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1940 Act File No. 811-7996
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. __ [ ]
Post-Effective Amendment No. __ [ ]
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 9 [X]
(check appropriate box or boxes)
SR&F BASE TRUST
(Exact Name of Registrant as Specified in Declaration of Trust)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Registrant's Principal Offices)
(312) 368-5612
(Registrant's Telephone Number, Including Area Code)
Jilaine Hummel Bauer Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd
and Secretary Three First National Plaza
SR&F Base Trust 70 W. Madison Street, Suite 3300
One South Wacker Drive Chicago, Illinois 60602
Chicago, Illinois 60606
(Agents for Service)
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EXPLANATORY NOTE
This Registration Statement has been filed by the Registrant
pursuant to Section 8(b) of the Investment Company Act of 1940.
However, beneficial interests in the Registrant are not being
registered under the Securities Act of 1933 (the "1933 Act")
because such interests will be issued solely in private placement
transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in the
Registrant may only be made by investment companies, insurance
company separate accounts, common or commingled trust funds, or
similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell or the
solicitation of an offer to buy any beneficial interests in the
Registrant.
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PART A
Responses to Items 1 through 3 have been omitted pursuant to
paragraph 4 of Instruction F of the General Instructions to Form N-
1A.
Item 4. General Description of Registrant.
Introduction
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SR&F Base Trust ("Base Trust") is a no-load, diversified, open-end
management investment company which was organized as a trust under
the laws of the Commonwealth of Massachusetts on August 23, 1993.
Beneficial interests in Base Trust (the "Interest" or "Interests")
are issued solely in private placement transactions that do not
involve any "public offering" within the meaning of Section 4(2) of
the Securities Act of 1933, as amended (the "1933 Act").
Investments in Base Trust may be made only by investment companies,
insurance company separate accounts, common or commingled trust
funds, or similar organizations or entities that are "accredited
investors" within the meaning of Regulation D under the 1933 Act.
This registration statement does not constitute an offer to sell or
the solicitation of an offer to buy any "security" within the
meaning of the 1933 Act. Currently, 13 series of Base Trust are
authorized and outstanding, as follows:
SR&F Cash Reserves Portfolio
SR&F Municipal Money Market Portfolio
SR&F High-Yield Municipals Portfolio
SR&F Intermediate Bond Portfolio
SR&F Income Portfolio
SR&F High Yield Portfolio
SR&F Balanced Portfolio
SR&F Growth & Income Portfolio
SR&F Growth Stock Portfolio
SR&F Growth Investor Portfolio
SR&F Special Portfolio
SR&F Special Venture Portfolio
SR&F International Portfolio
The series of Base Trust are referred to collectively as the
"Portfolios." Municipal Money Portfolio and High-Yield Municipals
Portfolio are referred to collectively as the "Municipal
Portfolios"; Intermediate Bond Portfolio, Income Portfolio and High
Yield Portfolio are referred to collectively as the "Bond
Portfolios"; and Balanced Portfolio, Growth & Income Portfolio,
Growth Stock Portfolio, Growth Investor Portfolio, Special
Portfolio, Special Venture Portfolio, and International Portfolio
are also referred to collectively as the "Equity Portfolios."
Objective and Basic Investment Strategy
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The investment objectives and basic investment strategy of each
Portfolio follow. Each Portfolio may also employ the indicated
strategies and techniques listed under Other Investment Strategies.
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SR&F Cash Reserves Portfolio
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Cash Reserves Portfolio seeks to obtain maximum current income
consistent with the preservation of capital and the maintenance of
liquidity by investing all of its assets in U.S. dollar-denominated
money market instruments maturing in thirteen months or less from
time of investment. Each security must be rated (or be issued by
an issuer that is rated with respect to its short-term debt) within
the highest rating category for short-term debt by at least two
nationally recognized statistical rating organizations ("NRSRO")
(or, if rated by only one NRSRO, by that rating agency), or, if
unrated, determined by or under the direction of the Board of
Trustees to be of comparable quality. These securities may
include:
(1) Securities issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities ("U.S. Government
Securities");
(2) Securities issued or guaranteed by the government of any
foreign country that are rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO; /1/
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total
assets in excess of $1 billion, or the equivalent in
other currencies (as of the date of the most recent
available financial statements) or of any branches,
agencies or subsidiaries (U.S. or foreign) of any such
bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A
or better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in
(1) above;
(7) Other high-quality short-term obligations.
In accordance with its investment objectives and policies, Cash
Reserves Portfolio may invest in variable and floating rate money
market instruments which provide for periodic or automatic
adjustment in coupon interest rates that are reset based on changes
in amount and directions of specified short-term interest rates.
Under normal market conditions, Cash Reserves Portfolio will invest
at least 25% of its total assets in securities of issuers in the
financial services industry (which includes, but is not limited to,
banks, personal credit and business credit institutions, and other
financial services institutions).
Cash Reserves Portfolio maintains a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a
stable net asset value per share, and not in excess of 90 days. It
is a fundamental policy /3/ that the maturity of any instrument
that grants the holder an optional right to redeem at par plus
interest and without penalty will be
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/1/ For a description of Moody's, S&P and Fitch ratings, see the
Appendix. All references to ratings apply to any ratings adopted
in the future by a rating service that are determined by the Board
of Trustees to be equivalent to current ratings. In addition,
rating modifiers showing relative standing within a rating category
do not affect whether a security is eligible for purchase.
/2/ A sale of securities to the Fund in which the seller (a bank or
securities dealer that the Adviser believes to be financially
sound) agrees to repurchase the securities at a higher price, which
includes an amount representing interest on the purchase price,
within a specified time.
/3/ A repurchase agreement involves a sale of securities to the
Portfolio in which the seller agrees to repurchase the securities
at a higher price, which includes an amount representing interest
on the purchase price, within a specified time. In the event of
bankruptcy of the seller, the Portfolio could experience both
losses and delays in liquidating its collateral.
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deemed at any time to be the next date provided for payment on
exercise of such optional redemption right.
SR&F Municipal Money Market Portfolio ("Municipal Money Portfolio")
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Municipal Money Portfolio seeks maximum current income exempt from
federal income tax by investing principally in a diversified
portfolio of "short-term" Municipal Securities.
In pursuing its objective, the Municipal Money Portfolio attempts
to maintain relative stability of principal and liquidity.
Municipal Money Portfolio invests principally in a diversified
portfolio of short-term Municipal Securities (as defined below).
"Short-term" means a remaining maturity of no more than thirteen
months (or comparable period) as defined in the Glossary.
It is a fundamental policy that normally at least 80% of Municipal
Money Portfolio's investments will produce income that is exempt
from federal income tax, except for periods in which Stein Roe &
Farnham Incorporated (the "Adviser") believes a defensive position
is required for the protection of shareholders.
