STEIN ROE ADVISOR FUNDS
Annual Report
June 30, 1998
Picture of
STEIN ROE ADVISOR FUNDS
Tax-Exempt Funds
Stein Roe Advisor High-Yield Municipals Fund
LOGO: STEIN ROE MUTUAL FUNDS
SENSIBLE RISKS. INTELLIGENT INVESTMENTS. (SM)
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Contents
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Fund Performance........................................................ 1
How the Stein Roe Advisor High-Yield Municipals Fund
has done over time
Q&A
Interviews with the portfolio managers and
summaries of investment activity
Stein Roe Advisor High-Yield Municipals Fund............................ 2
Portfolio of Investments................................................ 4
Complete list of investments with market values
Financial Statements.................................................... 11
Statements of assets and liabilities, operations
and changes in net assets
Notes to Financial Statements........................................... 17
Financial Highlights.................................................... 19
Selected per-share data
Report of Independent Auditors.......................................... 21
Must be preceded or accompanied by a prospectus.
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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).
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<CAPTION>
Average Annual Total Returns
Periods ended June 30, 1998
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<S> <C> <C> <C> <C>
Past 1 Past 3 Past 5 Past 10
Year Years Years Years
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ADVISOR HIGH-YIELD MUNICIPALS FUND 8.06% 7.76% 6.41% 7.77%
Lehman Municipal Bond Index 8.66 7.85 6.46 8.30
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GROWTH of a $10,000 investment for the years ended June 30.
Stein Roe Advisor High-Yield Municipals Fund
Advisor High-Yield Municipals Fund Lehman Municipal Bond Index
6/30/88 10000 10000
6/30/89 11375 11139
6/30/90 12209 11898
6/30/91 13252 12970
6/30/92 14413 14497
6/30/93 15509 16231
6/30/94 15622 16258
6/30/95 16914 17692
6/30/96 18032 18867
6/30/97 19583 20424
6/30/98 21127 22193
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 GAIN DISTRIBUTIONS. Total return figures do not include sales
charges or contingent deferred sales charges (CDSC). Class K shares may be
purchased only through certain intermediaries, including certain bank trust
departments, wrap fee programs and retirement plans. The Advisor currently
limits expenses on Class K shares to 1.10% of average net assets. Absent this
limit, total return would be less. Historical performance for Class K shares for
the period prior to 2/4/98 is based on the performance of the SR&F High-Yield
Municipals Portfolio, restated to reflect 12b-1 fees and any other expenses
applicable to that class, without giving any effect to fee waivers and assuming
reinvestment of dividends and capital gains. This graph compares the performance
of the Stein Roe Advisor High-Yield Municipals Fund to the Lehman Municipal Bond
Index, an unmanaged group of stocks not associated with any Stein Roe fund.
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Q&A
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AN INTERVIEW WITH JANE MCCART, PORTFOLIO MANAGER OF ADVISOR HIGH-YIELD
MUNICIPALS FUND AND SR&F HIGH-YIELD MUNICIPALS PORTFOLIO
FUND DATA
INVESTMENT OBJECTIVE:
Seeks a high level of tax-free income consistent with capital preservation by
investing in longer-term municipal securities, principally of medium and
lower quality.
Q: HOW DID THE FUND PERFORM?
A: We believe the Fund performed well throughout the year as investors continued
to favor high-yield bonds as an attractive alternative to volatile U.S.
equities. The Fund returned 8.06 percent for the fiscal year ended June 30,
1998, while the Lehman Municipal Bond Index and the Lipper high-yield municipals
debt fund peer group returned 8.66 percent and 9.52 percent, respectively, for
the same time period.
Q: WHY DID THE PORTFOLIO UNDERPERFORM ITS PEER GROUP?
A: A paper de-inking plant issue that we owned experienced start-up difficulties
which negatively impacted the Fund's performance in the early part of the fiscal
year. We sold that holding, but its effect on performance kept us behind the
peer group for the entire year. In addition, our holdings didn't experience as
many refundings as other funds in our peer group.
Q: WHAT WENT ON IN THE HIGH-YIELD MUNICIPAL MARKET THIS YEAR?
A: Opportunities were limited for most of the year. The spreads, or difference
in prices, between credit quality sectors continued to narrow as the number of
municipal bonds backed by insurance increased. It was hard to find attractive
issues in the mid-investment grade category and investors began to reach for
yield in lower-quality investments such as start-up continuing care facilities.
We stopped buying these types of securities about a year ago because we felt we
weren't getting compensated for the risk. Now, some of those facilities are
experiencing difficulties and investors who purchased them are beginning to
demand higher yields, though not yet at the level that we believe is justified.
A similar risk/reward situation exists in the co-generation/independent power
project sector. We own bonds in this sector, but we are comfortable with the
issues we own. We think investors are now more cautious and therefore, we're
seeing spreads widen among certain issues.
Q: DID YOU ADD TO YOUR POSITION IN THE POWER PROJECT SECTOR?
