STEIN ROE MUTUAL FUNDS
ANNUAL REPORT
JUNE 30, 1998
PHOTO: BONDS
STEIN ROE FIXED INCOME FUNDS
TAXABLE BOND FUND
INSTITUTIONAL CLIENT HIGH YIELD FUND
LOGO:STEIN ROE MUTUAL FUNDS
SENSIBLE RISKS. INTELLIGENT INVESTMENTS. (SM)
<PAGE>
Contents
- --------------------------------------------------------------------------------
Fund Performance................................................. 1
Q&A
Institutional Client High Yield Fund ............................ 2
Interview with the portfolio manager and
a summary of investment activity
Portfolio of Investments......................................... 4
A complete list of investments with market values
Financial Statements............................................. 8
Statements of assets and liabilities, operations
and changes in net assets
Notes to Financial Statements.................................... 14
Financial Highlights............................................. 16
Selected per-share data
Report of Independent Auditors................................... 18
Must be preceded or accompanied by a prospectus.
<PAGE>
Fund Performance
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There are several ways to evaluate a fund's historical performance. You can look
at the cumulative return percentage, the average annual return percentage or the
growth of a hypothetical $10,000 investment. Each performance figure includes
changes in a fund's share price, plus reinvestment of any dividends (net
investment income) and capital gain distributions (the profits the fund earns
when it sells fixed income securities that have grown in value).
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JUNE 30, 1998
- --------------------------------------------------------------------------------
Past 1 Since
Year Inception 1
- --------------------------------------------------------------------------------
INSTITUTIONAL CLIENT HIGH YIELD FUND 14.88% 15.01%
Merrill Lynch High Yield Master II Index 11.40 11.34
1 Inception dates: Institutional Client High Yield Fund - Feb. 14, 1997; because
index returns are calculated on a monthly basis, the index returns marked "Since
Inception" are calculated from the month-end results that fall closest to the
Fund's inception date.
Growth of a $10,000 investment since inception
Line chart
Institutional Client High Yield Fund
Institutional Client Merrill Lynch High
High Yield Fund Yield Master II Index
2/14/97 10000 10000
3/31/97 9900 9889
6/30/97 10548 10358
9/30/97 11102 10764
12/31/97 11352 11042
3/31/98 12075 11349
6/30/98 12117 11539
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions. This graph compares the performance of the
Stein Roe Institutional Client High Yield Fund to the Merrill Lynch High Yield
Master II Index, an unmanaged group of stocks not associated with any Stein Roe
fund.
<PAGE>
Q&A
- --------------------------------------------------------------------------------
AN INTERVIEW WITH STEVEN LOCKMAN, PORTFOLIO MANAGER OF STEIN ROE INSTITUTIONAL
CLIENT HIGH YIELD FUND AND SR&F HIGH YIELD PORTFOLIO
FUND DATA
INVESTMENT OBJECTIVE:
Seeks high current income and capital appreciation by investing principally
in high yield, high-risk, medium- and lower-quality debt securities.
FUND INCEPTION: Feb. 14, 1997
TOTAL NET ASSETS: $35.2 million
- --------------------------------------------------------------------------------
INSTITUTIONAL CLIENT HIGH YIELD FUND Q&A
Q: HOW DID THE FUND PERFORM?
A: With a 14.88 percent total return for the fiscal year ended June 30, 1998,
Institutional Client High Yield Fund significantly outperformed the Lipper high
yield bond fund peer group return of 11.14 percent and the 11.40 percent return
of the Merrill Lynch High Yield Master II Index for the same time period.
Q: WHAT SIGNIFICANT EVENTS OCCURRED IN THE HIGH YIELD MARKET THROUGHOUT THE
FISCAL YEAR, AND HOW DID THESE OCCURRENCES AFFECT THE FUND?
A: Low interest rates, lofty stock prices and declining yields on both Treasury
and corporate bonds all combined to drive investors further down on the quality
curve to capture higher yield. Demand came from many different investment
groups, such as insurance companies and other mutual funds, including equity
mutual funds. As some investors move out of equities and into bonds, we believe
the high yield category is a natural choice as these fixed income investments
have equity-like qualities.
Demand was met by dynamic growth as the market experienced record new
issuance over the previous year. This market is well over $500 billion and
growing.* New issues and players created a liquid market for high yield bonds.
The Fund's performance benefited greatly because we had previously increased our
allocation to bonds that had the best yield-narrowing potential. Additionally,
the Fund's assets nearly doubled, allowing us to take advantage of new issues
that could provide strong short- and long-term total return potential.
