STEIN ROE MUTUAL FUNDS
SEMIANNUAL REPORT
DEC. 31, 1997
PHOTO OF: VARIOUS BONDS
STEIN ROE FIXED INCOME FUNDS
TAXABLE BOND FUND
INSTITUTIONAL HIGH YIELD FUND
<PAGE>
Contents
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Q&A
Institutional High Yield Fund .............................................. 1
Interview with the portfolio manager and
a summary of investment activity
Investments................................................................. 3
A complete list of investments with market values
Financial Statements........................................................ 7
Statement of assets and liabilities, statement of operations
and changes in net assets
Notes to Financial Statements............................................... 13
Financial Highlights........................................................ 15
Selected per-share data
Must be preceded or accompanied by a prospectus.
<PAGE>
Q&A
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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:
Jan. 3, 1997
INSTITUTIONAL HIGH YIELD FUND Q&A
Q: HOW DID THE FUND PERFORM?
A: For the six-month period ended Dec. 31, 1997, the Fund returned 7.70 percent,
outpacing the Lipper peer group return of 6.78 percent.
Q: WHAT DROVE PERFORMANCE?
A: At the beginning of the reporting period, we found attractive yields among
lower-tier issues. Later in the year, we invested in the increasing yields of
higher and lower credit tiers. Because of the lower interest rate environment,
we sold off shorter-term bonds or bonds selling on a yield-to-call basis, to
purchase longer-term bonds or bonds that had better call features. We also
boosted our weightings in zero coupon bonds. This move benefited performance
given their attractive spreads during the positive interest rate background.
Q: CAN YOU EXPLAIN ZERO COUPON BONDS?
A: Zero coupon bonds are securities that are issued below face value and that
pay no current interest. Their return is the difference between the issuance (or
purchase) price and the final redemption price (par). Zero coupon bonds perform
well if credits are improving and if interest rates are declining. If you aren't
receiving an interest payment, you are taking on more credit risk. That's
because your only return is principal. Many companies will issue zero coupon
bonds if they need time to generate money and earnings before they can make
interest payments.
Q: WHAT ARE THE PROSPECTS FOR THESE SECURITIES?
A: Demand for yield has made the fixed income market receptive to zero coupon
bonds. Although we increased our exposure to zeros, we're mindful of the
stability, strength and growth prospects of each issue's underlying company.
These investments are still quite risky, so to the extent we see equity
valuations change, or growth slows for these companies, we will shift to a less
aggressive position.
Q: THE HIGH YIELD MARKET ENJOYED FAVORABLE RETURNS AND RAPID GROWTH DURING THE
LAST SIX MONTHS. DID THE PORTFOLIO BENEFIT?
A: The high yield market did grow substantially during the reporting period --
from $442 billion in assets as of June 30, 1997, to $495 billion in assets on
Dec. 31, 1997.* The portfolio benefited from this growth.
Investor interest in high yield bonds is greater than ever. High yield bonds
act a lot like equities in that they are affected by the earnings of the company
issuing the bond. As a result, the high yield market has a higher correlation to
the stock market than to other fixed income investments. Consequently, the high
yield market followed the booming performance of the equity markets. On the
other hand, as the stock market has continued to rise, investors have become
increasingly concerned about equity valuations, and they find the high yield
market a somewhat safer place to invest. High yield bonds offer fixed income
investors diversification and a way to decrease their correlation to interest
rates, which also has helped to drive demand.
Q: HOW HAS THE FAVORABLE INTEREST RATE ENVIRONMENT AFFECTED DEMAND?
A: A number of companies have either called or tendered for their bonds,
particularly those rated BB. Investors who held called bonds needed to replace
them, and demand spiked accordingly.
Q: HOW HAS THE HIGH YIELD MARKET ACCOMMODATED THE INCREASED DEMAND?
A: Issuance in the high yield market has not only met demand, but set records
for both size and number of new issues. In the late 1980s, new high yield bonds
were primarily issued by cable companies. Now, in the late 1990s, new issues in
the high yield market have been dominated by the telecommunications and
technology industries. We purchased several new issues in these industries,
including Brooks-Fiber and Next Link
(1.4 percent and 2.1 percent of total net assets, respectively).