As a fundamental policy, Municipal Money Portfolio invests in
Municipal Securities that, at the time of purchase, are: (1)
variable rate demand securities (as defined in the Glossary) whose
demand feature is rated within the two highest ratings assigned by
Moody's Investors Service, Inc. ("Moody's"), VMIG 1 or VMIG 2 /4/;
(2) notes rated within the two highest short-term municipal ratings
assigned by Moody's, MIG 1 or MIG 2, or within the highest rating
assigned by Standard & Poor's Corporation ("S&P"), SP-l+; (3)
municipal commercial paper (short-term promissory notes) rated
Prime-1 by Moody's, or A-l by S&P; (4) municipal bonds, including
industrial development bonds, rated within the two highest ratings
assigned to municipal bonds by S&P, AAA or AA, or by Moody's, Aaa
or Aa; (5) securities not rated as described in (1) through (4) but
determined by the Board of Trustees to be at least equal in quality
to one or more of the foregoing ratings, although other types of
obligations of the same issuer might not be within the foregoing
ratings; (vi) securities backed by the full faith and credit of the
U.S. Government; or (vii) securities as to which the payment of
principal and interest is collateralized by securities issued or
guaranteed by the U.S. Government or by its agencies or
instrumentalities ["U.S. Government Securities"] deposited in an
escrow for the benefit of holders of the securities. In accordance
with SEC Rule 2a-7 under the Investment Company Act, each security
in which Municipal Money Portfolio invests will be U.S. dollar
denominated and (a) rated (or be issued by an issuer that is rated
with respect to its short-term debt) within the two highest rating
categories for short-term debt by at
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/4/ The Board of Trustees has determined that the demand feature of
a variable rate demand security rated SP-1+, A-1+ or A-1 by S&P or
MIG 1, MIG 2 or Prime-1 by Moody's is at least equal in quality to
the demand feature of a variable rate demand security rated VMIG 2
by Moody's. As a non-fundamental policy, the Portfolio will not
invest in a variable rate security whose demand feature is
conditional unless the Board of Trustees determines that the
security is at least the economic equivalent of a variable rate
security with an unconditional demand feature or (a) the demand
feature is rated within the two highest ratings assigned by Moody's
or within the equivalent ratings assigned by S&P and (b) the
underlying security is rated within the two highest ratings
assigned by Moody's or S&P. The Board of Trustees has determined
that a variable rate security where the demand feature is suspended
only after a default followed by an acceleration of maturity is the
economic equivalent of a variable rate security with an
unconditional demand feature.
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least two nationally recognized statistical rating organizations
("NRSRO") or, if rated by only one NRSRO, rated within the two
highest rating categories by that NRSRO, or, if unrated, determined
by or under the direction of the Board of Trustees to be of
comparable quality, and (b) determined by or under the direction of
the Board of Trustees to present minimal credit risks.
SR&F High-Yield Municipals Portfolio
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High-Yield Municipals Portfolio seeks a high current yield exempt
from federal income tax by investing primarily in a diversified
portfolio of Municipal Securities. High-Yield Municipals Portfolio
invests principally in long-term (generally maturing in more than
ten years) medium- or lower-quality Municipal Securities bearing a
high rate of interest income; possible capital appreciation is of
secondary importance.
It is a fundamental policy that normally assets will be invested so
that at least 80% of its gross income will be derived from
securities the interest on which is exempt from federal income tax
in the opinion of counsel for the issuers of such securities,
except during periods in which the Adviser believes a temporary
defensive position is advisable.
Medium-quality Municipal Securities are obligations of issuers that
the Adviser believes possess adequate, but not outstanding,
capacities to service the obligations. Lower-quality Municipal
Securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk, including
the possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." The lowest rating assigned by Moody's
is for bonds that can be regarded as having extremely poor
prospects of ever attaining any real investment standing. The
Adviser attributes to medium- and lower-quality obligations the
same general characteristics as do rating services. Because many
issuers of medium- and lower-quality Municipal Securities choose
not to have their obligations rated by a rating agency, many of the
obligations in the investment portfolio may be unrated.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely disrupt
this market and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest. During
a period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and the Portfolio may have greater difficulty
selling its portfolio securities.
Although High-Yield Municipals Portfolio invests principally in
medium- or lower-quality Municipal Securities, it may invest in
Municipal Securities of higher quality when the Adviser believes it
is appropriate to do so.
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SR&F Intermediate Bond Portfolio ("Intermediate Bond Portfolio")
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The investment objective of Intermediate Bond Portfolio is to
provide a high level of current income, consistent with the
preservation of capital, by investing primarily in marketable debt
securities. Under normal market conditions, the Portfolio will
invest at least 65% of the value of its total assets (taken at
market value at the time of investment) in convertible and non-
convertible bonds and debentures, and at least 60% of its assets
will be invested in the following:
(1) Marketable straight-debt securities of domestic issuers,
and of foreign issuers payable in U.S. dollars, rated at
time of purchase within the three highest grades assigned
by Moody's or by S&P;
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P
at time of purchase, or, if unrated, issued or guaranteed
by a corporation with any outstanding debt rated Aa or
better by Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements, of
banks having total assets in excess of $1 billion.
Under normal market conditions, Intermediate Bond Portfolio invests
at least 65% of its assets in securities with an average life of
between three and ten years, and expects that the dollar-weighted
average life of its portfolio will be between three and ten years.
Average life is the weighted average period over which the Adviser
expects the principal to be paid, and differs from stated maturity
in that it estimates the effect of expected principal prepayments
and call provisions. With respect to GNMA securities and other
mortgage-backed securities, average life is likely to be
substantially less than the stated maturity of the mortgages in the
underlying pools. With respect to obligations with call
provisions, average life is typically the next call date on which
the obligation reasonably may be expected to be called. Securities
without prepayment or call provisions generally have an average
life equal to their stated maturity. During periods of rising
interest rates, the average life of mortgage-backed securities and
callable obligations may increase substantially because they are
not likely to be prepaid, which may result in greater net asset
value fluctuation.
Intermediate Bond Portfolio also may invest in other debt
securities (including those convertible into or carrying warrants
to purchase common stocks or other equity interests, and privately
placed debt securities), preferred stocks, and marketable common
stocks that the Adviser considers likely to yield relatively high
income in relation to cost.
Intermediate Bond Portfolio may invest up to 35% of its total
assets in debt securities that are rated below investment grade
(with no minimum permitted rating) and that, on balance, are
considered predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal according to the terms
of the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy. (See
Portfolio Investments and Strategies and Risks and Investment
Considerations for more information on the risks associated with
investing in debt securities rated below investment grade.)
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SR&F Income Portfolio ("Income Portfolio")
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The investment objective of Income Portfolio is to provide a high
level of current income. Consistent with that investment
objective, capital preservation and capital appreciation are
regarded as secondary objectives.
Income Portfolio attempts to achieve its objective by investing
principally in medium-quality debt securities, which are
obligations of issuers that the Adviser believes possess adequate,
but not outstanding, capacities to service their debt securities,
such as securities rated A or Baa by Moody's or A or BBB by S&P.
The Adviser generally attributes to medium-quality securities the
same characteristics as rating services.
Although Income Portfolio will invest at least 60% of its assets in
medium- or higher-quality debt securities, it may also invest to a
lesser extent in debt securities of lower quality (in the case of
rated securities, having a rating by Moody's or S&P of not less
than C). Although the Portfolio can invest up to 40% of its assets
in lower-quality securities, it does not intend to invest more than
35% in lower-quality securities. Lower-quality debt securities are
obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the possibility
of issuer default and bankruptcy, and are commonly referred to as
"junk bonds." Income Portfolio may invest in lower-quality debt
securities; for example, if the Adviser believes the financial
condition of the issuers or the protection offered to the
particular obligations is stronger than is indicated by low ratings
or otherwise. (See Risk Factors for more information on the risks
associated with investing in medium- and lower-quality debt
securities.) Income Portfolio may invest in higher-quality
securities; for example, under extraordinary economic or financial
market conditions, or when the spreads between the yields on
medium- and high-quality securities are relatively narrow.
Some issuers of debt securities choose not to have their securities
rated by a rating service, and Income Portfolio may invest in
unrated securities that the Adviser believes are suitable for
investment.
