fund will
make quarterly repurchase offers ("Repurchase Offer") for 5% to 25% of its
outstanding shares. For each Repurchase Offer, it is anticipated that each
Repurchase Request Deadline will be on the 15th day in each of the months of
March, June, September and December, or if the 15th day is not a business day,
the next business day. It is anticipated that normally the Repurchase Pricing
Date will be the same date as the Repurchase Request Deadline, and if so, the
Repurchase Request Deadline will be set for a time no later than the close of
the NYSE on such date. The Fund has determined that the Repurchase Pricing Date
may occur no later than the 14th day after the Repurchase Request Deadline, or
the next business day if the 14th day is not a business day. The Fund will repay
a Repurchase Offer no later than seven days after the Repurchase Pricing Date.
(See "Periodic Repurchase Offers.")

Not Exchange Listed. The Fund does not intend to list the shares on any national
securities exchange. SHARES OF THE FUND HAVE NO HISTORY OF PUBLIC TRADING AND
THERE IS NOT EXPECTED TO BE ANY SECONDARY TRADING MARKET IN THE SHARES. An
investment in the shares should be considered illiquid. (See "Principal Risks.")

INVESTMENT IN THE FUND INVOLVES CERTAIN RISKS, INCLUDING THE POSSIBLE LOSS OF
SOME OR ALL OF THE PRINCIPAL INVESTMENT AND RISKS ASSOCIATED WITH SECURITIES
RATED BELOW INVESTMENT GRADE (OFTEN REFERRED TO AS "JUNK"). (SEE "PRINCIPAL
RISKS.")

The Prospectus sets forth concisely the information that a prospective investor
should know before investing in shares of the Fund. Please read and retain this
Prospectus for future reference. A Statement of Additional Information regarding
the Fund dated January 1, 2002, has been filed with the Securities and Exchange
Commission ("SEC") and can be obtained without charge by calling 800-426-3750. A
table of contents to the Statement of Additional Information is located on the
last page of this Prospectus. This Prospectus incorporates by reference the
entire Statement of Additional Information (together with any supplement to it).
The Statement of Additional Information and other related materials are
available at the SEC's internet web site (http://www.sec.gov).

The Fund's investment advisor is Stein Roe & Farnham Incorporated ("Stein Roe").
The address of the Fund is One Financial Center, Boston, MA 02111.

This prospectus applies to the offering of shares of beneficial interest of the
Fund, which may be continuously issued and sold from time to time by the Fund
through the Distributor, as distributor and principal underwriter, and through
your financial advisor. Only eligible investors may purchase Class Z shares.
(See "How to Buy Shares.")

The Fund also offers three additional classes of shares -- Class A, B and C
shares are available through a separate prospectus. Each share class has its own
sales charge and expense structure. Determining which share class is best for
you depends on the dollar amount you are investing and the number of years for
which you are willing to invest. Based on your personal situation, your
investment advisor can help you decide which class of shares makes the most
sense for you. In general, anyone who is eligible to purchase Class Z shares,
which do not incur Rule 12b-1 fees or sales charges, should do so in preference
over other classes.

THE FUND HAS RECEIVED EXEMPTIVE RELIEF FROM THE SEC WITH RESPECT TO THE FUND'S
DISTRIBUTION FEE ARRANGEMENTS AND MULTI-CLASS STRUCTURE. AS A CONDITION OF SUCH
RELIEF, THE FUND WILL BE REQUIRED TO COMPLY WITH CERTAIN REGULATIONS THAT WOULD
NOT OTHERWISE BE APPLICABLE TO THE FUND.

SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK OR OTHER INSURED DEPOSITORY INSTITUTION, AND ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD
OR ANY OTHER GOVERNMENT AGENCY.


                                       2

                               PROSPECTUS SUMMARY

This is only a summary. You should review the more detailed information
contained in this prospectus and in the Statement of Additional Information.

THE FUND. The Fund is a continuously offered non-diversified, closed-end
         management investment company, organized as a Massachusetts business
         trust. The Fund invests all of its net investable assets in Stein Roe
         Floating Rate Limited Liability Company (the "Portfolio") under a
         master/feeder structure. The Portfolio is a non-diversified closed-end
         management investment company organized as a Delaware limited liability
         company.

         The Fund intends to offer its shares continuously through the
         Distributor, as principal underwriter, and through financial advisors
         at a price equal to the next determined net asset value per share. The
         minimum initial investment is $1,000,000. The Fund reserves the right
         to change the investment minimums and to refuse a purchase order for
         any reason.

INVESTMENT OBJECTIVE. The investment objective of the Fund and of the Portfolio
         is to provide a high level of current income, consistent with
         preservation of capital. There can be no assurance that the Portfolio
         or the Fund will achieve its investment objective.

         The Portfolio seeks to achieve the objective by investing at least 80%
         of its net assets (plus any borrowings for investment purposes) in a
         portfolio of Senior Loans to corporations, partnerships and other
         entities ("Borrowers") that operate in a variety of industries and
         geographic regions (including domestic and foreign entities).

INVESTMENT POLICIES. Under normal market conditions, at least 80% of the
         Portfolio's net assets (plus any borrowings for investment purposes)
         will be invested in Senior Loans of domestic Borrowers or foreign
         Borrowers (so long as Senior Loans to such foreign Borrowers are U.S.
         dollar denominated and payments of interest and repayments of principal
         pursuant to such Senior Loans are required to be made in U.S. dollars).
         Although most Senior Loans are secured, the Portfolio may invest up to
         20% of its total assets in interests in Senior Loans that are not
         secured by any collateral. During normal market conditions, the
         Portfolio may invest up to 20% of its total assets (including assets
         maintained by the Portfolio as a reserve against any additional loan
         commitments) in (i) high quality, short-term debt securities with
         remaining maturities of one year or less and (ii) warrants, equity
         securities and, in limited circumstances, junior debt securities
         acquired in connection with the Portfolio's investments in Senior
         Loans.

         Any amount less than 25% of total assets of the Fund or Portfolio
         (taken at current value) may be invested in Senior Loans to Borrowers
         and securities of other issuers in any one industry. However, the Fund
         or Portfolio may invest 25% or more of its total assets in securities
         the issuer of which is deemed to be in the financial services industry,
         which includes commercial banks, thrift institutions, insurance
         companies and finance companies. The Fund may not, however, invest 25%
         or more of its total assets in Senior Loans to Borrowers in the
         financial services industry and securities of other issuers in the
         financial services industry. Accordingly, the Fund or Portfolio may
         be more at risk to any single economic, political, or regulatory
         occurrence affecting such industries.


                                       3

HOW THE FUND OR PORTFOLIO INVESTS. Senior Loans generally are arranged through
         private negotiations between a Borrower and several financial
         institutions ("Lenders") represented in each case by one or more such
         Lenders acting as agent ("Agent") of the several Lenders. On behalf of
         the several Lenders, the Agent is primarily responsible for negotiating
         the loan agreement ("Loan Agreement") that establishes the relative
         terms and conditions of the Senior Loan and rights of the Borrower and
         the several Lenders. The Fund or Portfolio may invest all or
         substantially all of its assets in Senior Loans or other securities
         that are rated below investment grade, or in comparable unrated
         securities. These securities are commonly referred to as high-yield,
         high-risk or "junk debt."  Senior Loans in which the Portfolio will
         purchase interests generally pay interest at rates that are
         periodically redetermined by reference to a base lending rate plus a
         premium. The Portfolio may invest in participations ("Participations")
         in Senior Loans, may purchase assignments ("Assignments") of portions
         of Senior Loans from third parties, and may act as one of the group of
         Lenders originating a Senior Loan ("Primary Lender").

         Stein Roe expects the Portfolio's policy of acquiring interests in
         floating or variable rate Senior Loans to minimize the fluctuations in
         net asset value as a result of changes in interest rates. However, the
         Fund is not a money market fund and its net asset value will fluctuate.

PRINCIPAL RISKS. You should consider the following risk considerations before
         investing in the Fund. As described below, the risks could cause you to
         lose money as a result of investing in the Fund. See "Principal Risks"
         in the Prospectus for more detailed information.

         Non-Payment Risk. Senior Loans, like other corporate debt obligations,
         are subject to the risk of non-payment of scheduled interest or
         principal. Such non-payment would result in a reduction of income to
         the Fund, a reduction in the value of the Senior Loan experiencing
         non-payment, and a potential decrease in the net asset value of the
         Fund.

         Restrictions on Resale of Senior Loans. Senior Loans, at present,
         generally are not readily marketable and may be subject to restrictions
         on resale. As a result, the ability of the Portfolio to dispose of its
         investments in a timely fashion and at a fair price may be restricted.

         Ongoing Monitoring. On behalf of the several Lenders, the Agent
         generally will be required to administer and manage the Senior Loans
         and, with respect to collateralized Senior Loans, to service or monitor
         the collateral.

         Limited Information. The types of Senior Loans in which the Portfolio
         will invest historically have not been rated by a nationally recognized
         statistical rating organization, have not been registered with the SEC
         or any state securities commission, and have not been listed on any
         national securities exchange. Although the Portfolio will generally
         have access to financial and other information made available to the
         Lenders in connection with Senior Loans, the amount of public
         information available with respect to Senior Loans will generally be
         less extensive than that available for rated, registered or

                                       4

         exchange listed securities. As a result, the Portfolio is more
         dependent on the analytical ability of Stein Roe.

         Below Investment Grade Securities. The Portfolio may invest all or
         substantially all of its assets in Senior Loans or other securities
         that are rated below investment grade, or in comparable unrated
         securities. These securities are commonly referred to as high-yield,
         high-risk debt or "junk debt." The purchase of such Senior Loans
         exposes the Fund to financial, market, and interest-rate risks and
         greater credit risks than would the purchase of higher-rated Senior
         Loans. Such investments are also likely to result in increased
         fluctuation in the Fund's net asset value, particularly in response to
         economic downturns.

         Investments in Non-U.S. Issuers. Investment in non-U.S. issuers
         involves special risks, including that non-U.S. issuers may be subject
         to less rigorous accounting and reporting requirements than are U.S.
         issuers, less rigorous regulatory requirements, differing legal systems
         and laws relating to creditors' rights, the potential inability to
         enforce legal judgments, and the potential for political, social and
         economic adversities.

         Investments in Equity Securities. To the extent that the Portfolio
         invests in equity securities, the value of its portfolio will be
         affected by changes in the stock markets. The stock market can be
         volatile and stock prices can fluctuate drastically from day-to-day.
         This market risk will affect the Fund's net asset value, which will
         fluctuate as the value of the securities held by the Portfolio changes.

         Financial Services Industry Concentration. The financial services
         industries are subject to extensive government regulation which can
         limit both the amounts and types of loans and other financial
         commitments they can make, and the interest rates and fees they can
         charge. Profitability is largely dependent on the availability and cost
         of capital funds, and can fluctuate significantly when interest rates
         change. Credit losses resulting from financial difficulties of
         borrowers can negatively affect the financial services industries. The
         financial services industries are currently undergoing relatively rapid
         change as existing distinctions between financial service segments
         become less clear.

         Prepayment Risk. Borrowers may pay back principal before the scheduled
         due date. Borrowers may find it advantageous to prepay principal due to
         a decline in interest rates or an excess in cash flow. Such prepayments
         may require the Portfolio to replace a Senior Loan with a
         lower-yielding security. This may adversely affect the distributions on
         the Fund's shares.

         Legislation; Restrictions. To the extent that legislation or state or
         federal regulators impose additional requirements or restrictions with
         respect to the ability of financial institutions to make loans in
         connection with highly leveraged transactions, the availability of
         Senior Loan interests for investment by the Portfolio may be adversely
         affected.


                                       5

         Repurchase Offer Risks. The Fund, as a fundamental policy, will make
         quarterly repurchases for 5% to 25% of shares outstanding at net asset
         value. (See "Periodic Repurchase Offers" below for more information.)
         However, shares are less liquid than shares of funds that trade on a
         stock exchange. Under limited circumstances, the Fund may suspend or
         postpone a quarterly repurchase offer -- the Fund must meet certain
         regulatory requirements to do so. There is no guarantee that
         shareholders will be able to sell all of their shares that they desire
         to sell in a quarterly repurchase offer.

         Closed-End Fund Risks. The Fund is a closed-end investment company
         designed primarily for long-term investors and not as a trading
         vehicle. The Fund does not intend to list its shares for trading on any
         national securities exchange. There is not expected to be any secondary
         trading market in the shares and the shares should be considered
         illiquid. The shares are, therefore, not readily marketable. The shares
         of closed-end investment companies often trade at a discount from their
         net asset values and, in the unlikely event that a secondary market for
         the shares were to develop, the shares likewise may trade at a discount
         from net asset value.

         Non-Diversification Risk. The Portfolio is not subject to the general
         limitations under the Investment Company Act of 1940 ("1940 Act") that,
         for 75% of its total assets, it not invest more than 5% of its total
         assets in the securities of a single issuer. The Portfolio does not
         intend to invest more than 5% of the value of its assets in Senior
         Loans of a single Borrower. To the extent the Portfolio invests a
         relatively high percentage of its assets in obligations of a limited
         number of Borrowers, it will be more susceptible than a more widely
         diversified investment company to the consequences of any single
         corporate, economic, political or regulatory occurrence.

DISTRIBUTIONS. Income dividends are normally declared each business day, paid
         monthly, and confirmed at least quarterly. Capital gains, if any, are
         distributed at least annually, usually in December. Income dividends
         and capital gains distributions may be received in cash or reinvested
         in additional full and fractional shares of the Fund.

INVESTMENT ADVISOR.  Stein Roe & Farnham Incorporated.

DISTRIBUTOR.  Liberty Funds Distributor, Inc.