Q: WHAT SECTORS STOOD OUT?
A: Two sectors increased their importance in the high yield market throughout
the year: foreign issuance and telecommunications. An increasing amount of
foreign issuance saturated the high yield market providing some investors with
the unusual opportunity to buy high-quality companies in countries around the
world. The Fund did purchase some of these issues.
The second and more profound sector change was in the
telecommunications/media sector. For more than three years, this sector has been
the largest issuer in the high yield market, and it currently represents over 30
percent+ of the market. Telecommunications and media companies continue to bring
new products to the market, shaping the way businesses operate and compete on a
global scale. We believe these companies will benefit from global demand and our
large position in this sector has aided performance. It's important to note,
however, that many companies in this sector are start-ups, with little cash flow
and low credit ratings or none at all, which forces us to be extremely selective
in our purchases. We pay close attention not only to the size of the issues we
buy, but also to the number of brokers who back the issue and can provide
support in down markets. Although this may seem like a volatile area to invest,
we believe the rewards will be there. Some of these companies remind us of the
early days of the high yield market when investors were funding start-up
companies such as MCI. Now we're investing in NextLink (1.6 percent of total net
assets) and other Internet and long distance companies.
We believe they will shape the way companies operate in the future, as MCI did a
decade or so ago.
Q: WHERE DO YOU PLAN TO FOCUS YOUR INVESTMENTS GOING FORWARD?
A: We've increased our trading in the secondary market, where bonds are bought
and sold subsequent to original issuance. We find that when it is hard to find
suitable investments in the primary market, the secondary market is a good place
to look for undiscovered opportunities. We're looking for companies that are
improving their cash flows and revenues. We still favor consolidating sectors,
including telecommunications, defense and outsourcing of auto parts, and we have
a strong position in each of those industries. We believe the lowest quality
issues will be the best performers so we've concentrated our investments there.
We have also increased our zero coupon holdings. The recent Treasury
outperformance positions the zero coupon portion of the high yield market to
potentially be one of the best performing segments. If the stock market
declines, we plan to decrease our zero coupon holdings, perhaps by trading into
coupon holdings of the same issuer.
Q: WHAT'S YOUR OUTLOOK?
A: If the stock market continues to hit new highs, the high yield market should
benefit. We believe the strong economy should carry us through at least another
quarter before we see any material affects from the Asian crisis. However, we
are concerned that continuing fallout from Asia will have some longer-term
impact on the markets in coming quarters. When and if this happens, we believe
it will translate into lower valuations for most high yield bonds and we will
invest with caution.
* Source: Chase Bank.
+ Source: Merrill Lynch
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. Portfolio
holdings are as of June 30, 1998; portfolio data subject to change. Holdings are
disclosed as a percentage of SR&F High Yield Portfolio's total net assets. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions. The Merrill Lynch High Yield Master II Index is
an unmanaged group of bonds that differs from the composition of any Stein Roe
fund; it is not available for direct investment. The Adviser currently limits
expenses to 1.00 percent of average net assets, subject to termination upon 30
days' notice to the Fund. Absent this limit, the Fund's total return would have
been less. According to Lipper Analytical Services, Inc., an independent monitor
of mutual fund performance, the median returns for the Fund's high yield bond
fund peer group for the one-year and since inception periods ended June 30, 1998
were 11.14 percent and 10.69 percent, respectively.
Investing in high yield bonds involves greater credit and other risks not
associated with investing in higher-quality securities.