Under normal market conditions, Income Portfolio will invest at
least 65% of the value of its total assets (taken at market value)
in convertible and non-convertible bonds and debentures. Such
securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by Income Portfolio for a sufficient time to permit orderly
disposition thereof or to establish long-term holding periods for
federal income tax purposes.
Income Portfolio may invest up to 35% of its total assets in other
debt securities, marketable preferred and common stocks, and
foreign and municipal securities that the Adviser considers likely
to yield relatively high income in relation to costs, and rights to
acquire such securities. (Municipal securities are securities
issued by or on behalf of state and local governments, the interest
on which is generally exempt from federal income tax.) Any assets
not otherwise invested may be invested in money market instruments.
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SR&F High Yield Portfolio ("High Yield Portfolio")
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High Yield Portfolio seeks total return by investing for a high
level of current income and capital growth. High Yield Portfolio
invests principally in high-yield, high-risk medium- and lower-
quality debt securities. The medium- and lower-quality debt
securities in which High Yield Portfolio invests normally offer a
current yield or yield to maturity that is significantly higher
than the yield from securities rated in the three highest
categories assigned by rating services such as S&P or Moody's.
Under normal circumstances, at least 65% of High Yield Portfolio's
assets will be invested in high-yield, high-risk medium- and lower-
quality debt securities rated lower than Baa by Moody's and lower
than BBB by S&P, or equivalent ratings as determined by other
rating agencies or unrated securities that the Adviser determines
to be of comparable quality. Medium-quality debt securities,
although considered investment grade, have some speculative
characteristics. Lower-quality debt securities are obligations of
issuers that are considered predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal
according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk
bonds." The lowest rating assigned by Moody's is for bonds that
can be regarded as having extremely poor prospects of ever
attaining any real investment standing. Some issuers of debt
securities choose not to have their securities rated by a rating
service, and High Yield Portfolio may invest in unrated securities
that the Adviser has researched and believes are suitable for
investment. High Yield Portfolio may invest in debt obligations
that are in default, but such obligations are not expected to
exceed 10% of High Yield Portfolio's assets.
High Yield Portfolio may invest up to 35% of its total assets in
other securities including, but not limited to, pay-in-kind bonds,
securities issued in private placements, bank loans, zero coupon
bonds, foreign securities, convertible securities, futures, and
options. High Yield Portfolio may also invest in higher-quality
debt securities. Under normal market conditions, however, High
Yield Portfolio is unlikely to emphasize higher-quality debt
securities since generally they offer lower yields than medium- and
lower-quality debt securities with similar maturities. High Yield
Portfolio may also invest in common stocks and securities that are
convertible into common stocks, such as warrants.
SR&F Balanced Portfolio ("Balanced Portfolio")
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The investment objective of Balanced Portfolio is to seek long-term
growth of capital and current income, consistent with reasonable
investment risk. Balanced Portfolio allocates its assets among
equities, debt securities and cash. The portfolio manager
determines those allocations based on the views of the Adviser's
investment strategists regarding economic, market and other factors
relative to investment opportunities. The equity portion of the
portfolio of Balanced Portfolio is invested primarily in well-
established companies having market capitalizations in excess of $1
billion. Fixed-income senior securities will make up at least 25%
of Balanced Portfolio's total assets. Investments in debt
securities are limited to those that are within the four highest
grades (generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization or, if
unrated, determined by the Adviser to be of comparable quality.
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SR&F Growth & Income Portfolio ("Growth & Income Portfolio")
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The investment objective of Growth & Income Portfolio is to provide
both growth of capital and current income. It is designed for
investors seeking a diversified portfolio of securities that offers
the opportunity for long-term growth of capital while also
providing a steady stream of income. In seeking to meet this
objective, Growth & Income Portfolio invests primarily in well-
established companies whose common stocks are believed to have both
the potential to appreciate in value and to pay dividends to
shareholders. Although it may invest in a broad range of
securities (including common stocks, preferred stocks, securities
convertible into or exchangeable for common stocks, and warrants or
rights to purchase common stocks), normally Growth & Income
Portfolio emphasizes investments in equity securities of companies
having market capitalizations in excess of $1 billion. Securities
of these well-established companies are believed to be generally
less volatile than those of companies with smaller capitalizations
because companies with larger capitalizations tend to have
experienced management; broad, highly diversified product lines;
deep resources; and easy access to credit.
SR&F Growth Stock Portfolio ("Growth Stock Portfolio")
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The investment objective of Growth Stock Portfolio is long-term
capital appreciation. Growth Stock Portfolio attempts to achieve
this objective by normally investing at least 65% of its total
assets in common stocks and other equity-type securities (such as
preferred stocks, securities convertible into or exchangeable for
common stocks, and warrants or rights to purchase common stocks)
that, in the opinion of the Adviser, have long-term appreciation
possibilities.
SR&F Growth Investor Portfolio ("Growth Investor Portfolio")
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The investment objective of Growth Investor Portfolio is long-term
capital appreciation. Growth Investor Portfolio invests primarily
in common stocks and other equity-type securities that, in the
opinion of the Adviser, have long-term appreciation potential.
Under normal circumstances, at least 65% of the total assets of
Growth Investor Portfolio will be invested in securities of
companies that, in the opinion of the Adviser, directly or through
one or more subsidiaries, affect the lives of young people. Such
companies may include companies that produce products or services
that young people use, are aware of, or could potentially have an
interest in. Although Growth Investor Portfolio invests primarily
in common stocks and other equity-type securities (such as
preferred stocks, securities convertible into or exchangeable for
common stocks, and warrants or rights to purchase common stocks),
it may invest up to 35% of its total assets in debt securities.
SR&F Special Portfolio ("Special Portfolio")
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The investment objective of Special Portfolio is to invest in
securities selected for possible capital appreciation. Particular
emphasis is placed on securities that are considered to have
limited downside risk relative to their potential for above-average
growth, including securities of undervalued, underfollowed or out-
of-favor companies, and companies that are low-cost producers of
goods or services, financially strong or run by well-respected
managers. Special Portfolio may invest in securities of seasoned,
established companies that appear to have appreciation potential,
as well as securities of relatively small, new companies. In
addition, it may invest in securities with limited marketability,
new issues of securities, securities of companies that, in the
Adviser's opinion,
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will benefit from management change, new technology, new product or
service development or change in demand, and other securities that
the Adviser believes have capital appreciation possibilities;
however, Special Portfolio does not currently intend to invest more
than 5% of its net assets in any of these types of securities.
Securities of smaller, newer companies may be subject to greater
price volatility than securities of larger more well-established
companies. In addition, many smaller companies are less well known
to the investing public and may not be as widely followed by the
investment community. Although Special Portfolio invests primarily
in common stocks, it may also invest in other equity-type
securities, including preferred stocks and securities convertible
into equity securities.
SR&F Special Venture Portfolio ("Special Venture Portfolio")
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The investment objective of Special Venture Portfolio is to seek
long-term capital appreciation. Special Venture Portfolio invests
primarily in a diversified portfolio of common stocks and other
equity-type securities (such as preferred stocks, securities
convertible or exchangeable for common stocks, and warrants or
rights to purchase common stocks) of entrepreneurially managed
companies that the Adviser believes represent special
opportunities. Special Venture Portfolio emphasizes investments in
financially strong small and medium-sized companies based
principally on appraisal of their management and stock valuations.
The Adviser considers "small" and "medium-sized" companies to be
those with market capitalizations of less than $1 billion and $1 to
$3 billion, respectively. In both its initial and ongoing
appraisals of a company's management, the Adviser seeks to know
both the principal owners and senior management and to assess their
business judgment and strategies through personal visits. The
Adviser favors companies whose management has an owner/operator,
risk-averse orientation and a demonstrated ability to create wealth
for investors. Attractive company characteristics include unit
growth, favorable cost structures or competitive positions, and
financial strength that enables management to execute business
strategies under difficult conditions. A company is attractively
valued when its stock can be purchased at a meaningful discount to
the value of the underlying business.