PERIODIC REPURCHASE OFFERS. The Fund has adopted a fundamental policy to offer
         each calendar quarter to repurchase a specified percentage (between 5%
         and 25%) of the shares then outstanding at its net asset value. Such
         repurchase offers are referred to as a Repurchase Offer. Repurchase
         Offers are scheduled to occur on the 15th day (or the next business day
         if the 15th is not a business day) in the months of March, June,
         September, and December. (See "Periodic Repurchase Offers.")


                                       6

                                  FUND EXPENSES

The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund.

                                                                         
ANNUAL EXPENSES  (as a percentage of average net assets
   attributable to common shares)
Management Fee (%) (1) ..................................................   0.65
Other Expenses (%) ......................................................   0.33
Total Annual Expenses (%) (2)............................................   0.98



(1)  Management fees includes both the management fee and the administrative fee
     charged to the Fund. Stein Roe receives a management fee of 0.45% from the
     Portfolio and an administrative fee of 0.20% from the Fund.

(2)  Stein Roe has voluntarily agreed to waive advisory fees and to reimburse
     the Fund for certain expenses (exclusive of distribution and service fees,
     brokerage commissions, interest, taxes and extraordinary expenses, if any)
     will not exceed 0.80%. As a result, the actual Management Fee for Class Z
     shares would be 0.47% and Total Annual Expenses for Class Z shares would be
     0.80%. This arrangement may be modified or terminated by Stein Roe at any
     time.

EXAMPLE. This Example helps you compare the cost of investing in the Fund to the
cost of investing in other mutual funds. The Example assumes that (i) you invest
$1,000 in the Fund, (ii) your investment has a 5% return each year, (iii)
operating expenses remain the same, (iv) all income dividends and capital gains
distributions are reinvested in additional shares. Your actual costs may be
higher or lower because in reality Fund returns and other expenses change.



              1 year            3 years           5 years          10 years
              ------            -------           -------          --------
                                                            
              $ 10               $ 31              $ 54              $120



                                       7

                              FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the Fund's
financial performance. Information is shown for the Fund's Class Z shares fiscal
years since inception, which run from September 1 to August 31, unless otherwise
indicated. Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that you would have
earned (or lost) on an investment in the Fund (assuming reinvestment of all
dividends and distributions). This information has been derived from the Fund's
financial statements which have been audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the Fund's financial
statements, is included in the Fund's annual report. You can request a free
annual report by calling 800-422-3737.



                                                                                                 PERIOD ENDED
                                                                YEAR ENDED AUGUST 31,             AUGUST 31,
                                                                2001            2000               1999(a)

                                                                                       
Net asset value, Beginning of period ($)                        10.00           10.07              10.00

INCOME FROM INVESTMENT OPERATIONS ($):
Net investment income (b)                                        0.84            0.87               0.47
Net realized and unrealized gain (loss) allocated from
    Portfolio                                                   (0.37)          (0.07)              0.07
Total from Investment Operations                                 0.47            0.80               0.54

LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ($):
From net investment income                                      (0.85)          (0.87)             (0.47)
In excess of net investment income                                 --              --                   (g)
From net realized gains                                               (g)             (g)             --
Total Distributions Declared to Shareholders                    (0.85)          (0.87)             (0.47)
- -------------------------------------------------------------------------------------------------------------
Net asset value, End of period ($)                               9.62           10.00              10.07
- -------------------------------------------------------------------------------------------------------------

Total return (%) (c)(d)                                          4.89            8.23               5.43(e)

RATIOS TO AVERAGE NET ASSETS (%):

Expenses                                                         0.80            0.80               1.30(f)
Net investment income                                            8.63            8.94               7.10(f)
Waiver/reimbursement                                             0.18            0.39              55.49(f)
Net assets at end of period (000)($)                           11,662           6,845                893


- --------------
(a)  From commencement of operations on December 17, 1998.
(b)  Per share data was calculated using average shares outstanding during the
     period.
(c)  Had Stein Roe not waived or reimbursed a portion of expenses, total return
     would have been reduced.

                                      8


(d)  Total return at net asset value assuming all distributions reinvested.
(e)  Not annualized.
(f)  Annualized.
(g)  Rounds to less than $0.01.


                                       9

                                    THE FUND

The Fund is a non-diversified, closed-end management investment company
organized as a Massachusetts business trust on August 13, 1998, and managed by
the Board of Trustees. The Fund is engaged in a continuous public offering of
the shares at the next determined net asset value per share. The Fund's
principal office is located at One Financial Center, Boston, MA 02111 and its
telephone number is 800-345-6611.

                                 USE OF PROCEEDS

The net proceeds from the sale of the shares offered hereby will be invested
typically within 30 days after receipt, in accordance with the Fund's investment
objective and policies. Pending investment by the Portfolio, the proceeds may be
invested in high quality, short-term securities, and the Portfolio may not
achieve its objective during this time.

                        INVESTMENT OBJECTIVE AND POLICIES

INVESTMENT OBJECTIVE. The Fund's investment objective is to provide a high level
of current income, consistent with preservation of capital. The Fund's
investment objective is a non-fundamental policy, which means that the Board of
Trustees can change it without shareholder approval. Rather than invest in
securities directly, the Fund seeks to achieve its investment objective by using
the "master fund/feeder fund" structure. Under that structure, the Fund and
other investment companies with the same investment objective invest their
assets in another investment company having the same investment objective and
substantially the same investment policies as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and reduce costs. The
Fund's investment experience will correspond directly to the investment
experience of the Portfolio.

The Fund invests substantially all of its net investable assets in the
Portfolio. The Portfolio seeks to achieve its objective by investing at least
80% of its net assets (plus any borrowings for investment purposes) in a
professionally managed portfolio of interests in Senior Loans to Borrowers that
operate in a variety of industries and geographic regions (including domestic
and foreign entities). Although the Portfolio's net asset value per share will
vary, the Portfolio's policy of acquiring interests in floating or variable rate
Senior Loans is expected to minimize the fluctuations in the Fund's net asset
value per share as a result of changes in interest rates. The Fund's net asset
value may be affected by various factors, including changes in the credit
quality of Borrowers with respect to Senior Loan interests in which the
Portfolio invests.

An investment in the Fund may not be appropriate for all investors and is not
intended to be a complete investment program. No assurance can be given that the
Portfolio or the Fund will achieve its investment objective. The Fund is
appropriate for investors seeking a high level of current income consistent with
capital preservation.

POLICIES. Under normal market conditions, the Portfolio will invest at least 80%
of its net assets (plus any borrowings for investment purposes) (either as a
Primary Lender or as a purchaser of an Assignment or Participation) in Senior
Loans of domestic Borrowers or foreign Borrowers (so


                                       10

long as Senior Loans to such foreign Borrowers are U.S. dollar denominated and
payments of interest and repayments of principal pursuant to such Senior Loans
are required to be made in U.S. dollars). Although most Senior Loans are
collateralized, the Portfolio may invest up to 20% of its total assets (valued
at time of investment) in Senior Loans that are not secured by any collateral.

During normal market conditions, the Portfolio may invest up to 20% of its total
assets (including assets maintained by the Portfolio as a reserve against any
additional loan commitments) in (i) high quality, short-term debt securities
with remaining maturities of one year or less and (ii) warrants, equity
securities and junior debt securities acquired in connection with the
Portfolio's investments in Senior Loans. Such high quality, short-term
securities may include commercial paper rated at least Baa, P-3 or higher by
Moody's Investors Service, Inc. ("Moody's") or BBB, A-3 or higher by Standard &
Poor's ("S&P") (or if unrated, determined by Stein Roe to be of comparable
quality), interests in short-term loans and short-term loan participations of
Borrowers having short-term debt obligations rated or a short-term credit rating
at least in such rating categories (or having no such rating, determined by
Stein Roe to be of comparable quality), certificates of deposit and bankers'
acceptances and securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. Such high quality, short-term securities may pay
interest at rates that are periodically redetermined or may pay interest at
fixed rates.

                            HOW THE PORTFOLIO INVESTS

SENIOR LOANS. Senior Loans generally are arranged through private negotiations
between a Borrower and Lenders represented in each case by one or more Agents of
the several Lenders. On behalf of the several Lenders, the Agent, which is
frequently a commercial bank or other entity that originates the Senior Loan and
the person that invites other parties to join the lending syndicate, will be
primarily responsible for negotiating the Loan Agreement that establishes the
relative terms, conditions and rights of the Borrower and the several Lenders.
In larger transactions it is common to have several Agents; however, generally
only one such Agent has primary responsibility for documentation and
administration of a Senior Loan.

In a typical Senior Loan, the Agent administers the terms of the Loan Agreement
and is responsible for the collection of principal and interest and fee payments
from the Borrower and the apportionment of those payments to the credit of all
Lenders that are parties to the Loan Agreement. The Portfolio generally will
rely on the Agent to collect its portion of the payments on a Senior Loan.
Furthermore, the Portfolio will rely on the Agent to use appropriate creditor
remedies against the Borrower. Typically, under a Loan Agreement, the Agent is
given broad discretion in monitoring the Borrower's performance under the Loan
Agreement and is obligated to use only the same care it would use in the
management of its own property. Upon an event of default, the Agent typically
will act to enforce the Loan Agreement after instruction from Lenders holding a
majority of the Senior Loan. The Borrower compensates the Agent for the Agent's
services. This compensation may include special fees paid on structuring and
funding the Senior Loan and other fees paid on a continuing basis. The typical
practice of an Agent in relying exclusively or primarily on reports from the
Borrower may involve a risk of fraud by the Borrower.


                                       11

It is anticipated that the proceeds of the Senior Loans in which the Portfolio
will acquire interests primarily will be used to finance leveraged buyouts,
recapitalizations, mergers, acquisitions, stock repurchases, and, to a lesser
extent, to finance internal growth and for other corporate purposes of
Borrowers. Senior Loans have the most senior position in a Borrower's capital
structure, although some Senior Loans may hold an equal ranking with other
senior securities and certain other obligations of the Borrower. The capital
structure of a Borrower may include Senior Loans, senior and junior subordinated
debt (which may include "junk debt"), preferred stock and common stock issued by
the Borrower, typically in descending order of seniority with respect to claims
on the Borrower's assets. Senior and junior subordinated debt is collectively
referred to in this Prospectus as "junior debt securities." Senior Loans
generally are secured by specific collateral, which may include guarantees from
certain affiliates of the Borrower.

To the extent that the Portfolio invests a portion of its assets in Senior Loans
that are not secured by specific collateral, the Portfolio will not enjoy the
benefits associated with collateralization with respect to such Senior Loans and
such Senior Loans may pose a greater risk of nonpayment of interest or loss of
principal than do collateralized Senior Loans. As discussed below, the Portfolio
may also acquire warrants, equity securities and junior debt securities issued
by the Borrower or its affiliates as part of a package of investments in the
Borrower or its affiliates. Warrants, equity securities, and junior debt
securities will not be treated as Senior Loans and thus assets invested in such
securities will not count toward the 80% of the Portfolio's net assets (plus any
borrowings for investment purposes) that normally will be invested in Senior
Loans. The Portfolio may acquire interests in warrants, other equity securities
or junior debt securities through a negotiated restructuring of a Senior Loan or
in a bankruptcy proceeding of the Borrower.

In order to borrow money pursuant to a collateralized Senior Loan, a Borrower
will typically, for the term of the Senior Loan, pledge as collateral assets,
including but not limited to, accounts receivable, inventory, buildings, other
real estate, trademarks, franchises and common and preferred stock in its
subsidiaries. In addition, in the case of some Senior Loans, there may be
additional collateral pledged in the form of guarantees by and/or securities of
affiliates of the Borrowers. In certain instances, a collateralized Senior Loan
may be secured only by stock in the Borrower or its subsidiaries. Collateral may
consist of assets that are not readily liquidated, and there is no assurance
that the liquidation of such assets would satisfy fully a Borrower's obligations
under a Senior Loan. Similarly, in the event of bankruptcy proceedings involving
the Borrower, the Lenders may be delayed or prevented from liquidating
collateral or may choose not to do so as part of their participation in a plan
of reorganization of the Borrower.

Loan Agreements may also include various restrictive covenants designed to limit
the activities of the Borrower in an effort to protect the right of the Lenders
to receive timely payments of interest on and repayment of principal of the
Senior Loans. Restrictive covenants may include mandatory prepayment provisions
related to excess cash flows and typically include restrictions on dividend
payments, specific mandatory minimum financial ratios, limits on total debt and
other financial tests. Breach of such a covenant, if not waived by the Lenders,
is generally an event of default under the applicable Loan Agreement and may
give the Lenders the right to accelerate principal and interest payments. Stein
Roe will consider the terms of restrictive covenants in deciding whether to
invest in Senior Loans for the Portfolio's investment portfolio. When the
Portfolio holds a Participation in a Senior Loan, it may not have the right to
vote to waive enforcement of a restrictive covenant breached by a Borrower.
Lenders voting in


                                       12

connection with a potential waiver of a restrictive covenant may have interests
different from those of the Portfolio and such Lenders will not consider the
interests of the Portfolio in connection with their votes.

Senior Loans in which the Portfolio will invest generally pay interest at rates
that are periodically redetermined by reference to a base lending rate plus a
premium. These base lending rates generally are the prime or base lending
("Prime Rate") rate offered by one or more major United States banks or other
standard lending rates used by commercial lenders, such as the London Inter-Bank
Offered Rate ("LIBOR") or the certificate of deposit ("CD") rate. LIBOR, as
provided for in Loan Agreements, is an average of the interest rates quoted by
several designated banks as the rates at which such banks would offer to pay
interest to major financial institutional depositors in the London interbank
market on U.S. dollar denominated deposits for a specified period of time. The
CD rate, as generally provided for in Loan Agreements, is the average rate paid
on large certificates of deposit traded in the secondary market. Senior Loans
traditionally have been structured so that Borrowers pay higher premiums when
they elect LIBOR, in order to permit Lenders to obtain generally consistent
yields on Senior Loans, regardless of whether Borrowers select the LIBOR option,
or the Prime Rate option. In recent years, however, the differential between the
lower LIBOR base rates and the higher Prime Rate base rates prevailing in the
commercial bank markets has widened to the point where the higher margins paid
by Borrowers for LIBOR pricing options do not currently outweigh the
differential between the Prime Rate and the LIBOR rate. Consequently, Borrowers
have increasingly selected the LIBOR-based pricing option, resulting in a yield
on Senior Loans that is consistently lower than the yield available from the
Prime Rate-based pricing option. This trend will significantly limit the ability
of the Fund to achieve a net return to shareholders that consistently
approximates the average published Prime Rate of leading U.S. banks.