Foreign investments involve market, political and currency risks not associated
with other investments.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Portfolio of Investments at June 30, 1998
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Principal Market
LONG-TERM OBLIGATIONS (94.2%) Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
AEROSPACE & MILITARY TECHNOLOGY (4.6%)
<S> <C> <C>
Derlan Manufacturing (Yankee Issue) 10.000% 1/15/07.............................................. $ 1,000 $ 1,045
Dyncorp 9.500% 3/1/07............................................................................ 500 510
L-3 Communications Series B 10.375% 5/1/07....................................................... 500 552
United Defense Industries 8.875% 11/15/07........................................................ 1,500 1,521
----------
3,628
AUTOMOTIVE (1.3%)
Hayes Wheels International Series B 9.125% 7/15/07............................................... 500 522
Penda Series B 10.750% 3/1/04.................................................................... 500 508
----------
1,030
BUILDING & CONSTRUCTION (4.6%)
Beazer Homes USA 8.875% 4/1/08 (a)............................................................... 1,000 965
International Comfort Products 8.625% 5/15/08 (a)................................................ 1,250 1,239
PYCSA Panama 10.280% 12/15/12 (a)................................................................ 1,500 1,439
----------
3,643
BUSINESS SERVICES (2.3%)
Outdoor Systems 8.875% 6/15/07................................................................... 750 780
Rental Service 9.000% 5/15/08 (a)................................................................ 1,000 995
----------
1,775
CABLE & MEDIA (3.7%)
Frontiervision Zero Coupon (Yield to Maturity 4.660%) 9/15/07.................................... 750 593
Garden State Newspapers 8.750% 10/1/09 (a)....................................................... 1,000 1,015
Perry-Judd 10.625% 12/15/07 (a).................................................................. 1,000 1,040
Young Broadcasting 10.125% 2/15/05............................................................... 250 270
----------
2,918
CHEMICALS (0.6%)
Huntsman 9.500% 7/1/07 (a)....................................................................... 500 500
CONTAINERS (2.2%)
BWAY Series B 10.250% 4/15/07.................................................................... 350 376
Consumers International 10.250% 4/1/05 (a)....................................................... 500 540
Silgan 9.000% 6/1/09............................................................................. 750 782
----------
1,698
COSMETICS & PERSONAL CARE PRODUCTS (2.5%)
Chattem 8.875% 4/1/08 (a)........................................................................ 1,000 985
Revlon Consumer Products 8.625% 2/1/08........................................................... 1,000 1,000
----------
1,985
ENERGY SERVICES (1.5%)
Forcenergy Series B 8.500% 2/15/07............................................................... 500 475
Transamerican Energy Series B 11.500% 6/15/02.................................................... 750 701
----------
1,176
FINANCIAL (0.7%)
Penncorp Financial Group 9.250% 12/15/03......................................................... 500 511
FOOD & BEVERAGES (3.2%)
NBTY Series B 8.625% 9/15/07..................................................................... 1,000 1,015
Pepsi-Gemex Series B 9.750% 3/30/04.............................................................. 1,000 993
Windy Hill Pet Food 9.750% 5/15/07............................................................... 500 523
----------
2,531
<CAPTION>
See accompanying Notes to Financial Statements.
SR&F High Yield Portfolio CONTINUED
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
HEALTH SERVICES & EQUIPMENT (4.2%)
<S> <C> <C>
Dynacare (Yankee Issue) 10.750% 1/15/06.......................................................... $ 500 $ 529
Insight Health Services 9.625% 6/15/08 (a)....................................................... 1,250 1,239
Leiner Health 9.625% 7/1/07...................................................................... 500 531
Mediq Zero Coupon (Yield to Maturity 5.810%) 6/1/09 (a).......................................... 1,850 1,008
----------
3,307
HOSPITALS & NURSING HOME CARE (2.8%)
Integrated Health Services Series A 9.500% 9/15/07............................................... 400 419
Tenet Healthcare 8.625% 1/15/07.................................................................. 750 774
Universal Hospital Services 10.250% 3/1/08 (a)................................................... 1,000 1,000
----------
2,193
HOTELS & ENTERTAINMENT (8.7%)
Empress Entertainment 8.125% 7/1/06 (a).......................................................... 1,500 1,500
Hard Rock Hotels 9.250% 4/1/05 (a)............................................................... 1,500 1,541
Premier Parks
9.250% 4/1/06................................................................................. 250 258
9.750% 1/15/07................................................................................ 250 271
Zero Coupon (Yield to Maturity 4.939%) 4/1/08................................................. 1,750 1,164
Prime Hospitality Series B 9.750% 4/1/07......................................................... 1,000 1,064
Speedway Motorsports 8.500% 8/15/07.............................................................. 1,000 1,035
----------
6,833
INTERNET SERVICES (6.8%)
American Business Information 9.500% 6/15/08 (a)................................................. 1,250 1,256
Concentric Network 12.750% 12/15/07 (a).......................................................... 1,000 1,200
ICG Services Zero Coupon (Yield to Maturity 4.884%) 5/1/08 (a)................................... 2,250 1,311
Psinet 10.000% 2/15/05........................................................................... 1,500 1,534
----------
5,301
LEISURE PRODUCTS (1.0%)
Boyds Collection 9.000% 5/15/08 (a).............................................................. 750 748
METALS - STEEL (1.2%)
Geneva Steel 9.500% 1/15/04...................................................................... 1,000 930
PAPER (0.8%)
APP International Finance (Yankee Issue) 10.250% 10/1/00......................................... 150 132
Indah Kiat Finance 10.000% 7/1/07 (a)............................................................ 500 355
Specialty Paperboard 9.375% 10/15/06............................................................. 150 157
----------
644
RESTAURANTS (0.3%)
AFC Enterprises 10.250% 5/15/07.................................................................. 250 265
RETAIL (8.3%)
Amazon.com Zero Coupon (Yield to Maturity 4.929%) 5/1/08 (a)..................................... 2,000 1,215
Cole National Group 9.875% 12/31/06.............................................................. 200 216
Finlay Fine Jewelry 8.375% 5/1/08................................................................ 1,000 1,005
Holmes Products Series B 9.875% 11/15/07......................................................... 1,000 1,035
Marsh Supermarkets Series B 8.875% 8/1/07........................................................ 1,000 1,020
MTS 9.375% 5/1/05 (a)............................................................................ 1,500 1,477
Specialty Retailers Series B 8.500% 7/15/05...................................................... 500 514
----------
6,482
<CAPTION>
See accompanying Notes to Financial Statements.