<PAGE>
Q: MORE INTERNATIONAL ISSUES HAVE ENTERED THE HIGH YIELD MARKET. HOW HAS THAT
AFFECTED THE PORTFOLIO?
A: International bonds are providing additional supply and yield to the high
yield market. We increased the portfolio's weighting in foreign bonds from 0.8
percent on Sept. 30, 1997, to 4.0 percent on Dec. 31, 1997, because we believe
the adverse effects of the Asian currency crisis have created some long-term
relative value among international issuers.
A bond's credit rating is based largely on the country of issuance, and the
ratings of many large companies with strong balance sheets and good credit
prospects often are capped by the ratings of the country in which they are
located. As a result, we are selective in our purchases. We're always mindful of
a company's earnings prospects regardless of the country in which its bonds are
issued.
Q: WHAT'S YOUR OUTLOOK?
A: We remain optimistic about the high yield market and believe spreads have the
potential for some additional narrowing over the medium term. A continued
favorable interest rate background will increase our confidence. Recent
volatility in equity markets and the recent crisis in Asia might cause corporate
earnings growth to slow from the levels experienced in previous years. We intend
to upgrade the credit quality of the portfolio's holdings if the incremental
yields of lower-tier credits continue to narrow or if equity prices fall.
* Source: Credit Suisse/First Boston.
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 as of Dec. 31, 1997; portfolio data subject to change. Total return
performance includes changes in share price and reinvestment of income and
capital gains distributions. The Adviser currently limits expenses to 0.60
percent of average net assets, subject to 30 days' notice to the Fund. Absent
this limit, total return would have been less. According to Lipper Analytical
Services, Inc., an independent monitor of mutual fund performance, the median
return for the Fund's high current yield fund peer group for the one-year period
ended Dec. 31, 1997 was 12.77 percent.
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>
<TABLE>
<CAPTION>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------------------------------------------------------
Investments as of December 31, 1997
(Dollar Amounts In Thousands)
(Unaudited)
Principal Market
LONG-TERM OBLIGATIONS (95.5%) Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AEROSPACE & TRANSPORTATION EQUIPMENT (3.7%)
Derlan Manufacturing 10.000% 1/15/07............................................................. $ 250 $ 263
L-3 Communications Corp. Series B 10.375% 5/01/07................................................ 500 541
*United Defense Industries 8.875% 11/15/07....................................................... 1,500 1,509
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2,313
AUTOMOTIVE (3.3%)
Delco Remy International, Inc. 8.625% 12/15/07................................................... 1,000 1,013
Oxford Automotive 10.125% 6/15/07................................................................ 500 528
Penda Corporation Series B 10.750% 3/01/04....................................................... 500 505
----------
2,046
BUILDING & CONSTRUCTION (0.8%)
Standard Pacific Corp. 8.500% 6/15/07............................................................ 500 500
BUSINESS SERVICES (2.1%)
Iron Mountain Inc. 10.125% 10/01/06.............................................................. 500 553
Outdoor Systems, Inc. 8.875% 6/15/07............................................................. 750 784
----------
1,337
CABLE/MEDIA (8.6%)
Adelphia Communications 9.250% 10/01/02.......................................................... 1,000 1,019
Capstar Broadcasting 9.250% 7/01/07.............................................................. 750 771
Frontiervision
11.000% 10/15/06.............................................................................. 250 277
*Zero Coupon (Effective Yield 12.227%) 9/15/07................................................ 750 551
*Garden State Newspaper 8.750% 10/01/09.......................................................... 1,000 1,003
*Perry-Judd 10.625% 12/15/07..................................................................... 1,000 1,025
Rogers Communications, Inc. (Yankee Issue) 9.125% 1/15/06........................................ 200 203
TV Azteca Series B 10.500% 2/15/07............................................................... 250 257
Young Broadcasting Corp. 10.125% 2/15/05......................................................... 250 264
----------
5,370
CONSUMER PRODUCTS (1.8%)
Coleman Escrow Corp. Zero Coupon 5/15/01
11.125% (Effective Yield) First Priority Note................................................. 1,000 670
12.875% (Effective Yield) Second Priority Note................................................ 750 454
----------
1,124
CONTAINERS (2.1%)
*Consumers International 10.250% 4/01/05......................................................... 500 550
Silgan Corp. 9.000% 6/01/09...................................................................... 750 769
----------
1,319
DOMESTIC TELECOMMUNICATIONS (16.6%)
Brooks Fiber Properties 10.000% 6/01/07.......................................................... 750 862
*BTI Telecom Corp. 10.500% 9/15/07............................................................... 1,000 1,020
Concentric Network Corp. 12.750% 12/15/07........................................................ 1,000 1,028
GCI Inc. 9.750% 8/01/07.......................................................................... 1,000 1,035
*GlobalStar Telecommunications Ltd.