A: Yes, we did buy some additional issues in the co-generation/power plant
sector. These facilities generally convert a waste by-product to energy. The
power is then usually sold to public utilities or a manufacturing plant adjacent
to the power plant. We invested in low-cost power producers that we believe will
remain competitive in the changing environment of power production.
Q: INVESTING IN ELECTRICAL UTILITIES IS A NEWER THEME FOR THE PORTFOLIO. BECAUSE
OF THE DEREGULATION IN THAT INDUSTRY, IT SEEMS LIKE AN OPPORTUNISTIC MOVE. CAN
YOU EXPLAIN HOW THE PORTFOLIO MAY BENEFIT?
A: We think this will be an attractive sector going forward. Deregulation will
cause companies to operate more efficiently to gain market share. And demand has
been intense this year, due to unexpectedly warm weather and several nuclear
power-plant closings. We also think peak demand in the summer months will drive
prices even higher in this sector. So companies that operate well and have the
supply to sell stand to see abundant profits. Because the driving force behind
profits is a supply/demand issue, some companies also stand to suffer from this
trend. The key to uncovering opportunities in this sector is through credit
research, which is one of Stein Roe's strengths.
Q: WHAT'S YOUR OUTLOOK?
A: We plan to maintain our current posture, while looking for opportunities to
purchase lower-rated securities at attractive prices. Near the end of the fiscal
year, we began to see some credit spreads widen. If spreads widen enough to
warrant attractive purchases, we plan to buy higher-risk securities. We also
believe that if supply remains strong in the municipal market, issues will stay
cheap compared to their taxable counterparts.
We anticipate that the Federal Reserve will base its next interest rate
move on events in Asia and that will likely guide the overall markets' next
moves. If interest rates remain low, municipal bonds should remain cheap.
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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. Holdings
are disclosed as a percentage of SR&F High-Yield Municipals Portfolio. Portfolio
holdings are as of June 30, 1998; portfolio data is subject to change. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions. Tax-free income is exempt from federal taxes,
but may be subject to state and local taxes and federal alternative minimum tax.
Capital gains are subject to federal, state and local taxes. The Lehman
Municipal Bond Index is an unmanaged group of municipal bonds that differs from
the composition of the portfolio; it is not available for direct investment.
According to Lipper Analytical Services, Inc., an independent monitor of mutual
fund performance, the median returns for the Fund's tax-exempt high yield
municipal debt fund peer group for the one-, five- and 10-year periods ended
June 30, 1998, were 9.52 percent, 6.44 percent and 8.05 percent, respectively.
Investing in high yield bonds involves greater credit and other risks not
generally associated with investing in higher-quality securities.
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SR&F High-Yield Municipals Portfolio
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Portfolio Investments at June 30, 1998
(Dollar amounts in thousands)
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<CAPTION>
PRINCIPAL MARKET
MUNICIPAL SECURITIES (98.6%) ......................................................... AMOUNT VALUE
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<S> <C> <C>
ARIZONA (2.5%)
Arizona Health Facilities Authority Hospital System Revenue
(Phoenix Memorial Hospital) 8.125% 6/1/12 ......................................... $ 2,500 $ 2,705
Maricopa County Pollution Control Corporation PCR
(Arizona Public Service Company, LOC Bank of America)
Series E VRDB 3.800% .............................................................. 800 800
Pima County Industrial Development Authority IDR
(Tucson Electric Power Company)
Series B 6.000% 9/1/29 .......................................................... 1,000 1,010
Series C 6.000% 9/1/29 .......................................................... 4,000 4,041
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8,556
ARKANSAS (0.2%)
Pulaski County Public Facilities Board Multi-Family Revenue
(Chenel Park Apartments, LOC PNC Bank Kentucky)
VRDB 3.800% (a) ................................................................... 500 500
CALIFORNIA (2.7%)
Foothill/Eastern Transportation Corridor Agency Toll Road
Revenue Series 1995A 6.500% 1/1/32 ................................................ 2,000 2,179
Long Beach Aquarium of the Pacific Revenue Series A
6.125% 7/1/23 ..................................................................... 5,750 6,053
Los Angeles County TRAN Series 98-99A 4.500% 6/30/99 ................................. 1,000 1,008
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9,240
COLORADO (6.4%)
Adams County Single-Family Mortgage Revenue Series B
(escrowed in U.S. Treasury securities)
11.250% 9/1/11 (prerefunded to 9/1/09) .......................................... 325 507