SR&F High Yield Portfolio CONTINUED
- ------------------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RUBBER, PLASTIC & RELATED MATERIALS (2.7%)
Burke Industries 10.000% 8/15/07................................................................. $ 250 $ 254
Key Plastics Series B 10.250% 3/15/07............................................................ 500 519
Plastic Containers Series B 10.000% 12/15/06..................................................... 350 376
Tekni-Plex 9.250% 3/1/08 (a)..................................................................... 1,000 1,000
----------
2,149
SANITARY SERVICES (0.8%)
Allied Waste Industries Zero Coupon (Yield to Maturity 5.597%) 6/1/07............................ 900 659
TELECOMMUNICATIONS (16.0%)
American Mobile 12.250% 4/1/08 (a)............................................................... 1,250 1,175
Focal Communications Zero Coupon
(Yield to Maturity 5.967%) 2/15/08 (a)........................................................ 2,500 1,506
GlobalStar Telecommunications 10.750% 11/1/04.................................................... 1,000 955
Level 3 Communications 9.125% 5/1/08 (a)......................................................... 1,000 975
Metronet Communications
12.000% 8/15/07............................................................................... 1,000 1,125
Zero Coupon (Yield to Maturity 5.307%) 11/1/07................................................ 1,000 660
MGC Communications Series B 13.000% 10/1/04...................................................... 1,000 960
Nextlink Communications 9.625% 10/1/07........................................................... 1,250 1,275
Optel 11.500% 7/1/08 (a)......................................................................... 1,200 1,203
RCN 10.000% 10/15/07............................................................................. 1,000 1,028
Viatel
11.250% 4/15/08 (a)........................................................................... 1,000 1,050
Zero Coupon (Yield to Maturity 5.282%) 4/15/08 (a)............................................ 1,000 610
----------
12,522
TELEPHONE (6.5%)
Allegiance Telecom Zero Coupon
(Yield to Maturity 5.870%) 2/15/08 (a)........................................................ 1,500 739
BTI Telecom 10.500% 9/15/07...................................................................... 1,000 980
Comtel Brasileria (Yankee Issue) 10.750% 9/26/04 (a)............................................. 250 230
Esprit Telecom Group 11.500% 12/15/07............................................................ 1,000 1,029
IDT 8.750% 2/15/06 (a)........................................................................... 1,000 960
Knology Holdings Zero Coupon
(Yield to Maturity 5.840%) 10/15/07........................................................... 2,000 1,160
----------
5,098
TEXTILE & APPAREL (1.7%)
Pillowtex Series B 9.000% 12/15/07............................................................... 750 771
Polysindo International Finance 9.375% 7/30/07 (b)............................................... 1,000 330
William Carter Series A 10.375% 12/1/06.......................................................... 200 213
----------
1,314
TRANSPORTATION & TRANSPORTATION EQUIPMENT (4.5%)
Coach USA Series B 9.375% 7/1/07................................................................. 500 525
Greyhound Lines Series B 11.500% 4/15/07......................................................... 500 554
Holt Group 9.750% 1/15/06 (a).................................................................... 1,000 980
MTL 10.000% 6/15/06 (a).......................................................................... 1,000 990
Titan International 8.750% 4/1/07................................................................ 500 516
----------
3,565
UTILITIES (0.7%)
Calenergy Company 9.500% 9/15/06................................................................. 500 539
----------
TOTAL LONG-TERM OBLIGATIONS
(Cost $73,734)................................................................................... 73,944
<CAPTION>
See accompanying Notes to Financial Statements.