PRIMARY LENDER TRANSACTIONS, ASSIGNMENTS, AND PARTICIPATIONS. The Portfolio may
invest in Participations in Senior Loans, may purchase Assignments of portions
of Senior Loans from third parties and may act as one of the group of Primary
Lenders.

The Portfolio may invest up to 100% of its assets in Participations. The selling
Lenders and other persons interpositioned between such Lenders and the Portfolio
with respect to Participations will likely conduct their principal business
activities in the banking, finance and financial services industries. Although,
as discussed below, the Portfolio has taken measures that it believes
significantly reduce its exposure to risks associated with Participations, the
Portfolio may be more susceptible than an investment company that does not
invest in Participations in Senior Loans to any single economic, political or
regulatory occurrence affecting these industries. Persons engaged in these
industries may be more susceptible than are persons engaged in some other
industries to, among other things, fluctuations in interest rates, changes in
the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.

Participation by the Portfolio in a Lender's portion of a Senior Loan typically
will result in the Portfolio having a contractual relationship only with such
Lender, not with the Borrower. As a result, the Portfolio may have the right to
receive payments of principal, interest and any fees to which it is entitled
only from the Lender selling the Participation and only upon receipt by the
Lender of payments from the Borrower. In connection with purchasing
Participations, the


                                       13

Portfolio generally will have no right to enforce compliance by the Borrower
with the terms of the Loan Agreement, nor any rights with respect to any funds
acquired by other Lenders through set-off against the Borrower, and the
Portfolio may not directly benefit from the collateral supporting the Senior
Loan in which it has purchased the Participation. As a result, the Portfolio may
assume the credit risk of both the Borrower and the Lender selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Portfolio may be treated as a general creditor of the Lender,
and may not benefit from any set-off between the Lender and the Borrower. In an
effort to minimize such risks, the Portfolio will only acquire Participations if
the Lender selling the Participation, and any other institution interpositioned
between the Portfolio and the Lender, (i) at the time of investment has
outstanding debt or deposit obligations rated investment grade (BBB or A-3 or
higher by S&P or Baa or P-3 or higher by Moody's) or, if unrated, determined by
Stein Roe to be of comparable quality and (ii) has entered into an agreement
that provides for the holding of payments on the Senior Loan for the benefit of,
or the prompt disbursement of payments to, the Portfolio. Long-term debt rated
BBB by S&P is regarded by S&P as having adequate capacity to pay interest and
repay principal and debt rated Baa by Moody's is regarded by Moody's as a medium
grade obligation; i.e., it is neither highly protected nor poorly secured. The
Portfolio ordinarily will purchase a Participation only if, at the time of the
purchase, the Portfolio believes that the party from whom it is purchasing the
Participation is retaining an interest in the underlying Senior Loan. In the
event that the Portfolio does not so believe, it will only purchase a
Participation if, in addition to the requirements set forth above, the party
from whom the Portfolio is purchasing such Participation (i) is a bank, a member
of a national securities exchange or other entity designated in the 1940 Act as
qualified to serve as a custodian for a registered investment company and (ii)
has been approved as a custodian by the Board of the Portfolio.

The Portfolio may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the Loan
Agreement of the assigning Lender and becomes a Lender under the Loan Agreement
with the same rights and obligations as the assigning Lender.

When the Portfolio is a Primary Lender, it will have a direct contractual
relationship with the Borrower, may enforce compliance by the Borrower with the
terms of the Loan Agreement and may under contractual arrangements among the
Lenders have rights with respect to any funds acquired by other Lenders through
set-off. A Lender also has full voting and consent rights under the applicable
Loan Agreement. Action subject to Lender vote or consent generally requires the
vote or consent of the holders of a majority or some greater specified
percentage of the outstanding principal amount of the Senior Loan. Certain
decisions, such as reducing the amount or increasing the time for payment of
interest on or repayment of principal of a Senior Loan, or releasing collateral
therefor, frequently require the unanimous vote or consent of all Lenders
affected. When the Portfolio is a Primary Lender originating a Senior Loan it
may share in a fee paid by the Borrower to the Primary Lenders. The Portfolio
will never act as the Agent, originator, or principal negotiator or
administrator of a Senior Loan.

The Portfolio will purchase an Assignment or act as a Lender with respect to a
syndicated Senior Loan only where the Agent with respect to the Senior Loan at
the time of investment has outstanding debt or deposit obligations rated
investment grade (BBB or A-3 or higher by S&P or Baa or P-3 or higher by
Moody's) or determined by Stein Roe to be of comparable quality.


                                       14

Loan Agreements typically provide for the termination of the Agent's agency
status in the event that it fails to act as required under the relevant Loan
Agreement, becomes insolvent, enters FDIC receivership, or if not FDIC insured,
enters into bankruptcy. Should an Agent, Lender or any other interpositioned
institution with respect to an Assignment interpositioned between the Portfolio
and the Borrower become insolvent or enter FDIC receivership or bankruptcy, any
interest in the Senior Loan of any such interpositioned institution and any loan
payment held by any such interpositioned institution for the benefit of the
Portfolio should not be included in the estate of such interpositioned
institution. If, however, any such amount were included in such interpositioned
institution's estate, the Portfolio would incur certain costs and delays in
realizing payment or could suffer a loss of principal or interest. In such
event, the Portfolio could experience a decrease in net asset value.

PORTFOLIO MATURITY. The Portfolio is not subject to any restrictions with
respect to the maturity of Senior Loans held in its portfolio. It is currently
anticipated that the Portfolio's assets invested in Senior Loans will consist of
Senior Loans with stated maturities of between three and ten years, inclusive,
and with rates of interest that are redetermined either daily, monthly,
quarterly, semiannually or annually. Investment in Senior Loans with longer
interest rate redetermination periods may increase fluctuations in the
Portfolio's net asset value as a result of changes in interest rates. The Senior
Loans in the Portfolio's investment portfolio will at all times have a
dollar-weighted average days to reset until the next interest rate
redetermination of 90 days or less. As a result, as short-term interest rates
increase, interest payable to the Portfolio from its investments in Senior Loans
should increase, and as short-term interest rates decrease, interest payable to
the Portfolio from its investments in Senior Loans should decrease. The amount
of time required to pass before the Portfolio will realize the effects of
changing short-term market interest rates on its portfolio will vary with the
dollar-weighted average time until the next interest rate redetermination on the
Senior Loans in the investment portfolio. The Portfolio may utilize certain
investment practices to, among other things, shorten the effective interest rate
redetermination period of Senior Loans in its portfolio. In such event, the
Portfolio will consider such shortened period to be the interest rate
redetermination period of the Senior Loan; provided, however, that the Portfolio
will not invest in Senior Loans that permit the Borrower to select an interest
rate redetermination period in excess of one year. Because most Senior Loans in
the investment portfolio will be subject to mandatory and/or optional prepayment
and there may be significant economic incentives for a Borrower to prepay its
loans, prepayments of Senior Loans in the Portfolio's investment portfolio may
occur. Accordingly, the actual remaining maturity of the Portfolio's investment
portfolio invested in Senior Loans may vary substantially from the average
stated maturity of the Senior Loans held in the Portfolio's investment
portfolio.

NET ASSET VALUE FLUCTUATION. When prevailing interest rates decline, the value
of a portfolio invested in fixed-rate obligations can be expected to rise.
Conversely, when prevailing interest rates rise, the value of a portfolio
invested in fixed-rate obligations can be expected to decline. Although the
Fund's net asset value will vary, Stein Roe expects the Portfolio's policy of
acquiring interests in floating or variable rate Senior Loans to minimize
fluctuations in net asset value as a result of changes in interest rates.
Accordingly, Stein Roe expects the value of the investment portfolio to
fluctuate significantly less than a portfolio of fixed-rate, longer term
obligations as a result of interest rate changes. However, changes in prevailing
interest rates can


                                       15

be expected to cause some fluctuation in the Fund's net asset value. In addition
to changes in interest rates, various factors, including defaults by or changes
in the credit quality of Borrowers, will also affect the Fund's net asset value.
A default or serious deterioration in the credit quality of a Borrower could
cause a prolonged or permanent decrease in the Fund's net asset value.

DEBT RESTRUCTURING. The Portfolio may purchase and retain in its portfolio an
interest in a Senior Loan to a Borrower that has filed for protection under the
federal bankruptcy laws or has had an involuntary bankruptcy petition filed
against it by its creditors. Stein Roe's decision to purchase or retain such an
interest will depend on its assessment of the suitability of such investment for
the Portfolio, the Borrower's ability to meet debt service on Senior Loan
interests, the likely duration, if any, of a lapse in the scheduled repayment of
principal, and prevailing interest rates. At times, in connection with the
restructuring of a Senior Loan either outside of bankruptcy court or in the
context of bankruptcy court proceedings, the Portfolio may determine or be
required to accept equity securities or junior debt securities in exchange for
all or a portion of a Senior Loan interest. Depending upon, among other things,
Stein Roe's evaluation of the potential value of such securities in relation to
the price that could be obtained by the Portfolio at any given time upon sale
thereof, the Portfolio may determine to hold such securities in its portfolio.
Any equity security or junior debt security held by the Portfolio will not be
treated as a Senior Loan and thus will not count toward the 80% of assets that
normally will be invested in Senior Loans.

BORROWER CREDIT RATINGS. The Portfolio may invest in the lowest rated loans, but
does not intend to invest more than 5% of its assets in Senior Loans rated below
B- or B3 by S&P or Moody's. The Portfolio may invest a substantial portion of
its assets in Senior Loans to Borrowers having outstanding debt securities rated
below investment grade by a nationally recognized statistical rating
organization (or unrated but of comparable quality to such securities). Debt
securities rated below investment grade (or unrated but of comparable quality)
commonly are referred to as "junk debt." The Portfolio will invest only in those
Senior Loans with respect to which the Borrower, in the judgment of Stein Roe,
demonstrates one or more of the following characteristics: sufficient cash flow
to service debt; adequate liquidity; successful operating history; strong
competitive position; experienced management; and, with respect to
collateralized Senior Loans, collateral coverage that equals or exceeds the
outstanding principal amount of the Senior Loan. In addition, Stein Roe will
consider, and may rely in part, on the analyses performed by the Agent and other
Lenders, including such persons' determinations with respect to collateral
securing a Senior Loan.

FEES. The Portfolio may be required to pay or may receive various fees and
commissions in connection with purchasing, selling and holding interests in
Senior Loans. The fees normally paid by Borrowers may include three types:
facility fees, commitment fees and prepayment penalties. Facility fees are paid
to the Lenders upon origination of a Senior Loan. Commitment fees are paid to
Lenders on an ongoing basis based upon the undrawn portion committed by the
Lenders of the underlying Senior Loan. Lenders may receive prepayment penalties
when a Borrower prepays all or part of a Senior Loan. The Portfolio will receive
these fees directly from the Borrower if the Portfolio is a Primary Lender, or,
in the case of commitment fees and prepayment penalties, if the Portfolio
acquires an interest in a Senior Loan by way of Assignment. Whether or not the
Portfolio receives a facility fee from the Lender in the case of an Assignment,
or any fees in the case of a Participation, depends upon negotiations between
the


                                       16

Portfolio and the Lender selling such interests. When the Portfolio is an
assignee, it may be required to pay a fee, or forgo a portion of interest and
any fees payable to it, to the Lender selling the Assignment. Occasionally, the
assignor will pay a fee to the Portfolio based on the portion of the principal
amount of the Senior Loan that is being assigned. A Lender selling a
Participation to the Portfolio may deduct a portion of the interest and any fees
payable to the Portfolio as an administrative fee prior to payment thereof to
the Portfolio. The Portfolio may be required to pay over or pass along to a
purchaser of an interest in a Senior Loan from the Portfolio a portion of any
fees that the Portfolio would otherwise be entitled to.

PREPAYMENTS. Pursuant to the relevant Loan Agreement, a Borrower may be required
in certain circumstances, and may have the option at any time, to prepay the
principal amount of a Senior Loan, often without incurring a prepayment penalty.
In the event that like-yielding loans are not available in the marketplace,
Stein Roe believes that the prepayment of and subsequent reinvestment by the
Portfolio in Senior Loans could have a materially adverse impact on the yield on
the investment portfolio. Prepayments may have a beneficial impact on income due
to receipt of prepayment penalties, if any, and any facility fees earned in
connection with reinvestment.

COMMITMENTS TO MAKE ADDITIONAL PAYMENTS. A Lender may have certain obligations
pursuant to a Loan Agreement, which may include the obligation to make
additional loans in certain circumstances. Such circumstances may include,
without limitation, obligations under revolving credit facilities and facilities
that provide for further loans to Borrowers based upon compliance with specified
financial requirements. The Portfolio currently intends to reserve against any
such contingent obligation by segregating a sufficient amount of cash, liquid
securities and liquid Senior Loans. The Portfolio will not purchase interests in
Senior Loans that would require the Portfolio to make any such additional loans
if the aggregate of such additional loan commitments would exceed 20% of the
Portfolio's total assets or would cause the Portfolio to fail to meet the
diversification requirements set forth under the heading "Investment
Restrictions" in the Statement of Additional Information.