11.250% 6/15/04............................................................................... 500 501
10.750% 11/01/04.............................................................................. 1,000 973
ITC Deltacom Inc. 11.000% 6/01/07................................................................ 500 546
Knology Holdings Inc. 11.875% 10/15/07........................................................... 2,000 1,080
MGC Communications Inc. 13.000% 10/01/04......................................................... 1,000 1,003
Nextlink Communications 9.625% 10/01/07.......................................................... 1,250 1,284
*RCN Corp. 10.000% 10/15/07...................................................................... 1,000 1,038
----------
10,370
See accompanying notes to financial statements.
<PAGE>
<CAPTION>
SR&F High Yield Portfolio CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY - SERVICES (3.3%)
Dawson Production Services 9.375% 2/01/07........................................................ $ 250 $ 263
Forcenergy Inc. Series B 8.500% 2/15/07.......................................................... 500 505
*Transamerican Energy 11.500% 6/15/02............................................................ 750 735
*United Refining Co. 10.750% 6/15/07............................................................. 500 526
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2,029
FINANCIAL (2.3%)
Penncorp Financial Group 9.250% 12/15/03......................................................... 500 522
*Pera Financial Services 9.375% 10/15/02......................................................... 1,000 930
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1,452
FOOD & BEVERAGES (6.2%)
*Archibald Candy Corp. 10.250% 7/01/04........................................................... 500 524
*NBTY Inc. 8.625% 9/15/07........................................................................ 1,000 1,000
Pepsi-Gemex S.A. Series B 9.750% 3/30/04......................................................... 1,000 1,030
Stater Brothers Holdings 9.000% 7/01/04.......................................................... 750 783
Windy Hill Pet Food Co. 9.750% 5/15/07........................................................... 500 520
----------
3,857
FOREIGN SOVEREIGN REGIONAL BONDS (3.8%)
*Guangdong Enterprises (Yankee Issue) 8.875% 5/22/07............................................. 1,000 918
*Pycsa Panama 10.280% 12/15/12................................................................... 1,500 1,469
----------
2,387
FOREIGN TELECOMMUNICATIONS (4.9%)
*Comtel Brasileira Ltd. (Yankee Issue) 10.750% 9/26/04........................................... 250 242
Esprit Telecom Group 11.500% 12/15/07............................................................ 1,000 1,033
Metronet Communications
12.000% 8/15/07............................................................................... 1,000 1,153
Zero Coupon (Effective Yield 10.750%) 11/01/07................................................ 1,000 613
----------
3,041
HEALTH SERVICES & EQUIPMENT (1.7%)
Dynacare Inc. (Yankee Issue) 10.750% 1/15/06..................................................... 500 526
*Leiner Health 9.625% 7/01/07.................................................................... 500 532
----------
1,058
HOSPITALS & NURSING HOME CARE (5.1%)
*Healthcor Holdings Inc. 11.000% 12/1/04......................................................... 1,000 1,023
*Integrated Health Services 9.500% 9/15/07....................................................... 400 412
*Sun Healthcare Group, Inc. 9.500% 7/01/07....................................................... 500 515
Tenet Healthcare Corp. 8.625% 1/15/07............................................................ 750 772
Vencor Inc. 8.625% 7/15/07....................................................................... 500 499
----------
3,221
HOTELS & ENTERTAINMENT (5.4%)
*Alliance Gaming Corp. 10.000% 8/01/07........................................................... 500 503
*Boyd Gaming Corp. 9.500% 7/15/07................................................................ 500 524
Premier Parks Inc. 9.750% 1/15/07................................................................ 250 266
Prime Hospitality Series B 9.750% 4/01/07........................................................ 1,000 1,060
Speedway Motorsports Inc. 8.500% 8/15/07......................................................... 1,000 1,020
----------
3,373
MACHINERY & FABRICATED METAL PRODUCTS (4.2%)
*BWAY Corp. 10.250% 4/15/07...................................................................... 350 381
Hayes Wheels International, Inc. Series B 9.125% 7/15/07......................................... 500 517
*Hylsa SA & CV 9.250% 9/15/07.................................................................... 700 693
*IMPSA 9.500% 5/31/02............................................................................ 500 480
Titan Wheel International Inc. 8.750% 4/01/07.................................................... 500 522
----------
2,593
MAJOR CHEMICALS (0.8%)
*Huntsman Corp. 9.500% 7/01/07................................................................... 500 520
See accompanying notes to financial statements.