SR&F International Portfolio ("International Portfolio")
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The investment objective of International Portfolio is to seek
long-term growth of capital. International Portfolio seeks to
achieve this objective by investing primarily in a diversified
portfolio of foreign securities. Current income is not a primary
factor in the selection of portfolio securities. International
Portfolio invests primarily in common stocks and other equity-type
securities (such as preferred stocks, securities convertible or
exchangeable for common stocks, and warrants or rights to purchase
common stocks). International Portfolio may invest in securities
of smaller emerging companies as well as securities of well-
seasoned companies of any size. Smaller companies, however,
involve higher risks in that they typically have limited product
lines, markets, and financial or management resources. In
addition, the securities of smaller companies may trade less
frequently and have greater price fluctuation than larger
companies, particularly those operating in countries with
developing markets.
International Portfolio diversifies its investments among several
countries and does not concentrate investments in any particular
industry. In pursuing its objective, International Portfolio
varies the geographic allocation and types of securities in which
it invests based on the Adviser's continuing evaluation of
economic, market, and political
<PAGE> 12
trends throughout the world. While International Portfolio has not
established limits on geographic asset distribution, it ordinarily
invests in the securities markets of at least three countries
outside the United States, including but not limited to Western
European countries (such as Belgium, France, Germany, Ireland,
Italy, The Netherlands, the countries of Scandinavia, Spain,
Switzerland, and the United Kingdom); countries in the Pacific
Basin (such as Australia, Hong Kong, Japan, Malaysia, the
Philippines, Singapore, and Thailand); and countries in the
Americas (such as Argentina, Brazil, Colombia, and Mexico). In
addition, it does not currently intend to invest more than 2% of
its total assets in Russian securities.
Under normal market conditions, International Portfolio invests at
least 65% of its total assets (taken at market value) in foreign
securities. If, however, investments in foreign securities appear
to be relatively unattractive in the judgment of the Adviser
because of current or anticipated adverse political or economic
conditions, International Portfolio may hold cash or invest any
portion of its assets in securities of the U.S. Government and
equity and debt securities of U.S. companies, as a temporary
defensive strategy. To meet liquidity needs, International
Portfolio may also hold cash in domestic and foreign currencies and
invest in domestic and foreign money market securities (including
repurchase agreements and "synthetic" foreign money market
positions).
In the past, the U.S. Government has from time to time imposed
restrictions, through taxation and otherwise, on foreign
investments by U.S. investors such as International Portfolio. If
such restrictions should be reinstated, it might become necessary
for International Portfolio to invest all or substantially all of
its assets in U.S. securities. In such an event, International
Portfolio would review its investment objective and policies to
determine whether changes are appropriate.
Other Investment Practices
- ---------------------------
Each Portfolio may also engage to a limited extent in the following
investment practices, as indicated, each of which may involve
certain special risks.
Municipal Securities. Municipal Securities are debt obligations
issued by or on behalf of the governments of states, territories or
possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the
interest on which is generally exempt from the regular federal
income tax.
The two principal classifications of Municipal Securities are
"general obligation" and "revenue" bonds. "General obligation"
bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. "Revenue"
bonds are usually payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from
the proceeds of a special excise tax or other specific revenue
source. Industrial development bonds are usually revenue bonds,
the credit quality of which is normally directly related to the
credit standing of the industrial user involved. Municipal
Securities may bear either fixed or variable rates of interest.
Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize fluctuation
in values of the instruments.
Within the principal classifications of Municipal Securities, there
are various types of instruments, including municipal bonds,
municipal notes, municipal leases, custodial
<PAGE> 13
receipts, and participation certificates. Municipal notes include
tax, revenue, and bond anticipation notes of short maturity,
generally less than three years, which are issued to obtain
temporary funds for various public purposes. Municipal lease
securities, and participation certificates therein, evidence
certain types of interests in lease or installment purchases
contract obligations of a municipal authority or other entity.
Custodial receipts represent ownership in future interest or
principal payments (or both) on certain Municipal Securities and
are underwritten by securities dealers or banks. Some Municipal
Securities may not be backed by the faith, credit, and taxing power
of the issuer and may involve "non-appropriation" clauses which
provide that the municipal authority is not obligated to make lease
or other contractual payments, unless specific annual
appropriations are made by the municipality. A Municipal Portfolio
may invest more than 5% of its net assets in municipal bonds and
notes, but does not expect to invest more than 5% of its net assets
in the other Municipal Securities described in this paragraph. The
Board is responsible for determining the credit quality of unrated
municipal leases on an ongoing basis, including an assessment of
the likelihood that such leases will not be cancelled.
A Municipal Portfolio may also purchase Municipal Securities that
are insured as to the timely payment of interest and principal.
Such insured Municipal Securities may already be insured when
purchased by the Portfolio, or the Portfolio may purchase insurance
in order to turn an uninsured Municipal Security into an insured
Municipal Security.
Some Municipal Securities are backed by (1) the full faith and
credit of the U.S. Government, (2) agencies or instrumentalities of
the U.S. Government, or (3) U.S. Government Securities.
Except with respect to Municipal Securities with a demand feature
acquired by Municipal Money Portfolio (see the definition of
"short-term" in the Glossary to Part B), if, after purchase by the
Portfolio, an issue of Municipal Securities ceases to meet the
required rating standards, if any, the Portfolio is not required to
sell such security, but the Adviser would consider such an event in
deciding whether the Portfolio should retain the security in its
portfolio. In the case of Municipal Securities with a demand
feature acquired by a Municipal Portfolio, if the quality of such a
security falls below the minimum level applicable at the time of
acquisition, the Portfolio must dispose of the security, unless the
Board of Trustees determines that it is in the best interests of
the Portfolio and its shareholders to retain the security.
When-Issued and Delayed-Delivery Securities; Forward Contracts.
Each Portfolio's assets may include securities purchased on a when-
issued or delayed-delivery basis, and each Municipal Portfolio may
purchase forward contracts. Although the payment and interest
terms of these securities are established at the time the purchaser
enters into the commitment, the securities may be delivered and
paid for a month or more after the date of purchase, when their
value may have changed. A Portfolio makes such commitments only
with the intention of actually acquiring the securities, but may
sell the securities before settlement date if the Adviser deems it
advisable for investment reasons. Securities purchased in this
manner involve a risk of loss if the value of the security
purchased declines before settlement date.
<PAGE> 14
In the case of a Bond Portfolio, when-issued or delayed-delivery
securities may sometimes be purchased on a "dollar roll" basis,
meaning that the Portfolio will sell securities with a commitment
to purchase similar, but not identical, securities at a future
date. Generally, the securities are repurchased at a price lower
than the sales price. Dollar roll transactions involve the risk of
restrictions on the Portfolio's ability to repurchase the security
if the counterparty becomes insolvent; an adverse change in the
price of the security during the period of the roll or that the
value the security repurchased will be less than the security sold;
and transaction costs exceeding the return earned by the Portfolio
on the sales proceeds of the dollar roll.
Standby Commitments. To facilitate portfolio liquidity, a
Municipal Portfolio may obtain standby commitments when it
purchases Municipal Securities. A standby commitment gives the
holder the right to sell the underlying security to the seller at
an agreed-upon price on certain dates or within a specified period.