11.250% 9/1/11 (prerefunded to 9/1/10) .......................................... 360 571
11.250% 9/1/11 .................................................................. 220 355
11.250% 9/1/12 .................................................................. 1,440 2,361
Arapahoe County Capital Improvement Trust Fund Highway Revenue
(escrowed in U.S. Treasury securities, prerefunded to 8/31/05)
7.000% 8/31/26 .................................................................... 7,000 8,332
Briargate Public Building Authority Landowner Assessment Lien
Series 1985A 10.250% 12/15/00 (b) ................................................. 220 187
Series 1986A 9.500% 12/15/07 (b) .................................................. 807 686
Colorado Health Facilities Authority Revenue
(Birchwood Manor Apartments, collateralized by GNMA)
Series A 7.250% 4/1/11 .......................................................... 655 683
(PSL Health Systems, escrowed in U.S. Treasury securities,
prerefunded to 2/15/01) Series B 8.500% 2/15/21 ................................. 3,250 3,667
Denver City and County Airport Revenue Series D
7.750% 11/15/21 (escrowed in U.S. Treasury securities, prerefunded to 11/15/01) (a) 830 937
7.750% 11/15/21 (a) ............................................................... 3,170 3,524
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21,810
DISTRICT OF COLUMBIA (2.1%)
District of Columbia GO Series A 6.000% 6/01/26 ...................................... 7,000 7,366
FLORIDA (2.8%)
Florida Housing Finance Agency Multi-Family Housing Revenue
(Palm-Aire) 10.000% 1/1/20 (a) (b) ................................................ 2,835 2,126
Leesburg Hospital Revenue (Leesburg Regional Medical Center,
escrowed in U.S. Treasury securities, prerefunded to 7/1/02)
Series A 7.375% 7/1/11 ............................................................ 775 880
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SR&F High-Yield Municipals Portfolio CONTINUED
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PRINCIPAL MARKET
AMOUNT VALUE
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<S> <C> <C>
Orange County Health Facilities Authority
(Orlando Lutheran Towers) 8.625% 7/1/20 ........................................... $ 5,000 $ 5,901
St. Lucie County Solid Waste Disposal Revenue
(Florida Power & Light Company)
VRDB 3.900% (a) ................................................................... 400 400
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9,307
GEORGIA (4.2%)
Cartersville Development Authority (Anheuser-Busch)
7.375% 5/1/09 (a) ................................................................. 5,000 6,117
7.400% 11/1/10 (a) ................................................................ 1,000 1,238
Municipal Electric Authority of Georgia Power Revenue Series V
6.600% 1/1/18 ..................................................................... 6,065 7,173
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14,528
IDAHO (0.7%)
Idaho Housing Agency Single-Family Mortgage Series B 7.500% 7/1/24 (a) ............... 2,370 2,505
ILLINOIS (2.3%)
Chicago Skyway Toll Bridge Revenue
(escrowed in U.S. Treasury securities, prerefunded to 1/1/04)
6.750% 1/1/17 ..................................................................... 1,500 1,706
Illinois Development Finance Authority (Catholic Charities)
5.950% 1/1/09 ..................................................................... 1,400 1,446
Illinois Health Facilities Authority Revenue
(United Medical Center, escrowed in U.S. Treasury securities,
prerefunded to 7/1/03) 8.125% 7/1/06 ............................................ 2,225 2,501
(Edward Hospital Association, escrowed in U.S. Treasury securities,
prerefunded to 2/15/02) 7.000% 2/15/22 .......................................... 685 761
Illinois Housing Development Authority Multi-Family Housing
Series C 7.400% 7/1/23 ............................................................ 140 147
Sauget Village PCR (Monsanto) VRDB 3.650% ............................................ 800 800
Southwestern Illinois Development Authority Solid Waste Disposal
Revenue (Shell Oil Company) VRDB 3.900% (a) ....................................... 100 100
Will County Exempt Facilities Revenue (Amoco Corporation)
VRDB 3.900% (a) ................................................................... 500 500
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7,961
INDIANA (11.9%)
Hammond Sewer & Solid Waste Disposal Revenue
(American Maize Products, gtd. by Eridania Beghin-Say) 8.000% 12/1/24 (a) ......... 4,000 4,670
Indianapolis Airport Authority Revenue Special Facilities
(Federal Express) 7.100% 1/15/17 (a) .............................................. 5,000 5,636
(United Airlines) 6.500% 11/15/31 (a) ............................................. 7,000 7,579
Indianapolis Local Public Improvement Bond Bank Series C
(escrowed in U.S. Treasury securities, prerefunded to 1/1/02)
6.700% 1/1/17 ..................................................................... 8,900 9,793
Indiana State Development Finance Authority Revenue
(Inland Steel Company) 5.750% 10/1/11 ............................................. 5,000 5,151