SR&F High Yield Portfolio CONTINUED
- --------------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS SERVICES (0.8%)
Dyncorp Inc. 9.500% 3/01/07...................................................................... $ 500 $ 510
PAPER (1.1%)
APP International Finance Company (Yankee Issue)
10.250% 10/01/00.............................................................................. 150 138
*Indah Kiat Finance 10.000% 7/01/07.............................................................. 500 410
Specialty Paperboard Inc. 9.375% 10/15/06........................................................ 150 154
----------
702
RESTAURANTS (0.4%)
AFC Enterprises 10.250% 5/15/07.................................................................. 250 263
RETAIL (5.3%)
Cole National Group 9.875% 12/31/06.............................................................. 200 214
*Holmes Products Corp. 9.875% 11/15/07........................................................... 1,000 1,018
Marsh Supermarkets, Inc. 8.875% 8/01/07.......................................................... 1,000 1,005
Quality Food Centers Series B 8.700% 3/15/07..................................................... 500 541
Specialty Retailers Series B 8.500% 7/15/05...................................................... 500 510
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3,288
RUBBER, PLASTIC & RELATED MATERIALS (1.8%)
*Burke Industries Inc. 10.000% 8/15/07........................................................... 250 260
Key Plastics Inc. Series B 10.250% 3/15/07....................................................... 500 530
Plastic Containers Inc. Series B 10.000% 12/15/06................................................ 350 373
----------
1,163
SANITARY SERVICES (1.0%)
*Allied Waste Industries Inc. Zero Coupon (Effective Yield 11.300%) 6/01/07...................... 900 632
TECHNOLOGY SERVICES (1.2%)
*Viasystems Inc. 9.750% 6/01/07.................................................................. 750 774
TEXTILE & APPAREL (2.7%)
*Pillowtex Corporation 9.000% 12/15/07........................................................... 750 769
Polysindo International Finance 9.375% 7/30/07................................................... 1,000 720
William Carter 10.375% 12/01/06.................................................................. 200 210
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1,699
TRANSPORTATION & TRANSPORTATION EQUIPMENT (1.7%)
Coach USA Inc. Series B 9.375% 7/01/07........................................................... 500 515
Greyhound Lines Series B 11.500% 4/15/07......................................................... 500 552
----------
1,067
UTILITIES (2.1%)
AES Corporation 8.375% 8/15/07................................................................... 750 748
California Energy Company Inc. 9.500% 9/15/06.................................................... 500 540
----------
1,288
WIRELESS COMMUNICATIONS (0.7%)
Dobson Communications Corp. 11.750% 4/15/07...................................................... 250 264
Pricecellular Wire 10.750% 11/01/04.............................................................. 150 163
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427
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TOTAL LONG-TERM OBLIGATIONS
(Cost basis $58,641)............................................................................................. 59,723
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements.