BRIDGE FINANCING. The Portfolio may acquire interests in Senior Loans that are
designed to provide temporary or "bridge" financing to a Borrower pending the
sale of identified assets or the arrangement of longer-term loans or the
issuance and sale of debt obligations. A Borrower's use of a bridge loan
involves a risk that the Borrower may be unable to locate permanent financing to
replace the bridge loan, which may impair the Borrower's perceived
creditworthiness.

OTHER SECURITIES. The Portfolio will acquire warrants, equity securities and
junior debt securities only as are incident to the purchase or intended purchase
of interests in collateralized Senior Loans. The Portfolio generally will
acquire interests in warrants, equity securities and junior debt securities only
when Stein Roe believes that the relative value being given by the Portfolio in
exchange for such interests is substantially outweighed by the potential value
of such instruments. Investment in warrants, equity securities and junior debt
securities entail certain risks in addition to those associated with investments
in Senior Loans. Warrants and equity securities have a subordinate claim on a
Borrower's assets as compared with debt securities, and junior debt securities
have a subordinate claim on such assets as compared with Senior Loans. As such,
the values of warrants and equity securities generally are more dependent on the
financial condition of the Borrower and less dependent on fluctuations in
interest rates than are


                                       17

the values of many debt securities. The values of warrants, equity securities
and junior debt securities may be more volatile than those of Senior Loans and
thus may have an adverse impact on the ability of the Portfolio to minimize
fluctuations in its net asset value. (See "Principal Risks.")

DEFENSIVE INVESTMENT POLICY. If Stein Roe determines that market conditions
temporarily warrant a defensive investment policy, the Portfolio may (but is not
required to) invest, subject to its ability to liquidate its relatively illiquid
portfolio of Senior Loans, up to 100% of its assets in cash and high quality,
short-term debt securities. The Portfolio may also lend its portfolio securities
to other parties and may enter into repurchase and reverse repurchase agreements
for securities, subject to certain restrictions. For further discussion of the
Portfolio's investment objective and policies and its investment practices and
the associated considerations, see "Other Investment Practices."

FUNDAMENTAL RESTRICTIONS AND POLICIES. Each of the Portfolio and the Fund has
adopted certain fundamental investment restrictions and policies which may not
be changed unless authorized by a shareholder vote. These are set forth in the
Statement of Additional Information. Among these fundamental restrictions, the
Portfolio and the Fund may not purchase any security if, as a result of the
purchase, 25% or more of the Fund's or the Portfolio's total assets (taken at
current value) would be invested in the securities of Borrowers and other
issuers having their principal business activities in the same industry (the
electric, gas, water and telephone utility industries being treated as separate
industries for the purpose of this restriction). However, the Fund may invest
25% or more of its total assets in securities the issuer of which is deemed to
be in the financial institutions industry, which includes commercial banks,
thrift institutions, insurance companies and finance companies. The Fund may
not, however, invest 25% or more of its total assets in Senior Loans to
Borrowers in the financial services industry and securities of other
issuers in the financial services industry.  There is no
limitation with respect to obligations issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities. Except for the
fundamental restrictions and policies set forth as such in the Statement of
Additional Information, the Portfolio's and the Fund's investment objective and
policies are not fundamental policies and accordingly may be changed by the
Board without obtaining the approval of shareholders.

                                 PRINCIPAL RISKS

You should consider the following Principal Risks before investing in the Fund.
As described below, these risks could cause you to lose money as a result of
investing in the Fund. The Fund and the Portfolio are both closed-end investment
companies. The Fund is designed primarily for long-term investors and not as a
trading vehicle.

NON-PAYMENT. Senior Loans, like other corporate debt obligations, are subject to
the risk of non-payment of scheduled interest or principal. Non-payment would
result in a reduction of income to the Portfolio, a reduction in the value of
the Senior Loan experiencing non-payment and a potential decrease in the net
asset value of the Portfolio. The Portfolio generally will invest in
collateralized Senior Loans only if Stein Roe believes the value of the
collateral, which may include guarantees, exceeds the principal amount of the
Senior Loan at the time of initial investment. However, there can be no
assurance that the liquidation of any collateral would satisfy the Borrower's
obligation in the event of non-payment of scheduled interest or principal
payments, or that such collateral could be readily liquidated. Moreover, as a
practical matter,


                                       18

most Borrowers cannot satisfy their debts by selling their assets. Borrowers pay
their debts from the cash flow they generate. This is particularly the case for
Borrowers that are highly leveraged. Many of the Senior Loans purchased by the
Portfolio will be to highly leveraged Borrowers. If the Borrower's cash flow is
insufficient to pay its debts as they come due, the Borrower is far more likely
to seek to restructure its debts than it is to sell off assets to pay its Senior
Loans. Borrowers may try to restructure their debts either by seeking protection
from creditors under Chapter 11 of the federal Bankruptcy Code or negotiating a
work out. In the event of bankruptcy of a Borrower, the Portfolio could
experience delays or limitations with respect to its ability to realize the
benefits of the collateral securing a Senior Loan. To the extent that a Senior
Loan is collateralized by stock in the Borrower or its subsidiaries, such stock
may lose all or substantially all of its value in the event of bankruptcy of the
Borrower. The Agent generally is responsible for determining that the Lenders
have obtained a perfected security interest in the collateral securing the
Senior Loan. If a Borrower files for protection from creditors under Chapter 11
of the Bankruptcy Code, the Code will impose an automatic stay that prohibits
the Agent from liquidating collateral. The Agent may ask the bankruptcy court to
lift the stay. As a practical matter, the court is unlikely to lift the stay if
it concludes that the Borrower has a chance to emerge from the reorganization
proceedings and the collateral is likely to hold most of its value. If the
Lenders have a good security interest, the Senior Loan will be treated as a
separate class in the reorganization proceedings and will retain a priority
interest in the collateral. Chapter 11 reorganization plans typically are the
product of negotiation among the Borrower and the various creditor classes.
Successful negotiations may require the Lenders to extend the time for
repayment, change the interest rate or accept some consideration in the form of
junior debt or equity securities. A work out outside of bankruptcy may produce
similar concessions by senior lenders.

Some Senior Loans in which the Portfolio may invest are subject to the risk that
a court, pursuant to fraudulent conveyance or other similar laws, could
subordinate such Senior Loans to current or future indebtedness of the Borrower
or take other action detrimental to the holders of Senior Loans, such as the
Portfolio, including, under certain circumstances, invalidating such Senior
Loans. Lenders commonly have certain obligations pursuant to the Loan Agreement,
which may include the obligation to make additional loans or release collateral
in certain circumstances.

RESTRICTIONS ON RESALE. Senior Loans, at present, generally are not readily
marketable and may be subject to restrictions on resale. Interests in Senior
Loans generally are not listed on any national securities exchange or automated
quotation system and no active market may exist for many of the Senior Loans in
which the Portfolio may invest. To the extent that a secondary market may exist
for certain of the Senior Loans in which the Portfolio invests, such market may
be subject to irregular trading activity, wide bid/ask spreads and extended
trade settlement periods. The Portfolio has no limitation on the amount of its
assets that may be invested in Senior Loans that are not readily marketable or
are subject to restrictions on resale. Because a substantial portion of the
Portfolio's assets may be invested in Senior Loan interests, the ability of the
Portfolio to dispose of its investments in a timely fashion and at a fair price
may be restricted, and the Portfolio and shareholders may suffer capital losses
as a result. However, many of the Senior Loans in which the Portfolio expects to
purchase interests are of a relatively large principal amount and are held by a
relatively large number of owners which should, in Stein Roe's opinion, enhance
the relative liquidity of such interests. The risks associated with illiquidity
are particularly acute in situations where the Portfolio's operations require
cash, such


                                       19

as when the Fund makes a repurchase offer for its shares, and may result in
borrowing to meet short-term cash requirements.

ONGOING MONITORING. On behalf of the several Lenders, the Agent generally will
be required to administer and manage the Senior Loans and, with respect to
collateralized Senior Loans, to service or monitor the collateral. In this
connection, the valuation of assets pledged as collateral will reflect market
value and the Agent may rely on independent appraisals as to the value of
specific collateral. The Agent, however, may not obtain an independent appraisal
as to the value of assets pledged as collateral in all cases. The Portfolio
normally will rely primarily on the Agent (where the Portfolio is a Primary
Lender or owns an Assignment) or the selling Lender (where the Portfolio owns a
Participation) to collect principal of and interest on a Senior Loan.
Furthermore, the Portfolio usually will rely on the Agent (where the Portfolio
is a Primary Lender or owns an Assignment) or the selling Lender (where the
Portfolio owns a Participation) to monitor compliance by the Borrower with the
restrictive covenants in the Loan Agreement and notify the Portfolio of any
adverse change in the Borrower's financial condition or any declaration of
insolvency. Collateralized Senior Loans will frequently be secured by all assets
of the Borrower that qualify as collateral, which may include common stock of
the Borrower or its subsidiaries. Additionally, the terms of the Loan Agreement
may require the Borrower to pledge additional collateral to secure the Senior
Loan, and enable the Agent, upon proper authorization of the Lenders, to take
possession of and liquidate the collateral and to distribute the liquidation
proceeds pro rata among the Lenders. If the terms of a Senior Loan do not
require the Borrower to pledge additional collateral in the event of a decline
in the value of the original collateral, the Portfolio will be exposed to the
risk that the value of the collateral will not at all times equal or exceed the
amount of the Borrower's obligations under the Senior Loan. Lenders that have
sold Participation interests in such Senior Loan will distribute liquidation
proceeds received by the Lenders pro rata among the holders of such
Participations. Stein Roe will also monitor these aspects of the Portfolio's
investments and, where the Portfolio is a Primary Lender or owns an Assignment,
will be directly involved with the Agent and the other Lenders regarding the
exercise of credit remedies.

LIMITED INFORMATION. The types of Senior Loans in which the Portfolio will
invest historically have not been rated by a nationally recognized statistical
rating organization, have not been registered with the SEC or any state
securities commission, and have not been listed on any national securities
exchange. Although the Portfolio will generally have access to financial and
other information made available to the Lenders in connection with Senior Loans,
the amount of public information available with respect to Senior Loans will
generally be less extensive than that available for rated, registered or
exchange listed securities. As a result, the performance of the Portfolio and
its ability to meet its investment objective is more dependent on the analytical
ability of Stein Roe than would be the case for an investment company that
invests primarily in rated, registered or exchange listed securities.

To the extent that Senior Loans are rated, the Portfolio may invest in the
lowest rated loans, but does not intend to invest more than 5% of its assets in
Senior Loans rated below B- or B3 by S&P or Moody's or unrated Senior Loans
considered to be of comparable quality.

BELOW INVESTMENT GRADE SECURITIES. Securities rated below investment grade are
commonly referred to as high-yield, high risk debt or "junk debt." They are
regarded as predominantly speculative with respect to the issuing company's
continuing ability to meet principal and


                                       20

interest payments. The prices of high-yield securities have been found to be
less sensitive to interest rate changes than higher-rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in the prices of high-yield securities.

The secondary market in which high-yield securities are traded is generally less
liquid than the market for higher-grade debt. Less liquidity in the secondary
trading market could adversely affect the price at which the Portfolio could
sell a high-yield Senior Loan, and could adversely affect the net asset value of
the Fund's shares. At times of less liquidity, it may be more difficult to value
high-yield Senior Loans because this valuation may require more research, and
elements of judgment may play a greater role in the valuation since there is
less reliable, objective data available.

Investments in high-yield Senior Loans may result in greater net asset value
fluctuation than if the Portfolio did not make such investments.

There is no limit on the percentage of assets that may be invested in Senior
Loans and other securities that are rated below investment grade or that are
unrated but of comparable quality.

INVESTMENTS IN NON-U.S. ISSUERS. Investment in non-U.S. issuers involves special
risks, including that non-U.S. issuers may be subject to less rigorous
accounting and reporting requirements than are U.S. issuers, less rigorous
regulatory requirements, differing legal systems and laws relating to creditors'
rights, the potential inability to enforce legal judgments, and the potential
for political, social and economic adversities.

INVESTMENTS IN EQUITY SECURITIES. To the extent the Portfolio invests in equity
securities, the value of its portfolio will be affected by changes in the stock
markets, which may be the result of domestic or international political or
economic news, changes in interest rates, or changing investor sentiment. The
stock market can be volatile and stock prices can change substantially. The
equity securities of smaller companies are more sensitive to these changes than
those of larger companies. This market risk will affect the Fund's net asset
value, which will fluctuate as the value of the securities held by the Portfolio
changes. Not all stock prices change uniformly or at the same time and not all
stock markets move in the same direction at the same time. Other factors affect
a particular stock's prices, such as poor earnings reports by an issuer, loss of
major customers, major litigation against an issuer, or changes in governmental
regulations affecting an industry. Adverse news affecting one company can
sometimes depress the stock prices of all companies in the same industry. Not
all factors can be predicted.

FINANCIAL SERVICES INDUSTRY CONCENTRATION. The financial services industries are
subject to extensive government regulation which can limit both the amounts and
types of loans and other financial commitments they can make, and the interest
rates and fees they can charge. Profitability is largely dependent on the
availability and cost of capital funds, and can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties of
borrowers can negatively affect the financial services industries. Insurance
companies can be subject to severe price competition. The financial services
industries are currently undergoing relatively rapid change as existing
distinctions between financial service segments become less clear. For instance,
recent business combinations have included insurance, finance, and


                                       21

securities brokerage under single ownership. Some primarily retail corporations
have expanded into securities and insurance industries. Moreover, the federal
laws generally separating commercial and investment banking have recently been
repealed.