Indiana Transportation Finance Authority Airport Facilities
Lease Revenue Series A
6.250% 11/1/16 (escrowed in U.S. Treasury securities,
prerefunded to 11/1/02) ....................................................... 3,550 3,906
6.250% 11/1/16 .................................................................. 950 1,022
</TABLE>
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SR&FHigh-Yield Municipals Portfolio CONTINUED
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PRINCIPAL MARKET
AMOUNT VALUE
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<S> <C> <C>
INDIANA (CONTINUED)
New Castle Economic Development Revenue
8.650% 4/1/17 (escrowed in U.S. Treasury securities,
prerefunded to 4/1/99)........................................................... $ 2,860 $ 3,101
Zero Coupon (Yield to Maturity 10.855%) 3/1/18 (b)................................. 30,655 77
---------
40,935
IOWA (1.2%)
Iowa Housing Finance Authority (AMBAC Insured)
Zero Coupon (Yield to Maturity 10.262%) 9/1/16..................................... 18,005 2,383
Iowa State School Cash Anticipation Program (FSA Insured)
4.500% 6/25/99..................................................................... 1,000 1,008
Muscatine County PCR (Monsanto) VRDB 3.650%........................................... 800 800
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4,191
KANSAS (0.6%)
Wichita Revenue (CSJ Health System) 7.000% 11/15/18................................... 2,000 2,170
LOUISIANA (1.6%)
De Soto Parish Environmental Improvement Revenue
(International Paper) Series A 7.700% 11/1/18 (a).................................. 2,500 2,932
Louisiana Public Facilities Authority Hospital Revenue
(Women's Hospital Foundation, escrowed in U.S. Treasury
securities, prerefunded to 10/1/02) 7.250% 10/1/22................................. 2,300 2,606
---------
5,538
MASSACHUSETTS (2.6%)
Massachusetts Bay Transportation Authority Series 92B
6.200% 3/1/16...................................................................... 5,825 6,594
Massachusetts State Health & Educational Facilities Authority Revenue
(Dana Farber Cancer Institute) 6.250% 12/1/22...................................... 2,000 2,170
---------
8,764
MISSISSIPPI (3.5%)
Adams County Hospital Revenue (Jefferson Davis Memorial Hospital,
escrowed in U.S. Treasury securities, prerefunded to 10/1/01)
7.900% 10/1/08..................................................................... 750 851
Claiborne County PCR (System Energy Resources)
9.500% 12/1/13 .................................................................... 750 786
9.875% 12/1/14..................................................................... 1,000 1,049
7.300% 5/1/25...................................................................... 2,000 2,112
Lowndes County Solid Waste Disposal PCR
(Weyerhaeuser Company) 6.800% 4/1/22............................................... 5,995 7,249
---------
12,047
MISSOURI (1.6%)
Missouri Health & Educational Facilities Authority Health
Facilities Revenue (Lutheran Senior Services)
5.750% 2/1/17...................................................................... 2,000 2,066
St. Louis Industrial Development Authority IDR
(Kiel Center)
7.875% 12/1/24 (a)................................................................. 3,000 3,309
---------
5,375
MONTANA (0.3%)
Montana State Board of Housing Single-Family Mortgage
Series B-1 7.300% 10/1/17.......................................................... 415 438
Series B-2 7.500% 4/1/23 (a)....................................................... 460 486
---------
924
</TABLE>
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SR&F High-Yield Municipals Portfolio CONTINUED
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PRINCIPAL MARKET
AMOUNT VALUE
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<S> <C> <C>
NEBRASKA (1.3%)
Nebraska Higher Education Loan Program Series A-6 Junior Subordinated
(MBIA Insured) 6.450% 6/1/18 (a)................................................... $ 4,000 $ 4,451
NEVADA (2.2%)
Clark County IDR (Nevada Power Company)
Series A 5.900% 11/1/32 (a)........................................................ 5,000 5,077
Humboldt County PCR (Idaho Power Company)
8.300% 12/1/14..................................................................... 2,000 2,386
---------
7,463
NEW JERSEY (2.7%)
New Jersey Economic Development Authority Revenue
(Keswick Pines) 5.700% 1/1/18...................................................... 1,300 1,307
(Winchester Gardens) 8.625% 11/1/25................................................ 5,000 5,593
New Jersey Health Care Facilities Financing Authority Revenue
(Raritan Bay Medical Center) 7.250% 7/1/27......................................... 2,200 2,404
---------
9,304
NEW MEXICO (2.8%)
Farmington PCR
(Public Service Company of New Mexico) 6.300% 12/1/16.............................. 5,000 5,404
(Tucson Electric Power Company) 6.950% 10/1/20..................................... 2,000 2,244
New Mexico Educational Assistance Foundation Student Loan
Revenue Subordinated Series A-2 6.650% 11/1/25 (a)................................. 1,955 2,119
---------