Cash Reserves and the Bond Portfolios may also invest in securities
purchased on a standby commitment basis.
Participation Interests. A Municipal Portfolio may also purchase
participation interests or certificates of participation in all or
part of specific holdings of Municipal Securities, including
municipal obligations. Some participation interests, certificates
of participation, and municipal lease obligations are illiquid and,
as such, will be subject to the Portfolio's 10% limit on
investments in illiquid securities.
Debt Securities. In pursuing its investment objective, each
Portfolio may invest in debt securities. A debt security is an
obligation of a borrower to make payments of principal and interest
to the holder of the security. To the extent a Portfolio invests
in debt securities, such holdings will be subject to interest rate
risk and credit risk. Interest rate risk is the risk that the
value of a portfolio will fluctuate in response to changes in
interest rates. Generally, the debt component of a portfolio will
tend to decrease in value when interest rates rise and increase in
value when interest rates fall. Credit risk is the risk that an
issuer will be unable to make principal and interest payments when
due. Investments in debt securities by Growth & Income Portfolio,
Balanced Portfolio, Growth Stock Portfolio, and International
Portfolio are limited to those that are within the four highest
grades (generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization or, if
unrated, deemed to be of comparable quality by the Adviser. Each
of Special Venture Portfolio, Growth Investor Portfolio, and
Special Portfolio may invest up to 35% of its net assets in debt
securities, but does not expect to invest more than 5% of net
assets in debt securities that are rated below investment grade.
Securities rated within the fourth highest grade may possess
speculative characteristics. If the rating of a security held by a
Portfolio is lost or reduced below investment grade, the Portfolio
is not required to dispose of the security--the Adviser will,
however, consider that fact in determining whether the Portfolio
should continue to hold the security. When the Adviser considers a
temporary defensive position advisable, a Portfolio may invest
without limitation in high-quality fixed income securities, or hold
assets in cash or cash equivalents.
Convertible Securities. By investing in convertible securities, a
Bond Portfolio or an Equity Portfolio obtains the right to benefit
from the capital appreciation potential in the
<PAGE> 35
underlying stock upon exercise of the conversion right, while
earning higher current income than would be available if the stock
were purchased directly. In determining
<PAGE> 15
whether to purchase a convertible, the Adviser will consider
substantially the same criteria that would be considered in
purchasing the underlying stock. Although convertible securities
are frequently rated investment grade, an Equity Portfolio also may
purchase unrated securities or securities rated below investment
grade if the securities meet the Adviser's other investment
criteria. Convertible securities rated below investment grade:
- - Tend to be more sensitive to interest rate and economic changes;
- - May be obligations of issuers who are less creditworthy than
issuers of higher quality convertible securities;
- - May be more thinly traded due to the fact that such securities
are less well known to investors than either common stock or
conventional debt securities.
As a result, the Adviser's own investment research and analysis
tend to be more important than other factors in the purchase of
such securities.
Short Sales Against the Box. Each Portfolio may sell short
securities it owns or has the right to acquire without further
consideration, a technique called selling short "against the box."
Short sales against the box may protect a Portfolio against the
risk of losses in the value of its portfolio securities because any
unrealized losses with respect to such securities should be wholly
or partly offset by a corresponding gain in the short position.
However, any potential gains in such securities should be wholly or
partially offset by a corresponding loss in the short position.
Short sales against the box may be used to lock in a profit on a
security when, for tax reasons or otherwise, the Adviser does not
want to sell the security. For a more complete explanation, please
refer to Part B, the Statement of Additional Information.
Rule 144A Securities. Each Portfolio may purchase securities that
have been privately placed but that are eligible for purchase and
sale under Rule 144A under the Securities Act of 1933 ("1933 Act").
That Rule permits certain qualified institutional buyers, such as
the Portfolios, to trade in privately placed securities that have
not been registered for sale under the 1933 Act. The Adviser,
under the supervision of the Board of Trustees, will consider
whether securities purchased under Rule 144A are illiquid and thus
subject to the restriction of investing no more than 10% (15% in
the case of an Equity Portfolio or High-Yield Municipals Portfolio)
of net assets in illiquid securities. A determination of whether a
Rule 144A security is liquid or not is a question of fact. In
making this determination, the Adviser will consider the trading
markets for the specific security, taking into account the
unregistered nature of a Rule 144A security. In addition, the
Adviser could consider the (1) frequency of trades and quotes, (2)
number of dealers and potential purchasers, (3) dealer undertakings
to make a market, and (4) nature of the security and of marketplace
trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). The
liquidity of Rule 144A securities would be monitored and if, as a
result of changed conditions, it is determined that a Rule 144A
security is no longer liquid, holdings of illiquid securities would
be reviewed to determine what, if any, steps are required to assure
that a does not invest more than 10% or 15%, as applicable, of its
assets in illiquid securities. Investing in Rule 144A securities
could have the effect of increasing the amount of a Portfolio's
assets invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. No Portfolio
expects to invest as much as 5% of its total assets in Rule 144A
securities that have not been deemed to be liquid by the Adviser.
<PAGE> 16
Private Placements. Each Municipal Portfolio may invest in
securities that are purchased in private placements (including
privately placed securities eligible for purchase and sale under
Rule 144A of the Securities Act of 1933) and, accordingly, are
subject to restrictions on resale as a matter of contract or under
federal securities laws. Because there may be relatively few
potential purchasers for such investments, especially under adverse
market or economic conditions or in the event of adverse changes in
the financial condition of the issuer, a Portfolio could find it
more difficult to sell such securities when the Adviser believes it
is advisable to do so or may be able to sell such securities only
at prices lower than if such securities were more widely held. At
times, it may also be more difficult to determine the fair value of
such securities for purposes of computing net asset value.
Tender Option Bonds; Trust Receipts. A Municipal Portfolio may
purchase tender option bonds and trust receipts. A tender option
bond is a Municipal Security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than
prevailing short-term tax-exempt rates, that has been coupled with
the agreement of a third party, such as a bank, broker-dealer or
other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to
tender their securities to the institution and receive the face
value thereof. As consideration for providing the option, the
financial institution receives periodic fees equal to the
difference between the Municipal Security's fixed coupon rate and
the rate, as determined by a remarketing or similar agent at or
near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the
date of such determination. Thus, after payment of this fee, the
security holder effectively holds a demand obligation that bears
interest at the prevailing short-term tax-exempt rate. The Adviser
will consider on an ongoing basis the creditworthiness of the
issuer of the underlying Municipal Securities, of any custodian,
and of the third-party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be
terminable in the event of a default in payment of principal or
interest on the underlying Municipal Securities and for other
reasons. A Municipal Portfolio may invest up to 10% of net assets
in tender option bonds and trust receipts.
Foreign Securities. International Portfolio invests primarily in
foreign securities and each Bond Portfolio and each other Equity
Portfolio may invest up to 25% of its total assets in foreign
securities excluding American Depositary Receipts (ADRs), foreign
debt securities denominated in U.S. dollars, and securities
guaranteed by a U.S. person. A Portfolio may invest in sponsored
or unsponsored ADRs. In addition to, or in lieu of, such direct
investment, a Portfolio may construct a synthetic foreign debt
position by (a) purchasing a debt instrument denominated in one
currency, generally U.S. dollars; and (b) concurrently entering
into a forward contract to deliver a corresponding amount of that
currency in exchange for a different currency on a future date and
at a specified rate of exchange. Because of the availability of a
variety of highly liquid U.S. dollar debt instruments, a synthetic
foreign debt position utilizing such U.S. dollar instruments may
offer greater liquidity than direct investment in foreign currency
debt instruments. In connection with the purchase of foreign
securities, a Portfolio may contract to purchase an amount of
foreign currency sufficient to pay the purchase price of the
securities at the settlement date. Such a contract involves the
risk that the value of the foreign
<PAGE> 17
currency may decline relative to the value of the dollar prior to
the settlement date--this risk is in addition to the risk that the
value of the foreign security purchased may decline. A Portfolio
also may enter into foreign currency contracts as a hedging
technique to limit or reduce its exposure to currency fluctuations.