PREPAYMENT RISK. Borrowers may pay back principal before the scheduled due date.
Borrowers may find it advantageous to prepay principal due to a decline in
interest rates or an excess in cash flow. Such prepayments may require the
Portfolio to replace a Senior Loan with a lower-yielding security. This may
adversely affect the distributions on the Fund's shares.

LEGISLATION; RESTRICTIONS. To the extent that legislation or state or federal
regulators impose additional requirements or restrictions with respect to the
ability of financial institutions to make loans in connection with highly
leveraged transactions, the availability of Senior Loan interests for investment
by the Portfolio may be adversely affected. In addition, such requirements or
restrictions may reduce or eliminate sources of financing for certain Borrowers.
Further, to the extent that legislation or federal or state regulators require
such institutions to dispose of Senior Loan interests relating to highly
leveraged transactions or subject such Senior Loan interests to increased
regulatory scrutiny, such financial institutions may determine to sell Senior
Loan interests in a manner that results in a price that, in the opinion of Stein
Roe, is not indicative of fair value. Were the Portfolio to attempt to sell a
Senior Loan interest at a time when a financial institution was engaging in such
a sale with respect to the Senior Loan interest, the price at which the
Portfolio could consummate such a sale might be adversely affected.

REPURCHASE OFFER RISKS. The Fund, as a fundamental policy, will make quarterly
repurchases for 5% to 25% of shares outstanding at net asset value. (See
"Periodic Repurchase Offers" below for more information.) However, shares are
less liquid than shares of funds that trade on a stock exchange. Under limited
circumstances, the Fund may suspend or postpone a quarterly repurchase offer --
the Fund must meet certain regulatory requirements to do so. There is no
guarantee that shareholders will be able to sell all of their shares that they
desire to sell in a quarterly repurchase offer.

CLOSED-END FUND RISKS. The Fund is a closed-end investment company designed
primarily for long-term investors and not as a trading vehicle. The Fund does
not intend to list its shares for trading on any national securities exchange.
There is not expected to be any secondary trading market in the shares and the
shares should be considered illiquid. The shares are, therefore, not readily
marketable. The shares of closed-end investment companies often trade at a
discount from their net asset values and, in the unlikely event that a secondary
market for the shares were to develop, the shares likewise may trade at a
discount from net asset value.

NON-DIVERSIFICATION. The Portfolio has registered as a "non-diversified"
investment company so that, subject to its investment restrictions, it will be
able to invest more than 5% of the value of its assets in the obligations of any
single issuer, including Senior Loans of a single Borrower or Participations
purchased from a single Lender. (See "Investment Restrictions" in the Statement
of Additional Information.) The Portfolio does not intend, however, to invest
more than 5% of the value of its assets in interests in Senior Loans of a single
Borrower, and the Portfolio intends to limit its investments so as to comply
with the diversification requirements imposed by the Internal Revenue Code for
qualification as a "regulated investment company." To the extent the Portfolio
invests a relatively high percentage of its assets in obligations of a limited
number of issuers, the Portfolio will be more susceptible than a more widely
diversified


                                       22

investment company to the consequences of any single corporate, economic,
political or regulatory occurrence.

OTHER PRACTICES. The Portfolio may use various investment practices that involve
special considerations, including engaging in interest rate and other hedging
transactions, lending its portfolio securities, entering into when-issued and
delayed-delivery transactions and entering into repurchase and reverse
repurchase agreements. For further discussion of these practices and associated
special considerations, see "Other Investment Practices."

                           OTHER INVESTMENT PRACTICES

Stein Roe may use some or all of the following investment practices when, in its
opinion, their use is appropriate. These investment practices involve certain
special risk considerations. Although Stein Roe believes that these investment
practices may further the investment objective, no assurance can be given that
the utilization of these investment practices will achieve that result.

STRUCTURED NOTES. The Portfolio may invest up to 5% of its total assets in
structured notes, including "total rate of return swaps" with rates of return
determined by reference to the total rate of return on one or more loans
referenced in such notes. The rate of return on the structured note may be
determined by applying a multiplier to the rate of total return on the
referenced loan or loans. Application of a multiplier is comparable to the use
of financial leverage, a speculative technique. Leverage magnifies the potential
for gain and the risk of loss, because a relatively small decline in the value
of a referenced loan could result in a relatively large loss in the value of a
structured note. Structured notes are treated as Senior Loans for purposes of
the Portfolio's policy of normally investing at least 80% of its assets in
Senior Loans.

BORROWING. The Portfolio is authorized to borrow money for the purpose of
obtaining short-term liquidity in connection with Repurchase Offers for Fund
shares and for temporary, extraordinary or emergency purposes. The Portfolio may
enter into an agreement with a financial institution providing for an unsecured
discretionary credit facility, the proceeds of which may be used to finance, in
part, repurchases. (See "Periodic Repurchase Offers.") Under the requirements of
the 1940 Act, the Portfolio, immediately after any such borrowings, must have an
asset coverage of at least 300%. Asset coverage is the ratio which the value of
the total assets of the Portfolio, less all liabilities and indebtedness not
represented by senior securities (as that term is defined in the 1940 Act),
bears to the aggregate amount of any such borrowings by the Portfolio. The
rights of any lenders to the Portfolio to receive payments of interest on and
repayments of principal of borrowings will be senior to those of shareholders,
and the terms of any borrowings may contain provisions which limit certain
activities of the Portfolio, including the payment of dividends to shareholders
in certain circumstances. Further, the terms of any such borrowings may, and the
provisions of the 1940 Act do (in certain circumstances), grant lenders certain
voting rights in the event of default in the payment of interest or repayment of
principal. In the event that such provisions would impair the Portfolio's status
as a regulated investment company, the Portfolio, subject to its ability to
liquidate its relatively illiquid investments, intends to repay the borrowings.
Interest payments and fees incurred in connection with any borrowings will
reduce the amount of net income available for payment to shareholders.


                                       23

INTEREST RATE SWAPS AND OTHER HEDGING TRANSACTIONS. The Portfolio may enter into
various interest rate hedging and risk management transactions. Certain of these
interest rate hedging and risk management transactions may be considered to
involve derivative instruments. A derivative is a financial instrument whose
performance is derived at least in part from the performance of an underlying
index, security or asset. The values of certain derivatives can be affected
dramatically by even small market movements, sometimes in ways that are
difficult to predict. There are many different types of derivatives with many
different uses. The Portfolio expects to enter into these transactions primarily
to seek to preserve a return on a particular investment or portion of its
portfolio, and may also enter into such transactions to seek to protect against
decreases in the anticipated rate of return on floating or variable rate Senior
Loans the Portfolio owns or anticipates purchasing at a later date, or for other
risk management strategies such as managing the effective dollar-weighted
average duration of the investment portfolio. In addition, the Portfolio may
also engage in hedging transactions, including entering into put and call
options, to seek to protect the value of its portfolio against declines in net
asset value resulting from changes in interest rates or other market changes.
Market conditions will determine whether and in what circumstances the Portfolio
would employ any hedging and risk management techniques. The Portfolio will not
engage in any of these transactions for speculative purposes and will use them
only as a means to hedge or manage the risks associated with assets held in, or
anticipated to be purchased for, the investment portfolio or obligations
incurred by the Portfolio. The successful utilization of hedging and risk
management transactions requires skills different from those needed in the
selection of Senior Loans. The Portfolio will incur brokerage and other costs in
connection with its hedging transactions.

The Portfolio may enter into interest rate swaps or purchase or sell interest
rate caps or floors. The Portfolio will not sell interest rate caps or floors
that it does not own. Interest rate swaps involve the exchange by the Portfolio
with another party of their respective obligations to pay or receive interest;
e.g., an exchange of an obligation to make floating rate payments for an
obligation to make fixed rate payments. For example, the Portfolio may seek to
shorten the effective interest rate redetermination period of a Senior Loan to a
Borrower that has selected an interest rate redetermination period of one year.
The Portfolio could exchange the Borrower's obligation to make fixed rate
payments for one year for an obligation to make payments that readjust monthly.
In such event, the Portfolio would consider the interest rate redetermination
period of such Senior Loan to be the shorter period.

The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest at the difference between the index and the predetermined rate on a
notional principal amount (the reference amount with respect to which interest
obligations are determined although no actual exchange of principal occurs) from
the party selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the difference
between the index and the predetermined rate on a notional principal amount from
the party selling such interest rate floor. The Portfolio will not enter into
swaps, caps or floors if, on a net basis, the aggregate notional principal
amount with respect to such agreements exceeds the net assets of the Portfolio.

In circumstances in which Stein Roe anticipates that interest rates will
decline, the Portfolio might, for example, enter into an interest rate swap as
the floating rate payor or, alternatively, purchase an interest rate floor. In
the case of purchasing an interest rate floor, if interest rates


                                       24

declined below the floor rate, the Portfolio would receive payments from its
counterparty which would wholly or partially offset the decrease in the payments
it would receive with respect to the portfolio assets being hedged. In the case
where the Portfolio purchases such an interest rate swap, if the floating rate
payments fell below the level of the fixed rate payment set in the swap
agreement, the Portfolio's counterparty would pay the Portfolio amounts equal to
interest computed at the difference between the fixed and floating rates over
the notional principal amount. Such payments would offset or partially offset
the decrease in the payments the Portfolio would receive with respect to
floating rate portfolio assets being hedged.

The successful use of swaps, caps and floors to preserve the rate of return on a
portfolio of Senior Loans depends on Stein Roe's ability to predict correctly
the direction and extent of movements in interest rates. Although Stein Roe
believes that use of the hedging and risk management techniques described above
will benefit the Portfolio, if Stein Roe's judgment about the direction or
extent of the movement in interest rates is incorrect, the Portfolio's overall
performance would be worse than if it had not entered into any such transaction.
For example, if the Portfolio had purchased an interest rate swap or an interest
rate floor to hedge against its expectation that interest rates would decline
but instead interest rates rose, the Portfolio would lose part or all of the
benefit of the increased payments it would receive as a result of the rising
interest rates because it would have to pay amounts to its counterparty under
the swap agreement or would have paid the purchase price of the interest rate
floor.

Inasmuch as these hedging transactions are entered into for good-faith risk
management purposes, Stein Roe and the Portfolio believe such obligations do not
constitute senior securities. The Portfolio will usually enter into interest
rate swaps on a net basis; i.e., where the two parties make net payments with
the Portfolio receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of the Portfolio's
obligations over its entitlements with respect to each interest rate swap will
be accrued and an amount of cash or liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained. If the
Portfolio enters into a swap on other than a net basis, the Portfolio will
maintain the full amount of its obligations under each such swap. Accordingly,
the Portfolio does not treat swaps as senior securities. The Portfolio may enter
into swaps, caps and floors with member banks of the Federal Reserve System,
members of the New York Stock Exchange ("NYSE") or other entities determined to
be creditworthy by Stein Roe, pursuant to procedures adopted and reviewed on an
ongoing basis by the Board. If a default occurs by the other party to such
transactions, the Portfolio will have contractual remedies pursuant to the
agreements related to the transaction, but such remedies may be subject to
bankruptcy and insolvency laws that could affect the Portfolio's rights as a
creditor. The swap market has grown substantially in recent years with a large
number of banks and financial services firms acting both as principals and as
agents utilizing standardized swap documentation. As a result, the swap market
has become relatively liquid. Caps and floors are more recent innovations and
they are less liquid than swaps. There can be no assurance, however, that the
Portfolio will be able to enter into interest rate swaps or to purchase interest
rate caps or floors at prices or on terms Stein Roe believes are advantageous to
the Portfolio. In addition, although the terms of interest rate swaps, caps and
floors may provide for termination, there can be no assurance that the Portfolio
will be able to terminate an interest rate swap or to sell or offset interest
rate caps or floors that it has purchased.


                                       25

New financial products continue to be developed and the Portfolio may invest in
any such products as may be developed to the extent consistent with its
investment objective and the regulatory and federal tax requirements applicable
to investment companies.

"WHEN-ISSUED" AND "DELAYED-DELIVERY" TRANSACTIONS. The Portfolio may also
purchase and sell interests in Senior Loans and other portfolio securities on a
"when-issued" and "delayed-delivery" basis. No income accrues to the Portfolio
on such Senior Loans in connection with such purchase transactions prior to the
date the Portfolio actually takes delivery of such Senior Loans. These
transactions are subject to market fluctuation; the value of the interests in
Senior Loans and other portfolio debt securities at delivery may be more or less
than their purchase price, and yields generally available on such Senior Loans
when delivery occurs may be higher or lower than yields on the Senior Loans
obtained pursuant to such transactions. Because the Portfolio relies on the
buyer or seller, as the case may be, to consummate the transaction, failure by
the other party to complete the transaction may result in the Portfolio missing
the opportunity of obtaining a price or yield considered to be advantageous.
When the Portfolio is the buyer in such a transaction, however, it will maintain
cash or liquid securities having an aggregate value equal to the amount of such
purchase commitments until payment is made. The Portfolio will make commitments
to purchase such Senior Loans on such basis only with the intention of actually
acquiring these Senior Loans, but the Portfolio may sell such Senior Loans prior
to the settlement date if such sale is considered to be advisable. To the extent
the Portfolio engages in "when-issued" and "delayed-delivery" transactions, it
will do so for the purpose of acquiring Senior Loans for its investment
portfolio consistent with its investment objective and policies and not for the
purpose of investment leverage. No specific limitation exists as to the
percentage of the Portfolio's assets that may be used to acquire securities on a
"when-issued" or "delayed-delivery" basis.

REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreements (a
purchase of, and a simultaneous commitment to resell, a financial instrument at
an agreed-upon price on an agreed-upon date) only with member banks of the
Federal Reserve System and member firms of the NYSE. When participating in
repurchase agreements, the Portfolio buys securities from a seller (e.g., a bank
or brokerage firm) with the agreement that the seller will repurchase the
securities at a higher price at a later date. Such transactions afford an
opportunity for the Portfolio to earn a return on available liquid assets at
minimal market risk, although the Portfolio may be subject to various delays and
risks of loss if the counterparty is unable to meet its obligation to
repurchase. Under the 1940 Act, repurchase agreements are deemed to be
collateralized loans of money by the Portfolio to the counterparty. In
evaluating whether to enter into a repurchase agreement, Stein Roe will consider
carefully the creditworthiness of the counterparty. If the member bank or member
firm that is the party to the repurchase agreement petitions for bankruptcy or
otherwise becomes subject to the Bankruptcy Code, the law regarding the rights
of the Portfolio is unsettled. The securities underlying a repurchase agreement
will be marked to market every business day so that the value of the collateral
is at least equal to the value of the loan, including the accrued interest
thereon, and Stein Roe will monitor the value of the collateral. No specific
limitation exists as to the percentage of the Portfolio's assets that may be
used to participate in repurchase agreements.

REVERSE REPURCHASE AGREEMENTS. The Portfolio may enter into reverse repurchase
agreements with respect to debt obligations that could otherwise be sold by the
Portfolio. A reverse repurchase agreement is an instrument under which the
Portfolio may sell an underlying debt


                                       26

security and simultaneously obtain the commitment of the purchaser (a commercial
bank or a broker or dealer) to sell the security back to the Portfolio at an
agreed-upon price on an agreed-upon date. The Portfolio will maintain cash or
liquid securities in an amount sufficient to cover its obligations with respect
to reverse repurchase agreements. The Portfolio receives payment for such
securities only upon physical delivery or evidence of book entry transfer by its
custodian. SEC regulations require either that securities sold by the Portfolio
under a reverse repurchase agreement be segregated pending repurchase or that
the proceeds be segregated on the Portfolio's books and records pending
repurchase. Reverse repurchase agreements could involve certain risks in the
event of default or insolvency of the other party, including possible delays or
restrictions upon the Portfolio's ability to dispose of the underlying
securities. An additional risk is that the market value of securities sold by
the Portfolio under a reverse repurchase agreement could decline below the price
at which the Portfolio is obligated to repurchase them. Reverse repurchase
agreements will be considered borrowings by the Portfolio and as such would be
subject to the restrictions on borrowing described in the Statement of
Additional Information under "Investment Restrictions." The Portfolio will not
hold more than 5% of the value of its total assets in reverse repurchase
agreements as of the time the agreement is entered into.

                         DISTRIBUTIONS AND INCOME TAXES

DISTRIBUTIONS. Income dividends are declared each business day, paid monthly,
and confirmed at least quarterly. Capital gains, if any, are distributed at
least annually, usually in December. Shares accrue dividends as long as they are
issued and outstanding (i.e., from the date net asset value is determined for
the purchase order to the Redemption Pricing Date of the Repurchase Offer in
which the shares are accepted for repurchase by the Fund).

Dividend payments are not guaranteed and may vary with each payment. The Fund
does not pay "interest" or guarantee any fixed rate of return.

If you do not indicate on your application your preferences for handling
distributions, the Fund will automatically reinvest all distributions in
additional shares of the Fund. You can choose one of the following options for
distributions when you open your account: (1) reinvest all distributions in
additional shares of the Fund; (2) reinvest all distributions in shares of
another fund; (3) receive dividends in cash and reinvest capital gains; or (4)
receive all distributions in cash. Distributions of $10 or less will
automatically be reinvested in additional shares. If you elect to receive
distributions by check and the check is returned as undeliverable, or if you do
not cash a distribution check within six months of the check date, the
distribution will be reinvested in additional shares.

The Fund is authorized to borrow money subject to certain restrictions. (See
"Other Investment Practices.") Under the 1940 Act, the Fund may not declare any
dividend or other distribution on its shares unless the Fund has, at the time of
declaration, asset coverage of at least 300% of its aggregate indebtedness,
after deducting the amount of the distribution. This limitation may impair the
Fund's ability to maintain its qualification for taxation as a regulated
investment company.

INCOME TAXES. The Fund intends to satisfy those requirements relating to the
sources of its income, the distribution of its income, and the diversification
of its assets necessary to qualify for the special tax treatment afforded to
regulated investment companies under the Internal Revenue


                                       27

Code (the "Code") and thereby be relieved of federal income or excise taxes to
the extent that it distributes its net investment income and net realized
capital gains to shareholders in accordance with the requirements imposed by the
Code. For a detailed discussion of tax issues pertaining to the Fund, see
"Additional Income Tax Considerations" in the Statement of Additional
Information.

Your distributions will be taxable to you, under income tax law, whether
received in cash or reinvested in additional shares. For federal income tax
purposes, any distribution that is paid in January but was declared in October,
November or December of the prior calendar year is deemed paid in the prior
calendar year.

You will be subject to federal income tax at ordinary rates on income dividends
and distributions of net short-term capital gains. Distributions of net
long-term capital gains will be taxable to you as long-term capital gains
regardless of the length of time you have held your shares.

You will be advised annually as to the source of distributions for tax purposes.
If you are not subject to tax on your income, you will not be required to pay
tax on these amounts.

A shareholder who, pursuant to a Repurchase Offer, offers all of his or her
shares for repurchase (and is not considered to own any other shares pursuant to
attribution rules contained in the Code) may realize a taxable gain or loss
depending upon the shareholder's basis in the shares. Such gain or loss realized
on the disposition of shares (whether pursuant to a Repurchase Offer or in
connection with a sale or other taxable disposition of shares in a secondary
market) generally will be treated as long-term capital gain or loss if the
shares have been held as a capital asset for more than one year and as
short-term capital gain or loss if held as a capital asset for one year or less.
Net long-term capital gains realized upon the disposition of shares held longer
than five years and whose holding periods begin after December 31, 2000, will be
subject to a lower maximum capital gains tax rate than is currently available.
If shares are sold at a loss after being held for six months or less, the loss
will be treated as long-term -- instead of short-term -- capital loss to the
extent of any capital gain distributions received on those shares. All or a
portion of any loss realized on a sale or exchange of shares of the Fund will be
disallowed if the shareholder acquires other shares within 30 days before or
after the disposition. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss.

Different tax consequences may apply to shareholders whose shares are
repurchased (other than shareholders who do offer all of their shares for
repurchase described in the previous paragraph) and to shareholders who do not
offer their shares for repurchase in connection with the Repurchase Offer. For
example, if a shareholder offers for repurchase fewer than all his shares, the
proceeds received could be treated as a taxable dividend, a return of capital,
or capital gain depending on the portion of shares repurchased, the Fund's
earnings and profits, and the shareholder's basis in the repurchased shares.
Moreover, when fewer than all shares owned by a shareholder are repurchased
pursuant to a Repurchase Offer, there is a remote possibility that shareholders
whose shares are not repurchased may be considered to have received a deemed
distribution that is taxable to them in whole or in part. You may wish to
consult your tax advisor prior to offering your shares for repurchase.


                                       28

BACKUP WITHHOLDING. The Fund may be required to withhold federal income tax
("backup withholding") from certain payments to a shareholder -- generally
distribution payments and redemption proceeds. Backup withholding may be
required if:

- -    the shareholder fails to furnish its properly certified Social Security or
     other tax identification number;

- -    the shareholder fails to certify that its tax identification number is
     correct or that it is not subject to backup withholding due to the
     underreporting of certain income;

- -    the Internal Revenue Service ("IRS") informs the Fund that the
     shareholder's tax identification number is incorrect.

These certifications are contained in the application that you should complete
and return when you open an account. The Fund must promptly pay to the IRS all
amounts withheld. Therefore, it is usually not possible for the Fund to
reimburse you for amounts withheld. You may, however, claim the amount withheld
as a credit on your federal income tax return.

The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their tax advisors regarding the
specific federal and state tax consequences of purchasing, holding and disposing
of shares, as well as the effects of other state, local and foreign tax laws and
any proposed tax law changes.

                             MANAGEMENT OF THE FUND

BOARD OF TRUSTEES AND INVESTMENT ADVISOR. The Board of Trustees of the Fund has
overall management responsibility for the Fund; the Board of Managers of the
Portfolio has overall management responsibility for the Portfolio. See
"Management" in the Statement of Additional Information for the names of and
other information about the trustees, managers and officers. Since the Fund and
the Portfolio have the same Board members, they have adopted conflict of
interest procedures to monitor and address potential conflicts between the
interests of the Fund and the Portfolio.

The investment advisor, Stein Roe & Farnham Incorporated, One Financial Center,
Boston, MA 02111, is responsible for managing the investment portfolio of the
Portfolio and the business affairs of the Fund, subject to the direction of
their respective Boards. Stein Roe is registered as an investment advisor under
the Investment Advisers Act of 1940. Stein Roe is a direct wholly owned
subsidiary of Liberty Funds Group LLC ("LFG"), which is a direct wholly owned
subsidiary of Fleet/Liberty Holdings, Inc., a U.S. financial holding
corporation, which is a direct wholly owned subsidiary of Fleet National Bank, a
national banking association, which in turn is a direct wholly owned subsidiary
of FleetBoston Financial Corporation, a U.S. financial holding corporation.
Stein Roe and its predecessor have advised and managed mutual funds since 1949
and have been providing investment advisory services since 1932.

Stein Roe's mutual funds and institutional investment advisory businesses are
part of a larger business unit known as LFG that includes several separate legal
entities. LFG includes certain affiliates of Stein Roe, principally Colonial
Management Associates, Inc. ("Colonial"). Stein Roe and the LFG business unit
are managed by a single management team. Stein Roe, Colonial


                                       29

and the other LFG entities also share personnel, facilities, and systems that
may be used in providing administrative or operational services to the Fund.
Stein Roe and Colonial are registered investment advisors. Stein Roe, Colonial
and the other entities that make up LFG are subsidiaries of FleetBoston
Financial Corporation.

FEES AND EXPENSES. Stein Roe provides administrative services to the Fund and
the Portfolio and portfolio management services to the Portfolio. Stein Roe is
entitled to receive a monthly administrative fee from the Fund, computed and
accrued daily, based on an annual rate of 0.20% of average net assets and a
monthly management fee from the Portfolio, computed and accrued daily, based on
an annual rate of 0.45% of average net assets of the Portfolio. However, Stein
Roe may waive a portion of its fees.

Stein Roe provides office space and executive and other personnel to the Fund
and bears any sales or promotional expenses. The Fund pays all expenses other
than those paid by Stein Roe, including but not limited to printing and postage
charges, securities registration and custodian fees, and expenses incidental to
its organization.

PORTFOLIO MANAGERS. Brian W. Good and James R. Fellows, senior vice presidents
of Stein Roe, have been primarily responsible for the day-to-day management of
the Portfolio since the Fund and the Portfolio commenced operations. Mr. Fellows
and Mr. Good have been employed by Stein Roe since April 1998. Prior thereto,
Mr. Good was vice president and portfolio manager at Van Kampen American Capital
since 1989 and Mr. Fellows was vice president and senior credit analyst at Van
Kampen American Capital since 1988.

TRANSFER AGENT. Liberty Funds Services, Inc. ("Transfer Agent"), P.O. Box 1722,
Boston, MA 02105, a wholly owned subsidiary of LFG, is the agent of the Fund for
the transfer of shares, disbursement of dividends, and maintenance of
shareholder accounting records. Under a separate agreement, the Transfer Agent
also provides certain investor accounting services to the Portfolio.

DISTRIBUTOR. Fund shares are offered for sale through Liberty Funds Distributor,
Inc. ("Distributor"). The Distributor is a wholly owned indirect subsidiary of
LFG. The business address of the Distributor is One Financial Center, Boston, MA
02111.

CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street, Boston, MA
02101, is the custodian of the Fund and the Portfolio and has custody of the
securities and cash. The custodian, among other things, attends to the
collection of principal and income and payment for and collection of proceeds of
securities bought and sold.

                                HOW TO BUY SHARES

  When the Fund receives your purchase request in "good form," your shares will
be bought at the next calculated net asset value. "Good form" means that you
placed your order with your brokerage firm or your payment has been received and
your application is complete, including all necessary signatures.


                                       30

Outlined below are various ways you can purchase shares:



METHOD               INSTRUCTIONS
                  
Through your         Your financial advisor can help you establish your account
financial advisor    and buy Fund shares on your  behalf. Your financial advisor
                     may charge you fees for executing the purchase for you.
- --------------------------------------------------------------------------------
By check             For new accounts, send a completed application and check
(new account)        made payable to the Fund to the transfer agent, Liberty
                     Funds Services, Inc., P.O. Box 1722, Boston, MA 02105-1722.
- --------------------------------------------------------------------------------
By check             For existing accounts, fill out and return the additional
(existing account)   investment stub included in your quarterly statement, or
                     send a letter of instruction, including your Fund name and
                     account number with a check made payable to the Fund to
                     Liberty Funds Services, Inc., P.O. Box 1722, Boston, MA
                     02105-1722.
- --------------------------------------------------------------------------------
By exchange          You or your financial advisor may acquire shares for your
                     account by exchanging shares you own in one fund for shares
                     of the same class of the Fund at no additional cost. There
                     may be an additional charge when exchanging from a money
                     market fund. To exchange by telephone, call 800-422-3737.
- --------------------------------------------------------------------------------
By wire              You may purchase shares by wiring money from your bank
                     account to your Fund account. To wire funds to your Fund
                     account, call 800-422-3737 to obtain a control number and
                     the wiring instructions.
- --------------------------------------------------------------------------------
By electronic        You may purchase shares by electronically transferring
funds transfer       money from your bank account to your Fund account by
                     calling 800-422-3737. An electronic funds transfer may take
                     up to two business days to settle and be considered in
                     "good form." You must set up this feature prior to your
                     telephone request. Be sure to complete the appropriate
                     section of the application.
- --------------------------------------------------------------------------------
Automatic            You can make monthly or quarterly investments automatically
investment plan      from your bank account to your Fund account. You can select
                     a pre-authorized amount to be sent via electronic funds
                     transfer. Be sure to complete the appropriate section of
                     the application for this feature.
- --------------------------------------------------------------------------------
By dividend          You may automatically invest dividends distributed by
diversification      another Fund into the same class of  shares of the Fund at
                     no additional sales charge. To invest your dividends in
                     another fund, call 800-422-3737.