<PAGE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short Term Obligation (1.6%)
COMMERCIAL PAPER
Associates Corp. of North America 6.750% 1/02/98
(Amortized cost $990)......................................................................... $ 990 $ 990
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.1%)
(Cost basis $59,631)............................................................................................. 60,713
OTHER ASSETS, LESS LIABILITIES (2.9%)............................................................................ 1,795
----------
TOTAL NET ASSETS (100%).......................................................................................... $62,508
==========
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
*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 to qualified institutional buyers, such as the
Portfolio, and any resale must be in an exempt transaction, normally to other
qualified institutional investors. At December 31, 1997, the aggregate value of
the Portfolio's private placement securities was $24,573, which represented 39.3
percent of net assets.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Stein Roe Institutional High Yield Fund
Statement of Assets and Liabilities
December 31, 1997
(All amounts in thousands, except per-share amounts)
(Unaudited)
<CAPTION>
<S> <C>
ASSETS
Investment in SR&F High Yield Portfolio, at value ....................... $115
Cash .................................................................... 2
Other assets ............................................................ 19
----
Total Assets ......................................................... $136
----
LIABILITIES
Accrued expenses payable ................................................ 14
Payable to investment adviser and transfer agent ........................ 6
----
Total Liabilities .................................................... 20
----
Net Assets ........................................................... $116
====
CAPITAL
Paid-in capital ......................................................... $112
Net unrealized appreciation on investments .............................. 3
Accumulated net realized gains on investments ........................... 1
----
Total Capital (Net Assets) ........................................... $116
====
Shares Outstanding (Unlimited Number Authorized) ........................ 11
====
Net Asset Value (Capital) Per Share .....................................$10.41
======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Stein Roe Institutional High Yield Fund
Statement of Operations
For the Six Months Ended December 31, 1997
(All amounts in thousands)
(Unaudited)
<CAPTION>
<S> <C>
INTEREST INCOME......................................................... $ 5
------
EXPENSES
Trustees' fees.......................................................... 29
Amortization of organizational expenses................................. 25
SEC and state registration fees......................................... 13
Accounting fees......................................................... 12
Legal and audit fees.................................................... 7
Other................................................................... 4
------
Total Expenses....................................................... 90
Reimbursement of expenses by investment adviser......................... (90)
------
Net Expenses......................................................... --
------
Net Investment Income................................................ 5
------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains on investments....................................... 2
Net change in unrealized appreciation or depreciation on investments.... 1
------
Net Gains on Investments............................................. 3
------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.................... $ 8
======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Stein Roe Institutional High Yield Fund
Statements of Changes in Net Assets
(All amounts in thousands)
(Unaudited)
<CAPTION>
SIX MONTHS PERIOD
ENDED ENDED
DECEMBER 31, JUNE 30,
1997 1997(A)
<S> <C> <C>
OPERATIONS
Net investment income............................................................... $ 5 $ 4
Net realized gains on investments................................................... 2 1
Net change in unrealized appreciation or depreciation on investments................ 1 2
------ ------
Net Increase in Net Assets Resulting from Operations............................. 8 7
------ ------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income................................................ (5) (4)
Distributions from net capital gains................................................ (2) --
------ ------
Total Distributions.............................................................. (7) (4)
------ ------
SHARE TRANSACTIONS
Subscriptions to fund shares........................................................ -- 100
Investment income dividends reinvested.............................................. 6 4
Capital gains distributions reinvested.............................................. 2 --
------ ------
Net Increase from Share Transactions............................................. 8 104
------ ------
Net Increase in Net Assets....................................................... 9 107
TOTAL NET ASSETS
Beginning of Period................................................................. 107 --
------ ------
End of Period....................................................................... $116 $107
====== ======
ANALYSES OF CHANGES IN SHARES OF BENEFICIAL INTEREST
Subscriptions to fund shares ....................................................... -- 10
Investment income dividends reinvested.............................................. 1 --
Capital gains distributions reinvested.............................................. -- --
------ ------
Net Increase in Fund Shares...................................................... 1 10
Shares outstanding at beginning of period........................................... 10 --
------ ------
Shares outstanding at end of period................................................. 11 10
====== ======
<FN>
(a) From commencement of operations on January 3, 1997.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
SR&F High Yield Portfolio
Statement of Assets and Liabilities
December 31, 1997
(All Amounts in Thousands)
(Unaudited)