9,767
NEW YORK (4.8%)
Erie County Water Authority Revenue (AMBAC Insured)
Zero Coupon (Yield to Maturity 7.301%) 12/1/17..................................... 660 164
New York City GO
Series B 7.250% 8/15/07 ........................................................... 1,000 1,184
Series G 5.750% 2/1/14 ............................................................ 5,720 5,978
New York City Industrial Development Authority IDR
(Brooklyn Navy Yard, Cogen Partners) 5.650% 10/1/28 (a)............................ 3,000 3,030
New York City Industrial Development Authority Special
Facility Revenue (Terminal One Group Association)
6.000% 1/1/15 (a).................................................................. 3,465 3,650
Triborough Bridge & Tunnel Authority Revenue Series E
7.250% 1/1/10...................................................................... 2,000 2,351
---------
16,357
NORTH CAROLINA (2.8%)
North Carolina Eastern Municipal Power Agency Revenue
Series A 6.500% 1/1/18 (escrowed in U.S. Treasury securities) ..................... 3,320 3,936
Series A 6.500% 1/1/18............................................................. 1,680 1,899
Series B 6.000% 1/1/26............................................................. 3,500 3,795
---------
9,630
OHIO (3.2%)
Greater Allen County Housing Development Corporation Revenue
(Steiner-McBride Apartments) 10.250% 9/1/03 (a).................................... 1,385 1,388
Montgomery County Health Care Facilities Revenue
(Friendship Village of Dayton) Series B 6.250% 2/1/22.............................. 2,250 2,340
Ohio State Water Development Authority Solid Waste
Disposal Revenue (Bay Shore Power Company) Series A
5.875% 9/1/20 (a).................................................................. 7,000 7,099
---------
10,827
</TABLE>
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SR&F High-Yield Municipals Portfolio CONTINUED
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PRINCIPAL MARKET
AMOUNT VALUE
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<S> <C> <C>
PENNSYLVANIA (9.8%)
Allentown Area Hospital Authority Revenue (Sacred Heart
Hospital) 7.500% 7/1/06............................................................ $ 3,460 $ 3,767
Beaver County Industrial Development Authority PCR
(Toledo Edison Company) 7.625% 5/1/20.............................................. 4,900 5,564
Dauphin County Industrial Development Authority Water
Development Revenue (General Waterworks Corporation)
Series A 6.900% 6/1/24 (a)......................................................... 3,200 3,913
Montgomery County Higher Education & Health Authority
Hospital Revenue (Jeanes Health Systems, escrowed in U.S.
Treasury securities, prerefunded to 7/1/00) 8.750% 7/1/20.......................... 3,200 3,547
Pennsylvania Economic Development Financing Authority
Resource Recovery Revenue (Northhampton Generating)
Series B 6.750% 1/1/07 (a)....................................................... 3,000 3,287
Series A 6.500% 1/1/13 (a)....................................................... 2,000 2,123
Philadelphia Hospitals & Higher Education Facilities Authority
Revenue (Temple University Hospital) 5.875% 11/15/23............................... 4,000 4,137
Philadelphia Municipal Authority Revenue Lease Series 1993D
6.250% 7/15/13..................................................................... 2,500 2,655
Philadelphia Water & Sewer Revenue Tenth Series
(escrowed in U.S. Treasury securities)
7.350% 9/1/04...................................................................... 4,105 4,640
---------
33,633
PUERTO RICO (1.7%)
Puerto Rico Highway & Transportation Authority
Series T 6.625% 7/1/18 (escrowed in U.S. Treasury securities,
prerefunded to 7/1/02)........................................................... 3,200 3,551
Series V 6.625% 7/1/12 ............................................................ 2,000 2,180
---------
5,731
SOUTH DAKOTA (0.8%)
South Dakota Student Loan Assistance Corporation Series C
(escrowed in U.S. Treasury securities) 7.450% 8/1/00 (a)........................... 2,700 2,875
TENNESSEE (1.0%)
Knox County Health Educational and Housing Facilities Board
Hospital Facilities Revenue (Baptist Health Systems,
escrowed in U.S. Treasury securities, prerefunded to 4/15/99)
8.600% 4/15/16 2,005 2,120
Metropolitan Government of Nashville & Davidson Counties Health and
Educational Facilities Board Revenue (The Blakeford at Green Hills)
5.650% 7/1/24 1,500 1,478
---------
3,598
TEXAS (9.1%)
Alliance Airport Authority Special Facilities Revenue
(American Airlines) 7.000% 12/1/11 (a)............................................. 4,070 4,831
Bexar County Housing Finance Corporation Revenue
(collateralized by GNMA) Series B 9.250% 4/1/16 (a)................................ 140 143
Brazos Higher Education Authority Subordinated Series C-2
5.875% 6/1/04 (a).................................................................. 835 854
Brazos River Authority PCR (Texas Utilities Electric Company)
Variable Rate 4.150% Mandatory Put 6/18/99 (a)..................................... 4,000 4,000
</TABLE>