The minimum initial investment is $1,000,000 except as indicated below. The Fund
reserves the right to change the investment minimums. The Fund also reserves the
right to refuse a purchase order for any reason, including if it believes that
doing so would be in the best interest of the Fund and its shareholders.

The following investors are eligible to purchase Class Z shares: (i) clients of
broker-dealers or registered investment advisors that both recommend the
purchase of Fund shares and charge such clients an asset-based fee; (ii) a
retirement plan (or the custodian for such plan) with aggregate plan assets of
at least $5 million at the time of purchase and which purchases shares directly
from the Distributor or through a third party broker-dealer; (iii) any insurance
company, trust company or bank purchasing shares for its own account; (iv) any
endowment, investment company or foundation; (v) clients of investment advisory
affiliates of the Distributor provided that the clients meet certain criteria
established by the Distributor and its affiliates; (vi) any shareholder (or
family member of such shareholder) who owned shares of any of the funds of
Liberty Acorn


                                       31

Trust on September 29, 2000 (when all of the then outstanding shares of Liberty
Acorn Trust were re-designated Class Z shares) and who has since then continued
to own shares of any funds distributed by the Distributor; (vii) any person
investing all or part of the proceeds of a distribution, roll over or transfer
of assets into a Liberty IRA, from any deferred compensation plan which was a
shareholder of any of the funds of Liberty Acorn Trust on September 29, 2000, in
which the investor was a participant and through which the investor invested in
one or more of the funds of Liberty Acorn Trust immediately prior to the
distribution, transfer or roll over; (viii) any trustee of Liberty Acorn Trust,
any employee of Liberty Wanger Asset Management, L.P., or a member of the family
of such trustee or employee; and (ix) any person or entity listed in the account
registration for any account (such as joint owners, trustees, custodians, and
designated beneficiaries) that held shares of any of the funds of Liberty Acorn
Trust on September 29, 2000 and that has since then continued to hold shares of
any fund distributed by the Distributor.

Initial purchases of Class Z shares are subject to a minimum purchase amount of
$1,000,000, except that purchases by (a) retirement plans described in clause
(ii) above are not subject to any initial investment minimum, and (b) investors
described in clauses (vi), (viii) and (ix) above are subject to a minimum
purchase amount of $1,000. The Fund reserves the right to change the investment
minimums.

                             MULTIPLE SHARE CLASSES

CHOOSING A SHARE CLASS. The Fund offers one class of shares in this prospectus
- -- Class Z shares, which are available to institutional and other investors at
net asset value without a sales charge or early withdrawal charge. The Fund also
offers Classes A, B and C shares through a separate prospectus.

HOW TO EXCHANGE SHARES. Shareholders of the Fund whose shares are repurchased
during a Repurchase Offer may exchange those shares for shares of the same class
of a fund distributed by the Distributor at net asset value. Fund shareholders
will not be able to participate in this exchange privilege at any time other
than in connection with a Repurchase Offer. If your shares are subject to an
EWC, you will not be charged an EWC upon the exchange. However, when you sell
the shares acquired through the exchange, the shares sold may be subject to a
CDSC (a CDSC is the deferred sales charge applicable to the open-end Liberty
Funds) or EWC, depending upon when you originally purchased the shares you
exchanged. For purposes of computing the CDSC or EWC, the length of time you
have owned your shares will be computed form the date of your original purchase
and the applicable CDSC or EWC will be the CDSC or EWC of the original Fund.

Unless your account is part of a tax-deferred retirement plan, an exchange is a
taxable event. Therefore, you may realize a gain or a loss for tax purposes. The
Fund may terminate your exchange privilege if Stein Roe determines that your
exchange activity is likely to adversely impact its ability to manage the
Portfolio.

                           PERIODIC REPURCHASE OFFERS

The Board has adopted share repurchase policies as fundamental policies. Those
policies, which may not be changed without the vote of the holders of a majority
of the Fund's outstanding


                                       32

voting securities, provide that each calendar quarter, the Fund intends to make
a Repurchase Offer to repurchase a portion of the outstanding shares from
shareholders who request repurchases. The price of the repurchases of shares
normally will be the net asset value per share determined as of the close of
business (4 p.m., Eastern time) on the date the Repurchase Offer ends or within
a maximum of 14 days after the Repurchase Offer ends as described below.

REPURCHASE PROCEDURE. At the beginning of each Repurchase Offer, shareholders
will be notified in writing about the Repurchase Offer, how they may request
that the Fund repurchase their shares and the deadline for shareholders to
provide their repurchase requests to the Distributor (the "Repurchase Request
Deadline"), which is the date the Repurchase Offer ends. The time between the
notification of the shareholders and the Repurchase Request Deadline may vary
from no more than six weeks to no less than three weeks. For each Repurchase
Offer, it is anticipated that each Repurchase Request Deadline will be on the
15th day in each of the months of March, June, September and December, or, if
the 15th day is not a business day, the next business day. The repurchase price
of the shares will be the net asset value as of the close of the NYSE on the
date on which the repurchase price of shares will be determined (the "Repurchase
Pricing Date"). It is anticipated that normally the Repurchase Pricing Date will
be the same date as the Repurchase Request Deadline, and if so, the Repurchase
Request Deadline will be set for a time no later than the close of the NYSE on
such date. The Fund has determined that the Repurchase Pricing Date may occur no
later than the 14th day after the Repurchase Request Deadline or the next
business day if the 14th day is not a business day.

The Board may establish other policies for repurchases of shares that are
consistent with the 1940 Act and other pertinent laws. Shares offered for
repurchase by shareholders by any Repurchase Request Deadline will be
repurchased subject to the aggregate repurchase amounts established for that
Repurchase Request Deadline. Repurchase proceeds will be paid to shareholders in
cash within seven days after each Repurchase Pricing Date. The end of the seven
days is referred to as the "Repurchase Payment Deadline."

Repurchase offers and the need to fund repurchase obligations may affect the
ability of the Fund to be fully invested, which may reduce returns. Moreover,
diminution in the size of the Fund through repurchases without offsetting new
sales may result in untimely sales of Senior Loans and a higher expense ratio
and may limit the ability of the Fund to participate in new investment
opportunities. The Fund may borrow to meet repurchase obligations, which entails
certain risks and costs (see "Borrowing"). The Fund may also sell Senior Loans
to meet repurchase obligations which, in certain circumstances, may adversely
affect the market for Senior Loans and reduce the Fund's value.

REPURCHASE AMOUNTS. The Board, in its sole discretion, will determine the number
of shares that the Fund will offer to repurchase (the "Repurchase Offer Amount")
for a given Repurchase Request Deadline. However, the Repurchase Offer Amount
will be at least 5% and no more than 25% of the total number of shares
outstanding on the Repurchase Request Deadline.

If shareholders offer for repurchase more than the Repurchase Offer Amount for a
given Repurchase Offer, the Fund may repurchase an additional amount of shares
of up to 2% of the shares outstanding on the Repurchase Request Deadline. If the
Fund determines not to repurchase more than the Repurchase Offer Amount, or if
the Fund determines to repurchase the additional 2% of the shares outstanding,
but Fund shareholders offer shares for repurchase in


                                       33

excess of that amount, the Fund will repurchase the shares on a pro rata basis.
The Fund may, however, accept all shares offered for repurchase by shareholders
who own less than 100 shares and who offer all their shares, before accepting on
a pro rata basis shares offered by other shareholders. In the event there is an
oversubscription of a Repurchase Offer, shareholders may be unable to liquidate
all or a given percentage of their investment in the Fund at net asset value
during the Repurchase Offer.

NOTICES TO SHAREHOLDERS. Notice of each quarterly Repurchase Offer (and any
additional discretionary repurchase offers) will be given to each beneficial
owner of shares between 21 and 42 days before each Repurchase Request Deadline.
The notice will contain information shareholders should consider in deciding
whether or not to offer their shares for repurchase. The notice will also
include detailed instructions on how to offer shares for repurchase. The notice
will state the Repurchase Offer Amount. The notice will also identify the dates
of the Repurchase Request Deadline, scheduled Repurchase Pricing Date, and
scheduled Repurchase Payment Deadline. The notice will describe the risk of
fluctuation in the net asset value between the Repurchase Request Deadline and
the Repurchase Pricing Date, if such dates do not coincide, and the possibility
that the Fund may use an earlier Repurchase Pricing Date than the scheduled
Repurchase Pricing Date under certain circumstances (if the scheduled Repurchase
Pricing Date is not the Repurchase Request Deadline). The notice will describe
(i) the procedures for shareholders to offer their shares for repurchase, (ii)
the procedures for the Fund to repurchase shares on a pro rata basis, (iii) the
circumstances in which the Fund may suspend or postpone a Repurchase Offer, and
(iv) the procedures that will enable shareholders to withdraw or modify their
offers of shares for repurchase until the Repurchase Request Deadline. The
notice will set forth the net asset value of the shares to be repurchased no
more than seven days before the date of notification, and how shareholders may
ascertain the net asset value after the notification date.

REPURCHASE PRICE. The current net asset value of the shares is computed daily.
The Board has determined that the time at which the net asset value will be
computed will be as of the close of regular session trading on the NYSE. You may
call 1-800-422-3737 to learn the net asset value per share. The notice of the
Repurchase Offer will also provide information concerning the net asset value
per share, such as the net asset value as of a recent date or a sampling of
recent net asset values, and a toll-free number for information regarding the
Repurchase Offer.

SUSPENSION OR POSTPONEMENT OF REPURCHASE OFFER. The Fund may suspend or postpone
a Repurchase Offer only: (a) if making or effecting the Repurchase Offer would
cause the Fund to lose its status as a regulated investment company under the
Internal Revenue Code; (b) for any period during which the NYSE or any market on
which the securities owned by the Fund are principally traded is closed, other
than customary weekend and holiday closings, or during which trading in such
market is restricted; (c) for any period during which an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable, or during which it is not reasonably practicable for the Fund
fairly to determine the value of its net assets; or (d) for such other periods
as the SEC may by order permit for the protection of shareholders of the Fund.

LIQUIDITY REQUIREMENTS. The Fund and the Portfolio must maintain liquid assets
equal to their Repurchase Offer Amount from the time that the notice is sent to
shareholders until the Repurchase Pricing Date. The Fund and the Portfolio will
ensure that a percentage of their respective net assets equal to at least 100%
of the Repurchase Offer Amount consists of assets (a)


                                       34

that can be sold or disposed of in the ordinary course of business at
approximately the price at which the Fund or the Portfolio, as applicable, has
valued the investment within the time period between the Repurchase Request
Deadline and the Repurchase Payment Deadline; or (b) that mature by the
Repurchase Payment Deadline.

The Board of the Portfolio has adopted procedures that are reasonably designed
to ensure that the assets are sufficiently liquid so that the Fund and the
Portfolio can comply with the Repurchase Offer and the liquidity requirements
described in the previous paragraph. If, at any time, the Fund or the Portfolio
falls out of compliance with these liquidity requirements, their respective
Boards will take whatever action they deem appropriate to ensure compliance.

                                 NET ASSET VALUE

The purchase or redemption price of Fund shares is generally the net asset value
per share. The Fund determines the net asset value of each class of its shares
as of the close of regular session trading on the NYSE (currently 4 p.m.,
Eastern time) by dividing the difference between the values of each class's
assets less its liabilities by the number of that class's shares outstanding.
Net asset value will not be determined on days when the NYSE is closed unless,
in the judgment of the Board of Trustees, the net asset value should be
determined on any such day, in which case the determination will be made at 4
p.m., Eastern time.

The Senior Loans in which the Portfolio invests generally are not listed on any
securities exchange. Certain Senior Loans are traded by institutional investors
in an over-the-counter secondary market for Senior Loan obligations that has
developed over the past several years. This secondary market for those Senior
Loans generally is comparatively illiquid relative to markets for other fixed
income securities and no active trading market exists for many Senior Loans. In
determining net asset value, the Fund utilizes the valuations of Senior Loans
furnished to Stein Roe by an independent third-party pricing service. The
pricing service provider has no obligation to provide a valuation for a Senior
Loan if it believes that it cannot determine such a valuation. There can be no
assurance that the pricing service provider will continue to provide these
services or will provide a value for each Senior Loan held by the Portfolio.
However, Stein Roe believes that if the pricing service provider declines to
continue to act as such for the Portfolio, or does not provide values for a
significant portion of the Senior Loans held by the Portfolio, one or more
alternative independent third-party pricing service providers will be available
to provide comparable services on similar terms.

A pricing service provider typically values Senior Loans at the mean of the
highest bona fide bid and lowest bona fide ask prices when current quotations
are readily available. Senior Loans for which current quotations are not readily
available are valued at a fair value as determined by the pricing service
provider using a wide range of market data and other information and analysis,
including credit considerations considered relevant by the pricing service
provider to determine valuations. The procedures of any pricing service provider
and its valuations are reviewed by the officers of Stein Roe under the general
supervision of the Board. If Stein Roe believes that a value provided by a
pricing service provider does not represent a fair value as a result of
information, specific to that Senior Loan or Borrower or its affiliates, of
which Stein Roe believes that the pricing agent may not be aware, Stein Roe may
in its discretion value the Senior Loan subject to procedures approved by the
Board and reviewed on a periodic basis, and the Fund will


                                       35

utilize that price instead of the price as determined by the pricing service
provider. In addition to such information, Stein Roe will consider, among other
factors, (i) the creditworthiness of the Borrower and (ii) the current interest
rate, the period until next interest rate reset and maturity of such Senior Loan
interests in determining a fair value of a Senior Loan. If the pricing service
does not provide a value for a Senior Loan or if no pricing service provider is
then acting, a value will be determined by Stein Roe in the manner described
above.