<CAPTION>
<S> <C>
ASSETS
Investments, at market value.................................................$60,713
Cash......................................................................... 505
Accrued interest receivable.................................................. 1,310
Other assets................................................................. 19
-------
Total Assets.............................................................. 62,547
-------
LIABILITIES
Payable to investment adviser and transfer agent............................. 30
Other liabilities............................................................ 9
-------
Total Liabilities......................................................... 39
-------
Net Assets Applicable to Investors' Beneficial Interests.....................$62,508
=======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
SR&F High Yield Portfolio
Statement of Operations
For the Six Months Ended December 31, 1997
(All Amounts in Thousands)
(Unaudited)
<CAPTION>
<S> <C>
INTEREST INCOME..............................................................$2,316
------
EXPENSES
Management fees.............................................................. 129
Accounting fees.............................................................. 13
Trustees' fees............................................................... 5
Transfer agent fees.......................................................... 3
Other........................................................................ 5
------
Total Expenses............................................................ 155
------
Net Investment Income........................................................ 2,161
------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains on investments............................................ 876
Net change in unrealized appreciation or depreciation on investments......... 533
------
Net Gains on Investments.................................................. 1,409
------
Net Increase in Net Assets Resulting from Operations.........................$3,570
======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
SR&F High Yield Portfolio
Statement of Changes in Net Assets
(All amounts in thousands)
(Unaudited)
<CAPTION>
SIX MONTHS YEAR
ENDED ENDED
DEC. 31, JUNE 30,
1997 1997(A)
<S> <C> <C>
OPERATIONS
Net investment income..............................................................$ 2,161 $ 874
Net realized gains on investments.................................................. 876 336
Net change in unrealized appreciation or depreciation of investments............... 533 549
------- -------
Net Increase in Net Assets Resulting from Operations............................ 3,570 1,759
------- -------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions...................................................................... 22,026 38,807
Withdrawals........................................................................ (2,361) (1,293)
------- -------
Net Increase from Transactions in Investors' Beneficial Interest................ 19,665 37,514
------- -------
Net Increase in Net Assets...................................................... 23,235 39,273
TOTAL NET ASSETS
Beginning of Period................................................................ 39,273 --
------- -------
End of Period......................................................................$62,508 $39,273
======= =======
<FN>
(a) From commencement of operations on November 1, 1996.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
- -------------------------------------------------------------------------------
NOTE 1. ORGANIZATION OF THE SR&F HIGH YIELD PORTFOLIO
The SR&F High Yield Portfolio (the "Portfolio") is a separate series of the SR&F
Base Trust, a Massachusetts common trust organized under an Agreement and
Declaration of Trust dated August 23, 1993. The Declaration of Trust permits the
Trustees to issue non-transferable interests in the Portfolio. The Portfolio
commenced operations on November 1, 1996.
The Portfolio allocates net asset value, income and expenses based on
respective percentage ownership of each investor on a daily basis. At December
31, 1997, Stein Roe High Yield Fund, Stein Roe Institutional Client High Yield
Fund and Stein Roe Institutional High Yield Fund owned 50.4 percent, 49.4
percent and 0.2 percent, respectively.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of Stein Roe Institutional
High Yield Fund (the "Fund"), a series of the Stein Roe Institutional Trust, an
open-end diversified management investment company organized as a Massachusetts
business trust (the "Trust"), and the Portfolio.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
AMORTIZATION OF ORGANIZATION EXPENSES
Organization costs are amortized on a straight-line basis against income
over various periods of up to 60 months from the commencement of public offering
by the Fund, depending on the nature of the individual cost.
SECURITY VALUATIONS
All securities are valued as of December 31, 1997. 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 bond futures contracts to
either hedge against expected declines 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 period ended December 31, 1997.
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 such distributions to its
shareholders as 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.
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.
OTHER INFORMATION
Realized gains or losses from sales of securities are determined on the
specific identified cost basis.
Securities purchased on a when-issued basis may be settled one month or
more after the transaction date. These securities are subject to market
fluctuation during this period. The Portfolio did not have any when-issued or
delayed delivery purchase commitments as of December 31, 1997.
All amounts, except per-share amounts, are shown in thousands.
<PAGE>
NOTE 3. PORTFOLIO COMPOSITION
The Fund invests all of its net investable assets in the Portfolio. The
Portfolio invests primarily in high yield, high-risk medium- and lower-quality
debt securities. See the Portfolio's schedule of investments for information on
individual securities.
NOTE 4. TRUSTEES' FEES AND TRANSACTIONS WITH AFFILIATES
The Portfolio pays monthly management fees, computed and accrued daily, 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 .50 of 1 percent of the first $500
million of average daily net assets and .475 of 1 percent thereafter.