In addition, a Portfolio may use options and futures contracts, as
described below, to limit or reduce exposure to currency
fluctuations.
Settlement Transactions. When International Portfolio enters into
a contract for the purchase or sale of a foreign portfolio
security, it usually is required to settle the purchase transaction
in the relevant foreign currency or receive the proceeds of the
sale in that currency. In either event, International Portfolio is
obliged to acquire or dispose of an appropriate amount of foreign
currency by selling or buying an equivalent amount of U.S. dollars.
At or near the time of the purchase or sale of the foreign
portfolio security, International Portfolio may wish to lock in the
U.S. dollar value of a transaction at the exchange rate or rates
then prevailing between the U.S. dollar and the currency in which
the security is denominated. Known as "transaction hedging," this
may be accomplished by purchasing or selling such foreign
securities on a "spot," or cash, basis. Transaction hedging also
may be accomplished on a forward basis, whereby International
Portfolio purchases or sells a specific amount of foreign currency,
at a price set at the time of the contract, for receipt or delivery
at either a specified date or at any time within a specified time
period. In so doing, International Portfolio will attempt to
insulate itself against possible losses and gains resulting from a
change in the relationship between the U.S. dollar and the foreign
currency during the period between the date the security is
purchased or sold and the date on which payment is made or
received. Similar transactions may be entered into by using other
currencies if International Portfolio seeks to move investments
denominated in one currency to investments denominated in another.
Currency Hedging. Most of International Portfolio's assets will
be invested in foreign securities. As a result, in addition to the
risk of change in the market value of portfolio securities, the
value of the portfolio in U.S. dollars is subject to fluctuations
in the exchange rate between the foreign currencies and the U.S.
dollar. When, in the opinion of the Adviser, it is desirable to
limit or reduce exposure in a foreign currency to moderate
potential changes in the U.S. dollar value of the portfolio,
International Portfolio may enter into a forward currency exchange
contract to sell or buy such foreign currency (or another foreign
currency that acts as a proxy for that currency)--through the
contract, the U.S. dollar value of certain underlying foreign
portfolio securities can be approximately matched by an equivalent
U.S. dollar liability. This technique is known as "currency
hedging." By locking in a rate of exchange, currency hedging is
intended to moderate or reduce the risk of change in the U.S.
dollar value of International Portfolio's portfolio only during the
period of the forward contract. Forward contracts usually are
entered into with banks and broker-dealers; are not exchange
traded; and although they are usually less than one year, may be
renewed. A default on the contract would deprive International
Portfolio of unrealized profits or force International Portfolio to
cover its commitments for purchase or sale of currency, if any, at
the current market price.
Neither type of foreign currency transaction will eliminate
fluctuations in the prices of International Portfolio's portfolio
securities or prevent loss if the price of such securities
<PAGE> 18
should decline. In addition, such forward currency exchange
contracts will diminish the benefit of the appreciation in the U.S.
dollar value of that foreign currency. (For further information on
forward foreign currency exchange transactions, see the Statement
of Additional Information.)
International Portfolio may utilize spot and forward foreign
exchange transactions to reduce the risk caused by exchange rate
fluctuations between one currency and another when securities are
purchased or sold on a when-issued basis. It may also invest in
synthetic money market instruments. International Portfolio may
invest in repurchase agreements, provided that it will not invest
more than 15% of its net assets in repurchase agreements maturing
in more than seven days and any other illiquid securities. (See
the Statement of Additional Information.)
Lending Portfolio Securities. Subject to certain restrictions,
each Bond Portfolio and each Equity Portfolio may lend portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by a Portfolio. The
Portfolio would continue to receive the equivalent of the interest
or dividends paid by the issuer on the securities loaned, and would
also receive an additional return that may be in the form of a
fixed fee or a percentage of the collateral. The Portfolio would
have the right to call the loan and obtain the securities loaned at
any time on notice of not more than five business days. In the
event of bankruptcy or other default of the borrower, the Portfolio
could experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible
decline in the value of the collateral or in the value of the
securities loaned during the period while the Portfolio seeks to
enforce its rights thereto; (b) possible subnormal levels of income
and lack of access to income during this period; and (c) expenses
of enforcing its rights. Each Portfolio may participate in an
interfund lending program, subject to certain restrictions
described in Part B.
Derivatives. Consistent with its objective, each Bond Portfolio,
each Equity Portfolio and, to a lesser extent, High-Yield
Municipals Portfolio may invest in a broad array of financial
instruments and securities, including conventional, exchange-traded
and non-exchange-traded options, futures contracts, futures
options, forward contracts, securities collateralized by underlying
pools of mortgages or other receivables, floating rate instruments,
and other instruments that securitize assets of various types
("Derivatives"). In each case, the value of the instrument or
security is "derived" from the performance of an underlying asset
or a "benchmark" such as a security index, or an interest rate. No
Portfolio expects to invest more than 5% of its net assets in any
type of Derivative except for options, futures contracts, futures
options and, in the case of International Portfolio, forward
contracts.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because they are more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or
<PAGE> 19
benchmark. In addition, correlations in the performance of an
underlying asset to a Derivative may not be well established.
Finally, privately negotiated and over-the-counter Derivatives may
not be as well regulated and may be less marketable than exchange-
traded Derivatives. For additional information on Derivatives,
please refer to Part B.
Options and Futures. In seeking to achieve its desired investment
objective, provide additional revenue, or to hedge against changes
in security prices, interest rates or currency fluctuations, each
Bond Portfolio and each Equity Portfolio may: (1) purchase and
write both call options and put options on securities, indexes and
foreign currencies; (2) enter into interest rate, index and foreign
currency futures contracts; (3) write options on such futures
contracts; and (4) purchase other types of forward or investment
contracts linked to individual securities, indexes, or other
benchmarks. High-Yield Municipals Portfolio may purchase and write
both call options and put options on securities and on indexes, and
enter into interest rate and index futures contracts and options on
such futures contracts. A Portfolio may write a call or put
option only if the option is covered. As the writer of a covered
call option, a Portfolio foregoes, during the option's life, the
opportunity to profit from increases in market value of the
security covering the call option above the sum of the premium and
the exercise price of the call. There can be no assurance that a
liquid market will exist when a Portfolio seeks to close out a
position. In addition, because futures positions may require low
margin deposits, the use of futures contracts involves a high
degree of leverage and may result in losses in excess of the amount
of the margin deposit.