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SR&F High-Yield Municipals Portfolio CONTINUED
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PRINCIPAL MARKET
AMOUNT VALUE
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<S> <C> <C>
TEXAS (CONTINUED)
Gulf Coast Waste Disposal Authority (Amoco Oil Company)
Series 1993 VRDB 3.900% (a)........................................................ $ 500 $ 500
Series 1994 VRDB 3.900% (a)........................................................ 800 800
Harris County Housing Finance Corporation Single-Family
Mortgage Revenue 9.625% 3/15/03.................................................... 200 202
Houston Airport System Revenue (Continental Airlines)
6.125% 7/15/17 (a)................................................................. 4,000 4,166
6.125% 7/15/27 (a)................................................................. 2,000 2,076
Montgomery County Health Facilities Development Corporation
(Woodlands Medical Center, escrowed in U.S. Treasury
securities, prerefunded to 8/15/99) 8.850% 8/15/14................................. 2,400 2,557
Port of Bay City Authority Matagorda County Revenue
(Hoechst Celanese Corporation) 6.500% 5/1/26 (a)................................... 3,000 3,311
Texas City IDR (Atlantic Richfield Company)
7.375% 10/1/20..................................................................... 2,000 2,576
Texas Housing Agency Residential Development Revenue
Series D 8.400% 1/1/21 (a)......................................................... 270 283
Texas TRAN Series 97A 4.750% 8/31/98.................................................. 3,000 3,005
Tyler Health Facilities Development Corporation
(Mother Francis Hospital) Series A 5.625% 7/1/13................................... 1,785 1,791
---------
31,095
UTAH (0.2%)
Utah Housing Finance Agency Single-Family Mortgage
Series B-2 7.750% 1/1/23 (a)....................................................... 285 300
Series C-3 7.550% 7/1/23 (a)....................................................... 465 491
---------
791
VIRGINIA (2.1%)
Pittsylvania County Industrial Development Authority Revenue
(Multitrade of Pittsylvania County L.P.) Series A (a)
7.450% 1/1/09 ................................................................ 3,500 3,866
7.550% 1/1/19 ................................................................ 3,100 3,423
---------
7,289
WASHINGTON (5.6%)
Quincy Water and Sewer Revenue Series I (escrowed in
U.S. Treasury securities, prerefunded to 11/1/00)
9.250% 11/1/10 .................................................................... 2,475 2,738
Washington GO Series B 6.400% 6/1/17.................................................. 5,000 5,836
Washington State Health Care Facilities Authority Revenue
(Sacred Heart Medical Center) 6.875% 2/15/12....................................... 1,500 1,634
Washington State Housing Finance Commission Single-Family
Mortgage Revenue Series C (collateralized by GNMA/FNMA) (a)
Zero Coupon (Yield to Maturity 7.750%) 1/1/22.................................... 1,685 300
Zero Coupon (Yield to Maturity 7.750%) 7/1/22.................................... 1,860 320
Zero Coupon (Yield to Maturity 7.750%) 1/1/23.................................... 1,860 308
Zero Coupon (Yield to Maturity 7.750%) 7/1/23.................................... 1,865 298
Zero Coupon (Yield to Maturity 7.750%) 1/1/24.................................... 1,875 288
Zero Coupon (Yield to Maturity 7.750%) 7/1/24.................................... 1,865 277
Washington State Public Power Supply System Revenue
Zero Coupon (Yield to Maturity 6.888%) 7/1/07...................................... 6,945 4,545
6.300% 7/1/12 ..................................................................... 2,500 2,835
---------
19,379
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SR&F High-Yield Municipals Portfolio CONTINUED
- --------------------------------------------------------------------------------------------------------------
PRINCIPAL MARKET
AMOUNT VALUE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
WISCONSIN (0.9%)
Wisconsin Housing and Economic Development Authority
Series B 7.850% 3/1/24 (a)......................................................... $ 2,950 $ 3,108
WYOMING (0.4%)
Wyoming Community Development Authority Single-Family
Mortgage Series A
7.375% 6/1/17...................................................................... 1,140 1,205
---------
TOTAL MUNICIPAL SECURITIES (98.6%)
(Cost $312,137).................................................................... 338,220
OTHER ASSETS, LESS LIABILITIES (1.4%)................................................. 4,946
---------
TOTAL NET ASSETS (100.0%)............................................................. $343,166
=========
</TABLE>
NOTES TO PORTFOLIO OF INVESTMENTS
- -------------------------------------------------------------------------------
(a) These securities are subject to the federal alternative minimum tax. At June
30, 1998, these securities represented 33.7 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 $26,083,
consisting of gross unrealized appreciation of $28,181 and gross unrealized
depreciation of $2,098.