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER MARKET
PREFERRED STOCK (O.7%) OF UNITS VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
TELEPHONE (0.7%)
<C> <C> <C>
21st Century Telecom Group 13.75%
(Cost $500) .................................................................................. 500 $ 545
- ------------------------------------------------------------------------------------------------------------------------------------
Number
WARRANTS (0.2%) of Warrants
- ------------------------------------------------------------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.1%)
Metronet Communications Warrants (a)............................................................. 1,000 48
MGC Communications Warrants (a).................................................................. 1,000 60
----------
108
TELEPHONE (0.1%)
Knology Holdings Warrants (a).................................................................... 2,000 10
----------
TOTAL WARRANTS
(Cost $- )....................................................................................... 118
- ------------------------------------------------------------------------------------------------------------------------------------
Principal
SHORT-TERM OBLIGATION (2.6%) Amount
- ------------------------------------------------------------------------------------------------------------------------------------
COMMERCIAL PAPER
Associates Corp. of North America 6.338% 7/1/98
(Amortized cost $2,085)....................................................................... $ 2,085 2,085
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(Cost $76,319) (c)............................................................................................... 76,692
OTHER ASSETS, LESS LIABILITIES (2.3%)............................................................................ 1,795
----------
TOTAL NET ASSETS (100%).......................................................................................... $78,487
==========
</TABLE>
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a)Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933.
These securities generally are issued only to qualified institutional
investors, and any resale must be in an exempt transaction, normally to other
qualified institutional investors. At June 30, 1998, the aggregate value of
the Portfolio's private placement securities was $34,649 (aggregate cost
$34,738), which represented 44.1 percent of net assets.
(b)Issuer is in default of certain debt convenants. Income is not being accrued.
(c)At June 30, 1998, the cost of investments for financial reporting and federal
income tax purposes was identical. Net unrealized appreciation was $373,
consisting of gross unrealized appreciation of $1,995 and gross unrealized
depreciation of $1,622.
See accompanying Notes to Financial Statements.
<PAGE>
Stein Roe Institutional Client High Yield Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1998
(All amounts in thousands, except per-share amounts)
ASSETS
Investment in SR&F High Yield Portfolio, at value............ $35,240
Cash......................................................... 25
Other assets................................................. 6
-------
Total assets.............................................. 35,271
-------
LIABILITIES
Dividends payable............................................ 64
Payable to investment adviser and transfer agent............. 32
Accrued expenses payable..................................... 18
-------
Total liabilities......................................... 114
-------
Net assets................................................ $35,157
=======
ANALYSIS OF NET ASSETS
Paid-in capital.............................................. $33,521
Net unrealized appreciation on investments................... 235
Accumulated net realized gains on investments ............... 1,401
-------
Net assets................................................ $35,157
=======
Shares outstanding (unlimited number authorized)............. 3,300
=======
Net asset value per share.................................... $ 10.65
=======
See accompanying Notes to Financial Statements.
<PAGE>
Stein Roe Institutional Client High Yield Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the Year Ended June 30, 1998
(All amounts in thousands)
<TABLE>
<CAPTION>
INVESTMENT INCOME
<S> <C>
Interest income allocated from SR&F High Yield Portfolio.................... $2,708
---------
EXPENSES
Expenses allocated from SR&F High Yield Portfolio........................... 199
Administrative fees......................................................... 46
Trustees' fees.............................................................. 41
SEC and state registration fees............................................. 28
Accounting fees............................................................. 25
Amortization of organization expenses....................................... 23
Transfer agent fees......................................................... 15
Audit and legal fees........................................................ 12
Printing and postage........................................................ 3
Other expenses.............................................................. 3
---------
Total expenses........................................................... 395
Reimbursement of expenses by investment adviser............................. (241)
---------
Net expenses............................................................. 154
---------
Net investment income.................................................... 2,554
---------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains on investments allocated from SR&F High Yield Portfolio.. 1,702
Net change in unrealized appreciation or depreciation on investments........ (45)
---------
Net gains on investments................................................. 1,657
---------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $4,211
=========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
Stein Roe Institutional Client High Yield Fund
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended June 30, 1998, and the Period Ended June 30, 1997 (All
amounts in thousands)
<TABLE>
<CAPTION>
1998 1997(a)
---------- ----------
OPERATIONS
<S> <C> <C>
Net investment income............................................................................ $ 2,554 $ 377
Net realized gains on investments................................................................ 1,702 116
Net change in unrealized appreciation or depreciation on investments............................. (45) 280
---------- ----------
Net increase in net assets resulting from operations.......................................... 4,211 773
---------- ----------
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income......................................................... (2,554) (377)
Distributions from net capital gains............................................................. (417) --
---------- ----------
Total distributions to shareholders........................................................... (2,971) (377)
---------- ----------
SHARE TRANSACTIONS
Subscriptions to fund shares..................................................................... 5,275 24,962
Value of distributions reinvested................................................................ 2,968 316
---------- ----------
Net increase from share transactions.......................................................... 8,243 25,278
---------- ----------
Net increase in net assets.................................................................... 9,483 25,674
TOTAL NET ASSETS
Beginning of period.............................................................................. 25,674 --
---------- ----------
End of period.................................................................................... $35,157 $25,674
========== ==========
ANALYSES OF CHANGES IN SHARES OF BENEFICIAL INTEREST
Subscriptions to fund shares .................................................................... 503 2,484
Issued in reinvestment of distributions.......................................................... 282 31
---------- ----------
Net increase in fund shares................................................................... 785 2,515
Shares outstanding at beginning of period........................................................ 2,515 --
---------- ----------
Shares outstanding at end of period.............................................................. 3,300 2,515
========== ==========
</TABLE>
(a) From commencement of operations on February 14, 1997.