Mortgage and Other Asset-Backed Debt Securities. Intermediate Bond
Portfolio and High Yield Portfolio may invest in securities secured
by mortgages or other assets such as automobile or home improvement
loans and credit card receivables. These instruments may be issued
or guaranteed by the U.S. Government or by its agencies or
instrumentalities or by private entities such as commercial,
mortgage and investment banks and financial companies or financial
subsidiaries of industrial companies. Securities issued by GNMA
represent an interest in a pool of mortgages insured by the Federal
Housing Administration or the Farmers Home Administration, or
guaranteed by the Veterans Administration. Securities issued by
FNMA and FHLMC, U.S. Government-sponsored corporations, also
represent an interest in a pool of mortgages. The timely payment
of principal and interest on GNMA securities is guaranteed by GNMA
and backed by the full faith and credit of the U.S. Treasury. FNMA
guarantees full and timely payment of interest and principal on
FNMA securities. FHLMC guarantees timely payment of interest and
ultimate collection of principal on FHLMC securities. FNMA and
FHLMC securities are not backed by the full faith and credit of the
U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. Mortgage-backed securities
provide either a pro rata interest in underlying mortgages or an
interest in collateralized mortgage obligations ("CMOs"), which
represent a right to interest and/or principal payments from an
underlying mortgage pool. CMOs are not guaranteed by either the
U.S. Government or by its agencies or instrumentalities and are
usually issued in multiple classes, each of which has different
payment rights, prepayment risks, and yield characteristics.
Mortgage-backed securities involve the risk of prepayment of the
<PAGE> 20
underlying mortgages at a faster or slower rate than the
established schedule. Prepayments generally increase with falling
interest rates and decrease with rising rates, but they also are
influenced by economic, social, and market factors. If mortgages
are prepaid during periods of declining interest rates, there would
be a resulting loss of the full-term benefit of any premium paid by
a Bond Portfolio on purchase of the securities, and the proceeds of
prepayment would likely be invested at lower interest rates. The
Bond Portfolios tend to invest in CMOs of classes known as planned
amortization classes ("PACs") which have prepayment protection
features tending to make them less susceptible to price volatility.
Non-mortgage asset-backed securities usually have less prepayment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any. Asset-
backed securities tend to experience greater price volatility than
straight debt securities.
REMICs. Each Bond Portfolio may invest in real estate mortgage
investment conduits ("REMICs"). REMICs, which were authorized
under the Tax Reform Act of 1986, are private entities formed for
the purpose of holding a fixed pool of mortgages secured by an
interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code
and invests in certain mortgages principally secured by interests
in real property. Investors may purchase beneficial interests in
REMICs, which are known as "regular" interests, or "residual"
interests. Guaranteed REMIC pass-through certificates ("REMIC
Certificates") issued by FNMA or FHLMC represent beneficial
ownership interests in a REMIC trust consisting principally of
mortgage loans or FNMA-, FHLMC- or GNMA-guaranteed mortgage pass-
through certificates. For FHLMC REMIC Certificates, FHLMC
guarantees the timely payment of interest and also guarantees the
payment of principal as payments are required to be made on the
underlying mortgage participation certificates. FNMA REMIC
Certificates are issued and guaranteed as to timely distribution
and principal and interest by FNMA.
Floating Rate Instruments. Each Bond Portfolio may also invest in
floating rate instruments which provide for periodic adjustments in
coupon interest rates that are automatically reset based on changes
in amount and direction of specified market interest rates. In
addition, the adjusted duration of some of these instruments may be
materially shorter than their stated maturities. To the extent
such instruments are subject to lifetime or periodic interest rate
caps or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted
duration is an inverse relationship between market price and
interest rates and refers to the approximate percentage change in
price for a 100 basis point change in yield. For example, if
interest rates decrease by 100 basis points, a market price of a
security with an adjusted duration of 2 would increase by
approximately 2%. No Bond Portfolio intends to invest more than 5%
of its net assets in floating rate instruments.
PIK and Zero Coupon Bonds. Each Bond Portfolio may invest up to
20% of its total assets in zero coupon bonds and bonds the interest
on which is payable in kind ("PIK bonds"). A zero coupon bond is a
bond that does not pay interest for its entire life. A PIK bond
<PAGE> 21
pays interest in the form of additional securities. The market
prices of both zero coupon and PIK bonds are affected to a greater
extent by changes in prevailing levels of interest rates and
thereby tend to be more volatile in price than securities that pay
interest periodically and in cash. In addition, because a Bond
Portfolio accrues income with respect to these securities prior to
the receipt of such interest in cash, it may have to dispose of
portfolio securities under disadvantageous circumstances in order
to obtain cash needed to pay income dividends in amounts necessary
to avoid unfavorable tax consequences.
Portfolio Turnover
- ------------------
In seeking to attain its objective, each Portfolio may sell
portfolio securities without regard to the period of time they have
been held. Further, the Adviser may purchase and sell securities
for the investment portfolio with a view to maximizing current
return, even if portfolio changes would cause the realization of
capital gains. Further, the Adviser may purchase and sell
securities for the portfolios of Income Portfolio and High Yield
Portfolio with a view to maximizing current return, even if
portfolio changes would cause the realization of capital gains.
Although the average stated maturity of the portfolio of Income
Portfolio generally will exceed ten years and the average stated
maturity of High Yield Portfolio will be from five to ten years,
the Adviser may adjust the average effective maturity of an
investment portfolio from time to time, depending on its assessment
of the relative yields available on securities of different
maturities and its expectations of future changes in interest
rates.
Although an Equity Portfolio does not purchase securities with a
view to rapid turnover, there are no limitations on the length of
time portfolio securities must be held. Flexibility of investment
and emphasis on capital appreciation may involve greater portfolio
turnover than that of mutual funds that have the objectives of
income or maintenance of a balanced investment position.
As a result, the turnover rate may vary from year to year. It may
exceed 100%, but is not expected to exceed 200% under normal market
conditions. A high rate of portfolio turnover may result in
increased transaction expenses and the realization of capital gains
(which may be taxable) or losses.
Risk Factors
- ------------
The risks inherent in Cash Reserves Portfolio or in the respective
Municipal Portfolios and Bond Portfolios depend primarily upon the
maturity and quality of the obligations in which the Portfolio
invests, as well as on market conditions. A decline in prevailing
levels of interest rates generally increases the value of
securities in which the Portfolio invests, while an increase in
rates usually reduces the value of those securities. There can be
no assurance that it will achieve its objective, nor can it assure
that payments of interest and principal on portfolio obligations
will be made when due. Generally, high-quality short-term
obligations offer lower yields and less fluctuation in value than
long-term low-quality obligations. Each Portfolio seeks to reduce
risk by investing in a diversified portfolio, but this does not
eliminate all risk.
Cash Reserves Portfolio. The policy of Cash Reserves Portfolio of
investing at least 25% of its assets in securities of issuers in
the financial services industry may cause it to be more adversely
affected by changes in market or economic conditions and other
<PAGE> 22
circumstances affecting the financial services industry. Because
Cash Reserves' investment policy permits it to invest in:
securities of foreign branches of U.S. banks (Eurodollars), U.S.
branches of foreign banks (Yankee dollars), and foreign banks and
their foreign branches, such as negotiable certificates of deposit;
securities of foreign governments; and securities of foreign
issuers, such as commercial paper and corporate notes, bonds and
debentures, investment in Cash Reserves might involve risks that
are different in some respects from an investment in a fund that
invests only in debt obligations of U.S. domestic issuers. Such
risks may include future political and economic developments; the
possible imposition of foreign withholding taxes on interest income
payable on securities held in the portfolio; possible seizure or
nationalization of foreign deposits; the possible establishment of
exchange controls; or the adoption of other foreign governmental
restrictions that might adversely affect the payment of principal
and interest on securities in the portfolio. Additionally, there
may be less public information available about foreign banks and
their branches. Foreign banks and foreign branches of foreign
banks are not regulated by U.S. banking authorities, and generally
are not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
Municipal Portfolios. Municipal Money Portfolio is designed for
investors who seek little or no fluctuation in portfolio value.
High-Yield Municipals Portfolio is designed for investors who seek
a high level of tax-exempt income and who can accept still greater
fluctuation in portfolio value and other risks, such as increased
credit risk, associated with medium- and lower-quality long-term
Municipal Securities.