The Fund pays monthly administrative fees to the Adviser. The administrative
fee for the Fund is .15 of 1 percent of the first $500 million of average daily
net assets and .125 of 1 percent thereafter.
The administrative agreement of the Fund provides that the Adviser will
reimburse the Fund to the extent that its annual expenses, excluding certain
expenses, exceed the applicable limits prescribed by any state in which the
Fund's shares are offered for sale. In addition, the Adviser has agreed to
reimburse the Fund to the extent that expenses exceed .60 of 1 percent of
average net assets. The expense limitation expires October 31, 1999, subject to
earlier termination by the Adviser on 30 days' notice to the Fund. Prior to May
28, 1997, expenses were limited to .75 of 1 percent of average net assets.
The transfer agent fees of the Fund 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. an indirect, majority-owned subsidiary of Liberty Mutual Insurance
Company, to act as subtransfer agent for the Fund.
The Adviser also provides fund accounting services.
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 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 during the period ended December 31, 1997.
NOTE 6. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales (other than short-term
obligations) for the SR&F High Yield Portfolio for the period ended December 31,
1997 were $89,454 and $69,288, respectively.
At December 31, 1997, cost of investments for financial reporting purposes
and for federal tax purposes were the same. Unrealized appreciation and
depreciation on investments were $1,827 and $745, respectively.
<PAGE>
<TABLE>
Financial Highlights
Stein Roe Institutional High Yield Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
<CAPTION>
SIX MONTHS
PERIOD ENDED
ENDED DECEMBER 31,
JUNE 30, 1997
1997(A) (UNAUDITED)
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................$ 10.00 $ 10.27
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................................................ 0.40 0.45
Net realized and unrealized gains on investments............................. 0.27 0.37
------- -------
Total from investment operations........................................... 0.67 0.82
DISTRIBUTIONS
Net investment income........................................................ (0.40) (0.45)
Net realized gains........................................................... -- (0.23)
------- -------
Total distributions........................................................ (0.40) (0.68)
------- -------
NET ASSET VALUE, END OF PERIOD..................................................$ 10.27 $ 10.41
======= =======
Ratio of net expenses to average net assets (b)................................. 0.72%* 0.60%*
Ratio of net investment income to average net assets (c)........................ 8.13%* 8.35%*
Total return (c)................................................................ 6.89%+ 7.70%+
Net assets, end of period (000's)...............................................$ 107 $ 116
<FN>
* Annualized
+ Not annualized
(a) From commencement of operations on January 3, 1997.
(b)If the Fund had paid all of its expenses and there had been no reimbursement
by the Adviser, this ratio would have been 171.3 percent for the period ended
June 30, 1997, and 160.45 percent for the six months ended December 31, 1997.
(c) Computed giving effect to Adviser's expense limitation undertaking.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Highlights CONTINUED
SR&F High Yield Portfolio
<CAPTION>
SIX MONTHS
PERIOD ENDED
ENDED DEC.31,
JUNE 30, 1997
1997 (A) (UNAUDITED)
<S> <C> <C>
Ratio of expenses to average net assets......................................... 0.89%* 0.60%*
Ratio of net investment income to average net assets............................ 8.24%* 8.35%*
Portfolio turnover rate ........................................................ 168%+ 282%*
<FN>
*Annualized
+Not annualized.
(a) From commencement of operations on November 1, 1996.
</FN>
</TABLE>
<PAGE>
Stein Roe Institutional Trust
TRUSTEES
Timothy K. Armour
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
Timothy K. Armour, President
William D. Andrews, Executive Vice President
Thomas W. Butch, Executive Vice President
Loren A. Hanson, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Philip J. Crosley, Vice President
Michael T. Kennedy, Vice President
Stephen F. Lockman, Vice President
Lynn C. Maddox, Vice President
Anne E. Marcel, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Heidi J. Walter, Vice President
Stacy H. Winick, 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 Public Accountants
Stein Roe & Farnham
One South Wacker Drive
Chicago, IL 60606-4685
1-800-322-1130
http://www.steinroe.com
Liberty Securities Corporation, Distributor
Member SIPC