See accompanying Notes to Financial Statements.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1998
(All amounts in thousands)
ASSETS
Investments, at market value (cost $76,319).................... $76,692
Receivable for investments sold................................ 5,691
Accrued interest receivable.................................... 1,405
Cash........................................................... 1,098
----------
Total Assets................................................ 84,886
----------
LIABILITIES
Payable to investment adviser and transfer agent............... 6,350
Payable to investment adviser.................................. 37
Other liabilities.............................................. 12
----------
Total Liabilities........................................... 6,399
----------
Net assets applicable to investors' beneficial interests.... $78,487
==========
See accompanying Notes to Financial Statements.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Statement of Operations
For the year ended june 30, 1998
(All amounts in thousands)
INVESTMENT INCOME
Interest income....................................................... $5,401
EXPENSES
Management fees....................................................... 307
Accounting fees....................................................... 25
Audit and legal fees.................................................. 18
Trustees' fees........................................................ 15
Other................................................................. 36
------
Total expenses..................................................... 401
------
Net investment income................................................. 5,000
------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains on investments..................................... 3,084
Net change in unrealized appreciation or depreciation on investments.. (176)
------
Net gains on investments........................................... 2,908
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................. $7,908
=======
See accompanying Notes to Financial Statements.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
For the Year Ended June 30, 1998, and the Period Ended June 30, 1997
(All amounts in thousands)
<TABLE>
<CAPTION>
1998 1997(A)
----------- -----------
OPERATIONS
<S> <C> <C>
Net investment income............................................................................ $ 5,000 $ 874
Net realized gains on investments................................................................ 3,084 336
Net change in unrealized appreciation or depreciation of investments............................. (176) 549
----------- -----------
Net increase in net assets resulting from operations.......................................... 7,908 1,759
----------- -----------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions.................................................................................... 40,432 38,807
Withdrawals...................................................................................... (9,126) (1,293)
----------- -----------
Net increase from transactions in investors' beneficial interest.............................. 31,306 37,514
----------- -----------
Net increase in net assets.................................................................... 39,214 39,273
TOTAL NET ASSETS
Beginning of period.............................................................................. 39,273 --
----------- -----------
End of period.................................................................................... $78,487 $39,273
=========== ===========
</TABLE>
(a) From commencement of operations on November 1, 1996.
See accompanying Notes to Financial Statements.
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(All amounts in thousands)
NOTE 1. ORGANIZATION
Stein Roe Institutional Client High Yield Fund (the "Fund") is a series
of Stein Roe Trust (the "Trust"), an open-end management investment company
organized as a Massachusetts business trust. The Fund invests substantially all
of its assets in SR&F High Yield Portfolio (the "Portfolio"), which seeks a high
level of current income and capital growth by investing primarily in high yield,
high-risk, medium- and lower-quality debt securities.
The Portfolio is a series of SR&F Base Trust, a Massachusetts common
law trust organized under an Agreement and Declaration of Trust dated August 23,
1993. The Portfolio commenced operations on November 1, 1996. The Portfolio
allocates income, expenses, realized and unrealized gains and losses to each
investor on a daily basis, based on their respective percentage of ownership. At
June 30, 1998, Stein Roe High Yield Fund, Stein Roe Institutional Client High
Yield Fund and Stein Roe Institutional High Yield Fund owned 53.0 percent, 44.9
percent and 2.1 percent, respectively, of the Portfolio.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of the
Fund and Portfolio. These policies are in conformity with generally accepted
accounting principles, which require management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on trade date. Interest
income, including discount accretion and premium amortization, is recorded daily
on the accrual basis. Realized gains or losses from investment transactions are
reported on an identified cost basis.