See accompanying Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
Stein Roe Advisor High-Yield Municipals Fund
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities
June 30, 1998
(All amounts in thousands, except per-share amount)
<S> <C>
ASSETS
Investment in SR&F High-Yield Municipals Portfolio, at value.......................... $1,023
Cash ................................................................................. 15
Receivable for fund shares sold....................................................... 10
Other assets.......................................................................... 3
-------
Total assets....................................................................... 1,051
-------
LIABILITIES
Payable to investment adviser ........................................................ 9
Dividends payable..................................................................... 3
Other liabilities..................................................................... 10
-------
Total liabilities.................................................................. 22
-------
Net assets......................................................................... $1,029
=======
ANALYSIS OF NET ASSETS
Paid-in capital....................................................................... $1,030
Net unrealized appreciation on investments............................................ 1
Accumulated net realized losses on investments ....................................... (2)
-------
Net assets......................................................................... $1,029
=======
Shares outstanding (unlimited number authorized)...................................... 103
=======
Net asset value per share............................................................. $ 9.94
=======
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Stein Roe Advisor High-Yield Municipals Fund
- --------------------------------------------------------------------------------
Statement of Operations
For the period ended June 30, 1998 (a)
(All amounts in thousands)
<S> <C>
INVESTMENT INCOME
Tax-exempt interest allocated from SR&F High-Yield Municipals Portfolio................. $ 12
------
EXPENSES
Audit and legal fees.................................................................... 11
Accounting fees......................................................................... 10
Trustees' fees.......................................................................... 3
SEC and state registration fees......................................................... 2
Transfer agent fees..................................................................... 1
Expenses allocated from SR&F High-Yield Municipals Portfolio............................ 1
Printing and postage.................................................................... 1
Other................................................................................... 2
------
Total expenses....................................................................... 31
Reimbursement of expenses by investment adviser......................................... (29)
------
Net expenses......................................................................... 2
------
Net investment income................................................................ 10
------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized losses on investments allocated from SR&F High-Yield Municipals Portfolio.. (2)
Change in unrealized appreciation or depreciation on investments........................ 1
------
Net losses on investments............................................................ (1)
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................................... $ 9
======
</TABLE>
(a)From commencement of operations on February 4, 1998.
See accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Stein Roe Advisor High Yield Municipals Fund
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets For the period ended June 30, 1998 (a)
(All amounts in thousands)
<S> <C>
OPERATIONS
Net investment income.................................................................. $ 10
Net realized losses on investments..................................................... (2)
Net change in unrealized appreciation or depreciation on investments................... 1
-------
Net increase in net assets resulting from operations................................ 9
-------
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income............................................... (10)
-------
SHARE TRANSACTIONS
Subscriptions to fund shares........................................................... 1,078
Value of distributions reinvested...................................................... 2
Redemptions of fund shares............................................................. (50)
-------
Net increase from share transactions................................................ 1,030
-------
Net increase in net assets.......................................................... 1,029
TOTAL NET ASSETS
Beginning of period.................................................................... --
-------
End of period.......................................................................... $1,029
=======
ANALYSES OF CHANGES IN SHARES OF BENEFICIAL INTEREST
Subscriptions to fund shares .......................................................... 108
Issued in reinvestment of distributions................................................ --
Redemptions of fund shares............................................................. (5)
-------
Net increase in fund shares......................................................... 103
Shares outstanding at beginning of period.............................................. --
-------
Shares outstanding at end of period.................................................... 103
=======
</TABLE>
(a)From commencement of operations on February 4, 1998.
See accompanying Notes to Financial Statements.
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(All amounts in thousands)
NOTE 1. ORGANIZATION
Stein Roe Advisor High-Yield Municipals Fund (the "Fund") is a series
of Stein Roe Advisor 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 Municipals Portfolio (the
"Portfolio"), which seeks a high level of tax-free income by investing in
long-term municipal securities principally of medium and lower quality.
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 February 2, 1998. At commencement,
Stein Roe High-Yield Municipals Fund contributed $335,711 in securities and
other assets in exchange for beneficial ownership of the Portfolio. At February
4, 1998, Stein Roe Advisor High-Yield Municipals Fund contributed $100 in
securities and other assets. 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
Municipals Fund and Stein Roe Advisor High-Yield Municipals Fund owned 99.70
percent and .30 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.
INVESTMENT VALUATIONS
All securities are valued as of June 30, 1998. Municipal securities are
valued at a fair value using a procedure determined in good faith by the Board
of Trustees, which has authorized the use of bid valuations provided by a
pricing service. Other securities and assets are valued at fair value as
determined in good faith by or under the direction of the Board of Trustees.
FUTURES CONTRACTS
The Portfolio may enter into futures contracts to either hedge against
expected declines of its portfolio 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 portfolio securities
being hedged.
Upon entering into a futures contract, the Portfolio deposits with its
custodian cash or securities in an amount sufficient to meet the initial margin
requirements. 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 period 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 taxes 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 their respective percentages of ownership.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid
monthly. Capital gains distributions, if any, are distributed annually.
Dividends are determined in accordance with income tax principles, which may
treat certain transactions differently than generally accepted accounting
principles. Distributions in excess of tax basis earnings are reported in the
financial statements as a return
<PAGE>
Notes to Financial Statements CONTINUED
- --------------------------------------------------------------------------------
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. PORTFOLIO COMPOSITION
The Portfolio invests in municipal securities including, but not
limited to, general obligation bonds, revenue bonds and escrowed bonds (which
are bonds that have been refinanced, the proceeds of which have been invested in
U.S. government or agency obligations and set aside to pay off the original
issue at the first call date or maturity). See the Portfolio's schedule of
investments for additional information regarding portfolio composition.