It is expected that the Fund's net asset value will fluctuate as a function of
interest rate and credit factors. Although the Fund's net asset value will vary,
Stein Roe expects the Fund's policy of acquiring interests in floating or
variable rate Senior Loans to minimize fluctuations in net asset value as a
result of changes in interest rates. Accordingly, Stein Roe expects the value of
the investment portfolio to fluctuate significantly less than a portfolio of
fixed-rate, longer term obligations as a result of interest rate changes.

Other long-term debt securities for which market quotations are not readily
available are valued at fair value based on valuations provided by pricing
services approved by the Board, which may employ electronic data processing
techniques, including a matrix system, to determine valuations. The value of
interest rate swaps, caps, and floors will be determined in accordance with a
formula and then confirmed periodically by obtaining a quotation. Short-term
debt securities with remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains or losses. The
Board believes that the amortized cost represents a fair value for such
securities. Short-term debt securities with remaining maturities of more than 60
days for which market quotations are not readily available are valued by use of
a matrix prepared by Stein Roe based on quotations for comparable securities.
Other assets and securities held by the Fund for which these valuation methods
do not produce a fair value are valued by a method that the Board believes will
determine a fair value.

                             PERFORMANCE INFORMATION

The Fund seeks to provide an effective yield that is higher than other
short-term instrument alternatives. From time to time, the Fund may include its
current and/or effective yield based on various specific time periods. Yields
will fluctuate from time to time and are not necessarily representative of
future results.

The current yield is calculated by annualizing the most recent monthly
distribution (i.e., multiplying the distribution amount by 365/31 for a 31 day
month) and dividing the product by the current maximum offering price.  The
effective yield is calculated by dividing the current yield by 365/31 and
adding 1.  The resulting quotient is then taken to the 365/31st power and
reduced by 1.  The result is the effective yield.  The Fund will calculate its
standardized 30-day yield in accordance with the SEC's formula, which is
described in the section "Investment Performance" in the Statement of
Additional Information.

On occasion, the Fund may compare its yield to: (a) LIBOR, quoted daily in the
Wall Street Journal; (b) the CD Rate as quoted daily in the Wall Street Journal
as the average of top rates paid by major New York banks on primary new issues
of negotiable CDs, usually on amounts of $1 million or more; (c) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on corporate loans at
large U.S. money center commercial banks; (d) one or more averages compiled by
Donoghue's Money Fund Report, a widely recognized independent publication that
monitors the performance of money market mutual funds; (e) the average yield
reported by the Bank Rate Monitor National Index(TM) for money market deposit
accounts offered by the 100


                                       36

leading banks and thrift institutions in the ten largest standard metropolitan
statistical areas; (f) yield data published by Lipper, Inc.; (g) the yield on an
investment in 90-day Treasury bills on a rolling basis, assuming quarterly
compounding; or (h) the yield on an index of loan funds comprised of all
continually offered closed-end bank loan funds, as categorized by Lipper (the
"loan fund index"). In addition, the Fund may compare the Prime Rate, the
Donoghue's averages and the other yield data described above to each other.
Yield comparisons should not be considered indicative of the Fund's yield or
relative performance for any future period.

From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information may include a distribution rate and an average compounded
distribution rate of the Fund for specified periods of time. Such information
may also include performance rankings and similar information from independent
organizations such as Lipper, Inc., Business Week, Forbes or other industry
publications.

The Fund's distribution rate generally is determined on a monthly basis with
respect to the immediately preceding monthly distribution period. The
distribution rate is computed by first annualizing the Fund's distributions per
share during such a monthly distribution period and dividing the annualized
distribution by the Fund's maximum offering price per share on the last day of
such period. The Fund calculates the compounded distribution rate by adding one
to the monthly distribution rate, raising the sum to the power of 12 and
subtracting one from the product. In circumstances in which the Fund believes
that, as a result of decreases in market rates of interest, its expected monthly
distributions may be less than the distributions with respect to the immediately
preceding monthly distribution period, the Fund reserves the right to calculate
the distribution rate on the basis of a period of less than one month.

When utilized by the Fund, distribution rate and compounded distribution rate
figures are based on historical performance and are not intended to indicate
future performance. Distribution rate, compounded distribution rate and net
asset value per share can be expected to fluctuate over time.

Advertisements and communications to present or prospective shareholders also
may cite a total return for any period. Total return is calculated by
subtracting the net asset value of a single purchase of shares at a given date
from the net asset value of those shares (assuming reinvestment of
distributions) on a later date. The difference divided by the original net asset
value is the total return. The Fund may include information about the total
return on the loan fund index, and compare that to the total return of the Fund
and other indices.

In calculating the Fund's total return, all dividends and distributions are
assumed to be reinvested in additional shares of the Fund at net asset value.
Therefore, the calculation of the Fund's total return and effective yield
reflects the effect of compounding. The calculations of total return, current
yield and effective yield do not reflect the amount of any shareholder income
tax liability, which would reduce the performance quoted. If the Fund's fees or
expenses are waived or reimbursed, the Fund's performance will be higher.

Finally, the Fund may include information on the history of its net asset value
per share and the net asset value per share of the loan fund index, including
comparisons between them, in advertisements and other material furnished to
present and prospective shareholders. Information about the performance of the
Fund or other investments is not necessarily indicative


                                       37

of future performance and should not be considered representative of what an
investor's yield or total return may be in the future.

                     ORGANIZATION AND DESCRIPTION OF SHARES

The Fund is a Massachusetts business trust organized under an Agreement and
Declaration of Trust ("Declaration of Trust") dated August 13, 1998, which
provides that each shareholder shall be deemed to have agreed to be bound by the
terms thereof. The Declaration of Trust may be amended by a vote of either the
Fund's shareholders or its trustees. The Fund offers four classes of shares --
Class A, Class B, Class C and Class Z. Class A, Class B and Class C shares are
offered through a separate prospectus.

Under Massachusetts law, shareholders of a Massachusetts business trust such as
the Fund could, in some circumstances, be held personally liable for unsatisfied
obligations of the trust. However, the Declaration of Trust provides that
persons extending credit to, contracting with, or having any claim against the
Fund shall look only to its assets for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the Fund shall have
no personal liability therefor. The Declaration of Trust requires that notice of
such disclaimer of liability be given in each contract, instrument or
undertaking executed or made on behalf of the Fund. Further, the Declaration of
Trust provides for indemnification of any shareholder against any loss and
expense arising from personal liability solely by reason of being or having been
a shareholder. Thus, the risk of a shareholder incurring financial loss on
account of shareholder liability is believed to be remote, because it would be
limited to circumstances in which the disclaimer was inoperative and the Fund
was unable to meet its obligations.

The shares are not, and are not expected to be, listed for trading on any
national securities exchange nor, to the Fund's knowledge, is there, or is there
expected to be, any secondary trading market in the shares.

Anti-Takeover Provisions in the Declaration of Trust. The Declaration of Trust
includes provisions that could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund. In addition, in the event a
secondary market were to develop in the shares, such provisions could have the
effect of depriving shareholders of an opportunity to sell their shares at a
premium over prevailing market prices.

The Declaration of Trust requires the favorable vote of the holders of not less
than three-fourths of the outstanding shares then entitled to vote to authorize
certain transactions, unless at least three-fourths of the members of the Board
then in office and at least three-fourths of the non-interested trustees who
have acted in such capacities for at least 12 months (or since commencement of
operation if that period is less than 12 months) authorize such transaction and
then only a vote of the majority of the holders of the outstanding shares then
entitled to vote is required.

The Board has determined that the voting requirements described above, which are
greater than the minimum requirements under Massachusetts law or the 1940 Act,
are in the best interests of shareholders generally. Reference should be made to
the Declaration of Trust on file with the SEC for the full text of these
provisions.


                                       38

STATUS OF SHARES. The Board of Trustees may classify or reclassify any issued or
unissued shares of the Fund into shares of any class by redesignating such
shares or by setting or changing in any one or more respects, from time to time,
prior to the issuance of such shares, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends,
qualifications, or terms or conditions of repurchase of such shares. Any such
classification or reclassification will comply with the provisions of the 1940
Act.

As of November 30, 2001, the following shares of the Fund were outstanding:



                                                                    (4)
                       (2)                 (3)                Amount Outstanding
       (1)           Amount       Amount held by Fund or     Exclusive of Amount
  Title of Class   Authorized        for its Account           Shown Under (3)
- --------------------------------------------------------------------------------
                                                    
Class A              Unlimited             0              14,430,542.826
Class B              Unlimited             0              20,840,620.003
Class C              Unlimited             0              18,759,609.801
Class Z              Unlimited             0               1,370,208.987


               MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS

The Fund seeks to achieve its objective by investing all of its assets in
another Portfolio having an investment objective identical to that of the Fund.
The initial shareholder of the Fund approved this policy of permitting the Fund
to act as a feeder fund by investing in the Portfolio. Please refer to
"Investment Objective and Policies" for a description of the investment
objectives, policies, and restrictions of the Portfolio. The management and
expenses of both the Fund and the Portfolio are described under "Fund Expenses"
and "Management of the Fund -- Fees and Expenses." The Fund bears its
proportionate share of Portfolio expenses.

Stein Roe has provided investment management services in connection with other
mutual funds employing the master fund/feeder fund structure since 1991.

The common investment objective of the Fund and the Portfolio is non-fundamental
and may be changed without shareholder approval, subject, however, to at least
30 days' advance written notice to the Fund's shareholders. The fundamental
policies of the Fund, and the corresponding fundamental policies of the
Portfolio, can be changed only with shareholder approval.

If the Fund, as a Portfolio investor, is requested to vote on a proposed change
in a fundamental policy of the Portfolio or any other matter pertaining to the
Portfolio (other than continuation of the business of the Portfolio after
withdrawal of another investor), the Fund will solicit proxies from its
shareholders and vote its interest in the Portfolio for and against such matters
proportionately to the instructions to vote for and against such matters
received from the Fund's


                                       39

shareholders. The Fund will vote shares for which it receives no voting
instructions in the same proportion as the shares for which it receives voting
instructions. There can be no assurance that any matter receiving a majority of
votes cast by the Fund's shareholders will receive a majority of votes cast by
all Portfolio investors. If other investors hold a majority interest in the
Portfolio, they could have voting control over the Portfolio.

In the event that the Portfolio's fundamental policies were changed so as to be
inconsistent with those of the Fund, the Board of the Fund would consider what
action might be taken, including changes to the Fund's fundamental policies,
withdrawal of the Fund's assets from the Portfolio and investment of such assets
in another pooled investment entity, or the retention of another investment
advisor. Any of these actions would require the approval of the Fund's
shareholders. The Fund's inability to find a substitute master fund or
comparable investment management could have a significant impact upon its
shareholders' investments. Any withdrawal of the Fund's assets could result in a
distribution in kind of Senior Loans (as opposed to a cash distribution) to the
Fund. Should such a distribution occur, the Fund would incur brokerage fees or
other transaction costs in converting such Senior Loans to cash. In addition, a
distribution in kind could result in a less diversified portfolio of the Fund
and could affect the liquidity of the Fund.

The Portfolio may permit other investment companies and/or other institutional
investors to invest, but members of the general public may not invest directly
in the Portfolio. Other investors in the Portfolio are not required to sell
their shares at the same public offering price as the Fund, and could incur
different administrative fees, expenses, and sales commissions than the Fund.
Therefore, Fund shareholders might have different investment returns than
shareholders in another investment company that invests exclusively in the
Portfolio. Investment by such other investors in the Portfolio would provide
funds for the purchase of additional Senior Loans and would tend to reduce the
Portfolio's operating expenses as a percentage of its net assets. Conversely,
large-scale redemptions by any such other investors in the Portfolio could
result in untimely liquidations of the Portfolio's Senior Loans, loss of
investment flexibility, and increases in the operating expenses of the Portfolio
as a percentage of its net assets. As a result, the Portfolio's security
holdings may become less diverse, resulting in increased risk.

Information regarding any other investors in the Portfolio may be obtained by
writing to Stein Roe Floating Rate Limited Liability Company, One Financial
Center, Boston, MA 02111 or by calling 800-426-3750. Stein Roe may provide
administrative or other services to one or more such investors.

                               SHAREHOLDER REPORTS

The Fund issues reports to its shareholders annually and semi-annually that
include financial information.

                              FINANCIAL STATEMENTS

The Fund will furnish without charge, when available, copies of its Annual
Report and any subsequent Semi-Annual Report to shareholders upon request to the
Fund, One Financial Center, Boston, MA 02111, toll-free 800-422-3737.


                                       40

                              TABLE OF CONTENTS OF
                       STATEMENT OF ADDITIONAL INFORMATION


                                                                            Page
                                                                        
The Fund .................................................................     2
Investment Policies ......................................................     2
Portfolio Investments and Strategies .....................................     3
Investment Restrictions ..................................................    12
Repurchase Offer Fundamental Policy ......................................    15
Management ...............................................................    16
Financial Statements .....................................................    24
Principal Shareholders ...................................................    25
Investment Advisory and Other Services ...................................    26
Distributor ..............................................................    29
Programs for Reducing or Eliminating Sales Charges .......................    31
Transfer Agent ...........................................................    35
Custodian ................................................................    35
Independent Accountants of the Fund and Portfolio ........................    36
Portfolio Transactions ...................................................    36
Additional Income Tax Considerations .....................................    42
Investment Performance ...................................................    42
Appendix -- Ratings ......................................................    45

                           [LIBERTY FUNDS LETTERHEAD]

761-01/306I-1201