Securities purchased on a when-issued or delayed delivery basis may be
settled a month or more after the transaction date. The values of such
securities are subject to market fluctuations during this period. There were no
when-issued or delayed delivery purchase commitments as of June 30, 1998.
SECURITY VALUATIONS
All securities are valued as of June 30, 1998. Long-term debt
securities are valued using market quotations if readily available at the time
of valuation. If market quotations are not readily available, they are valued at
a fair value using a procedure determined in good faith by the Board of
Trustees, which has authorized the use of market valuations provided by a
pricing service. Short-term debt securities with remaining maturities of 60 days
or less are valued at their amortized cost. Those with remaining maturities of
more than 60 days for which market quotations are not readily available are
valued by use of a matrix, prepared by the Adviser, based on quotations for
comparable securities. Other assets are valued by a method that the Board of
Trustees believes represents a fair value.
FUTURES CONTRACTS
The Portfolio may enter into U.S. Treasury security futures contracts
to either hedge against expected declines in the value of its securities or as a
temporary substitute for the purchase of individual bonds. Risks of entering
into futures contracts include the possibility that there may be an illiquid
market at the time the Portfolio seeks to close out a contract, and changes in
the value of the futures contract may not correlate with changes in the value of
the securities being hedged.
Upon entering into a futures contract, the Portfolio deposits cash or
securities with its custodian in an amount sufficient to meet the initial margin
requirement. Subsequent payments are made or received by the Portfolio equal to
the daily change in the contract value and are recorded as unrealized gains or
losses. The Portfolio recognizes a realized gain or loss when the contract is
closed or expires. The Portfolio did not enter into any futures contracts during
the year ended June 30, 1998. FEDERAL INCOME TAXES No provision is made for
federal income taxes, since (a) the Fund elects to be taxed as a "regulated
investment company" and makes distributions to its shareholders to be relieved
of all federal income tax under provisions of current federal tax law; and (b)
the Portfolio is treated as a partnership for federal income tax purposes and
all of its income is allocated to its owners based on respective percentages of
ownership.
Notes to Financial Statements CONTINUED
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO FUND SHAREHOLDERS
Dividends from net investment income are declared daily and paid
monthly. Capital gains distributions, if any, are distributed annually.
Distributions in excess of tax basis earnings are reported in the financial
statements as a return of capital. Permanent differences in the recognition or
classification of income between the financial statements and tax earnings are
reclassified to paid-in capital.
NOTE 3. TRUSTEES' FEES AND TRANSACTIONS WITH AFFILIATES
The Portfolio pays a monthly management fee and the Fund pays a monthly
administrative fee to Stein Roe & Farnham Incorporated (the "Adviser"), an
indirect, majority-owned subsidiary of Liberty Mutual Insurance Company, for its
services as investment adviser and manager.
The management fee for the Portfolio is computed at an annual rate of
.50 of 1 percent of the first $500 million of average daily net assets, and .475
of 1 percent thereafter. The administrative fee for the Fund is computed at an
annual rate of .15 of 1 percent of the first $500 million of average daily net
assets, and .125 of 1 percent thereafter.
The Adviser also provides fund accounting services.
The Adviser has agreed to reimburse the Fund to the extent that
expenses exceed .50 of 1 percent of average annual net assets. This commitment
expires January 31, 2000, subject to earlier termination by the Adviser on 30
days notice to the Fund.
Transfer agent fees are paid to SteinRoe Services, Inc., (SSI), an
indirect, majority-owned subsidiary of Liberty Mutual Insurance Company. SSI has
entered into an agreement with Colonial Investors Service Center, Inc., also an
indirect, majority-owned subsidiary of Liberty Mutual Insurance Company, to act
as subtransfer agent for the Fund.
Certain officers and trustees of the Trust are also officers of the
Adviser. Compensation is paid to trustees not affiliated with the Adviser. No
remuneration was paid to any other trustee or officer of the Trust.
NOTE 4. SHORT-TERM DEBT
To facilitate portfolio liquidity, the Fund and Portfolio maintain
borrowing arrangements under which they can borrow against portfolio securities.
There were no borrowings during the year ended June 30, 1998.