NOTE 4. 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
.45 of 1 percent of the first $100 million of average daily net assets, .425 of
1 percent of the next $100 million, and .40 of 1 percent thereafter. The
administrative fee for the Fund is computed at an annual rate of .15 of 1
percent of the first $100 million of average daily net assets, .125 of 1 percent
of the next $100 million, and .10 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 1.10 percent of average annual net assets. This expense
limitation expires on January 31, 1999, subject to earlier termination by the
Adviser on 30 days notice.
Shares of the Fund are distributed by Liberty Funds Distributor, Inc.
(the "Distributor"), an indirect, majority-owned subsidiary of Liberty Mutual
Insurance Company. The trustees of the Trust have adopted a plan of distribution
and service pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"Plan"). The Plan provides that, as compensation for services and/or
distribution, the Distributor receives from the Fund a fee at an annual rate not
to exceed 0.25 percent of average daily net assets.
Transfer agent fees are paid to Colonial Investor Services Inc. (CISC),
an indirect, majority-owned subsidiary of Liberty Mutual Insurance Company.
Certain officers and trustees of the Trust are also officers of the
Adviser. No remuneration was paid to any other trustee or officer of the Trust.
NOTE 5. 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 by either the Fund or the Portfolio during the period
ended June 30, 1998.
NOTE 6. INVESTMENT TRANSACTIONS
The Portfolio's aggregate cost of purchases and proceeds from sales or
maturities of securities, excluding short-term obligations, for the period ended
June 30, 1998, were $14,947 and $9,434, respectively.
<PAGE>
Financial Highlights
- --------------------------------------------------------------------------------
Stein Roe Advisor High-Yield Municipals Fund
Selected per-share data (for a share outstanding throughout the period), ratios
and supplemental data.
PERIOD
ENDED
JUNE 30,
1998 (A)
-----------
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.00
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income...................................... 0.20
Net realized and unrealized losses......................... (0.06)
--------
Total from investment operations......................... 0.14
--------
DISTRIBUTIONS
Net investment income...................................... (0.20)
--------
NET ASSET VALUE, END OF PERIOD................................ $9.94
========
Ratio of net expenses to average net assets (b)............... 1.10%(d)
Ratio of net investment income to average net assets (c)...... 5.13%(d)
Total return (c).............................................. 1.42%
Net assets, end of period (000's)............................. $1,029
(a) From commencement of operations on February 4, 1998.
(b) If the Fund had paid all of its expenses and there had been no reimbursement
by the Adviser, this ratio would have been 16.25% for the period ended June
30, 1998.
(c) Computed giving effect to Adviser's expense limitation undertaking.
(d) Annualized
<PAGE>
Financial Highlights CONTINUED
- --------------------------------------------------------------------------------
SR&F High-Yield Municipals Portfolio
PERIOD
ENDED
JUNE 30,
1998 (A)
----------------
SELECTED RATIOS
Ratio of net expenses to average net assets ............... 0.47%(b)
Ratio of net investment income to average net assets....... 5.72%(b)
Portfolio turnover rate.................................... 3%
(a) From commencement of operations on February 2, 1998.
(b) Annualized
<PAGE>
Report of Independent Auditors
- --------------------------------------------------------------------------------
To the Board of Trustees of the Stein Roe Advisor Trust and the SR&F
Base Trust
We have audited the accompanying statement of assets and liabilities of
Stein Roe Advisor High Yield Municipals Fund as of June 30, 1998 and the related
statement of operations, statement of changes in net assets and financial
highlights for the period February 4, 1998 to June 30, 1998. We have also
audited the accompanying statement of assets and liabilities, including the
portfolio of investments, of SR&F High Yield Municipals Portfolio as of June 30,
1998 and the related statement of operations, statement of changes in net assets
and financial highlights for the period February 2, 1998 to June 30, 1998. 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 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 Advisor High Yield Municipals Fund and SR&FHigh Yield
Municipals 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 Advisor 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. Hansen, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President, Chief Financial Officer
David P. Brady, Vice President
Kevin M. Carome, Vice President, Assistant Secretary
Daniel K. Cantor, Vice President
Erik P. Gustafson, Vice President
David P. Harris, Vice President
Harvey B. Hirschhorn, Vice President
Michael T. Kennedy, Vice President
Stephen F. Lockman, Vice President
Eric S. Maddix, Vice President
Lynn C. Maddox, Vice President
M. Jane McCart, Vice President
John S. McLandsborough, Vice President
Arthur J. McQueen, Vice President
Nicolette D. Parrish, Vice President, Assistant Secretary
Richard B. Peterson, Vice President
M. Gerard Sandel, Vice President
Gloria J. Santella, Vice President
Heidi J. Walter, Vice President, Secretary
Sharon R. Robertson, Controller
Scott E. Volk, Treasurer
Margaret O. Zwick, Assistant Treasurer
Janet B. Rysz, Assistant Secretary
AGENTS AND ADVISERS
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
Colonial Investors Service Center, Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
<PAGE>
Stein Roe & Farnham
One South Wacker Drive
Chicago, IL 60606-1130
www.steinroe.com
Liberty Funds Distributor, Inc.