NOTE 5. INVESTMENT TRANSACTIONS
The Portfolio's aggregate cost of purchases and proceeds from sales or
maturities of securities, excluding short-term obligations, for the year ended
June 30, 1998, were $282,664 and $249,280, respectively.
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Stein Roe Institutional Client High Yield Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
YEAR PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997 (C)
-------- --------
NET ASSET VALUE, BEGINNING OF PERIOD...................... $ 10.21 $ 10.00
-------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................................. 0.88 0.33
Net realized and unrealized gains on investments....... 0.58 0.21
-------- --------
Total from investment operations..................... 1.46 0.54
-------- --------
DISTRIBUTIONS
Net investment income.................................. (0.88) (0.33)
Net realized gains..................................... (0.14) --
-------- --------
Total distributions.................................. (1.02) (0.33)
-------- --------
NET ASSET VALUE, END OF PERIOD............................ $ 10.65 $10.21
======== ========
Ratio of net expenses to average net assets (a)........... 0.50% 0.50%(d)
Ratio of net investment income to average net assets (b).. 8.31% 8.76%(d)
Total return (b).......................................... 14.88% 5.48%
Net assets, end of period (000's)......................... $35,157 $25,674
(a) If the Fund had paid all of its expenses and there had been no reimbursement
by the Adviser, this ratio would have been 1.28 percent for the year ended
June 30, 1998, and 2.59 percent for the period ended June 30, 1997.
(b) Computed giving effect to the Adviser's expense limitation undertaking. (c)
From commencement of operations on February 14, 1997. (d) Annualized
Financial Highlights CONTINUED
- --------------------------------------------------------------------------------
SR&F High Yield Portfolio
YEAR PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997 (A)
----------- -----------
SELECTED RATIOS
Ratio of net expenses to average net assets .......... 0.65% 0.89%(b)
Ratio of net investment income to average net assets.. 8.13% 8.24%(b)
Portfolio turnover rate............................... 426% 168%
(a) From commencement of operations on November 1, 1996.
(b) Annualized
<PAGE>
Report of Independent Auditors
- --------------------------------------------------------------------------------
To the Board of Trustees of the Stein Roe Trust and the SR&F Base Trust
We have audited the accompanying statement of assets and liabilities of Stein
Roe Institutional Client High Yield Fund as of June 30, 1998 and the related
statement of operations for the year then ended, and statements of changes in
net assets and financial highlights for the year ended June 30, 1998 and the
period February 14, 1997 to June 30, 1997. We have also audited the accompanying
statement of assets and liabilities, including the portfolio of investments, of
SR&F High Yield Portfolio as of June 30, 1998 and the related statement of
operations for the year then ended, and statements of changes in net assets and
financial highlights for the year ended June 30, 1998 and the period November 1,
1996 to June 30, 1997. These financial statements and financial highlights are
the responsibility of the Fund's and Portfolio's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits of the financial statements provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial positions of
Stein Roe Institutional Client High Yield Fund and SR&F High Yield Portfolio at
June 30, 1998, and the results of their operations, the changes in their net
assets, and their financial highlights for the periods referred to above, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young, LLP
Chicago, Illinois
August 14, 1998
<PAGE>
Stein Roe Trust
- --------------------------------------------------------------------------------
TRUSTEES
Thomas W. Butch
President, Mutual Fund Division and Director,
Stein Roe & Farnham Incorporated
William W. Boyd
Chairman and Director, Sterling Plumbing
Group Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Douglas A. Hacker
Senior Vice President and Chief Financial Officer,
United Airlines
Janet Langford Kelly
Senior Vice President, Secretary and General
Counsel, Sara Lee Corporation
Charles R. Nelson
Van Voorhis Professor of Political Economy,
University of Washington
Thomas C. Theobald
Managing Partner, William Blair Capital Partners
OFFICERS
Thomas W. Butch, President
William D. Andrews, Executive Vice President
Loren A. Hanson, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Kevin M. Carome, Vice President,
Assistant Secretary
Michael T. Kennedy, Vice President
Stephen F. Lockman, Vice President
Lynn C. Maddox, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Heidi J. Walter, Vice President, Secretary
Janet B. Rysz, Assistant Secretary
Sharon R. Robertson, Controller
Scott E. Volk, Treasurer
Margaret O. Zwick, Assistant Treasurer
AGENTS AND ADVISERS
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
SteinRoe Services Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
Stein Roe & Farnham
One South Wacker Drive
Chicago, IL 60606-4685
1-800-322-1130
http://www.steinroe.com
Liberty Funds Distributor, Inc.