Although each Municipal Portfolio currently limits its investments
in Municipal Securities to those the interest on which is exempt
from the regular federal income tax, it may invest up to 100% of
its total assets in Municipal Securities the interest on which is
subject to the federal alternative minimum tax. A Municipal
Portfolio may invest 25% or more of its assets in Municipal
Securities that are related in such a way that an economic,
business, or political development affecting one such security
could also affect the other securities. For example, Municipal
Securities the interest upon which is paid from revenues of
similar-type projects, such as hospitals, utilities, or housing,
would be so related. A Municipal Portfolio may invest 25% or more
of its assets in industrial development bonds (subject to the
concentration restrictions described in this Part A under
Investment Restrictions and in Part B). Assets of a Municipal
Portfolio that are not invested in Municipal Securities may be held
in cash or invested in short-term taxable investments. /5/
High-Yield Municipals Portfolio may purchase high-yield Municipal
Securities, commonly referred to as "junk bonds," which are
Municipal Securities rated lower than investment grade. Although
high-yield Municipal Securities generally offer higher yields than
investment grade Municipal Securities with comparable maturities,
high-yield Municipal Securities involve greater risks and their
total return and yield can be expected to fluctuate more than those
of investment grade Municipal Securities. High-yield Municipal
Securities are regarded as predominantly speculative with respect
to the issuer's continuing ability to meet principal and interest
payments, and are also subject to the risks associated with
substantial market-price volatility resulting from
- ---------
/5/ The policy expressed in this sentence is a fundamental policy
of Municipal Money Portfolio.
- ---------
<PAGE> 23
changes in interest rates and economic conditions, as well as the
possibility of default or bankruptcy. A real or perceived economic
downturn or higher interest rates could cause a decline in the
price of high-yield Municipal Securities. Some additional risks
include the possibility that the Portfolio's interest in a high-
yield Municipal Security could be subordinated to the prior claims
of other creditors, and the tax or other advantages of high-yield
Municipal Securities could be limited or restricted by Congress.
High-yield Municipal Securities are thinly traded and can be more
difficult to sell and value accurately than high-quality Municipal
Securities. Successful investment in high-yield Municipal
Securities involves greater investment risk and is highly dependent
on the Adviser's credit analysis. Because reliable objective
pricing data may not be readily available, the Adviser's judgment
may play a greater role in the valuation process.
Bond Portfolios. Intermediate Bond Portfolio is appropriate for
investors who seek high income with less net asset value
fluctuation from interest rate changes than that of a longer-term
mutual fund, and who can accept greater levels of credit and other
risks associated with securities that are rated below investment
grade. Income Portfolio and High Yield Portfolio are designed for
investors who seek a higher level of income and who can accept
greater levels of credit and other risks associated with securities
of medium or lower quality. Although both Income Portfolio and
High Yield Portfolio invest in medium- and lower-quality debt
securities, High Yield Portfolio is designed for investors who can
accept the heightened level of risk and principal fluctuation which
might result from a portfolio that invests at least 65% of its
assets in medium- and lower-quality debt securities, while Income
Portfolio, which invests up to 60% of its assets in high- and
medium-quality bonds, can invest only up to 40% of its assets in
such securities.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. The Bond Portfolios seek to reduce
investment risk through diversification, credit analysis, and
evaluation of developments in both the economy and financial
markets.
An economic downturn could severely disrupt the high-yield market
and adversely affect the value of outstanding bonds and the ability
of the issuers to repay principal and interest. In addition,
lower-quality bonds are less sensitive to interest rate changes
than higher-quality instruments and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of
rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the investment objective will be more dependent on
the Adviser's credit analysis than would be the case if a Bond
Portfolio were investing in higher-quality debt securities. Since
the ratings of rating services (which evaluate the safety of
principal and interest payments, not market risks) are used only as
preliminary indicators of investment quality, the Adviser employs
its own credit research and analysis, from which it has developed a
proprietary credit rating system based upon comparative credit
analyses of issuers within the same industry. These analyses may
take into consideration such quantitative factors as an issuer's
present and potential liquidity, profitability, internal capability
to generate funds, debt/equity ratio and debt servicing
capabilities,
<PAGE> 24
and such qualitative factors as an assessment of management,
industry characteristics, accounting methodology, and foreign
business exposure.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and a Portfolio may have greater difficulty selling
its portfolio securities. The market value of these securities and
their liquidity may be affected by adverse publicity and investor
perceptions.
Equity Portfolios. Although an Equity Portfolio seeks to reduce
risk by investing in a diversified portfolio, diversification does
not eliminate all risk. An Equity Portfolio will not, however,
invest more than 25% of the total value of its assets (at the time
of investment) in the securities of companies in any one industry.
Balanced Portfolio is designed for long-term investors who can
accept the fluctuations in portfolio value and other risks
associated with seeking long-term capital appreciation through
investments in securities. Growth & Income Portfolio is designed
for long-term investors who desire to participate in the stock
market with moderate investment risk while seeking to limit market
volatility. Growth Stock Portfolio and Special Portfolio are
designed for long-term investors who desire to participate in the
stock market with more investment risk and volatility than the
stock market in general, but with less investment risk and
volatility than aggressive capital appreciation Portfolios. Growth
Investor Portfolio is designed for long-term investors who desire
to participate in the stock market and places an emphasis on
companies that appeal to young investors. These investors can
accept more investment risk and volatility than the stock market in
general but want less investment risk and volatility than
aggressive capital appreciation funds; by investing in companies
whose products or services appeal to young investors, the Portfolio
emphasizes various consumer goods sectors. Special Venture
Portfolio is designed for long-term investors who want greater
return potential than is available from the stock market in
general, and who are willing to tolerate the greater investment
risk and market volatility associated with investments in small and
medium-sized companies. International Portfolio is intended for
long-term investors who can accept the risks entailed in investing
in foreign securities. Of course, there can be no guarantee that a
Portfolio will achieve its objective.
Debt securities rated in the fourth highest grade may have some
speculative characteristics, and changes in economic conditions or
other circumstances may lead to a weakened capacity of the issuers
of such securities to make principal and interest payments.
Securities rated below investment grade may possess speculative
characteristics, and changes in economic conditions are more likely
to affect the issuer's capacity to pay interest or repay principal.
Foreign Investing. Non-U.S. investments may be attractive because
they increase diversification, as compared to a portfolio comprised
solely of U.S. investments. In addition, many foreign economies
have, from time to time, grown faster than the U.S. economy, and
the returns on investments in these countries have exceeded those
of similar U.S. investments--there can be no assurance, however,
that these conditions will continue.
<PAGE> 25
International diversification also allows International Portfolio
and an investor to take advantage of changes in foreign economies
and market conditions.
Investors should understand and consider carefully the greater
risks involved in foreign investing. Investing in foreign
securities--positions which are generally denominated in foreign
currencies--and utilization of forward foreign currency exchange
contracts involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in exchange
rates of foreign currencies; possible imposition of exchange
control regulations or currency restrictions that would prevent
cash from being brought back to the United States; less public
information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in the securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements. These risks are greater for emerging market
countries.
Although a Portfolio will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory taxation,
seizure or nationalization of foreign bank deposits or other
assets, establishment of exchange controls, the adoption of foreign
government restrictions, and other adverse political, social or
diplomatic developments that could adversely affect investment in
these nations. The price of securities of small, rapidly growing
companies is expected to fluctuate more widely than the general
market due to the difficulty in assessing financial prospects of
companies developing new products or operating in countries with
developing markets.
The strategy for selecting investments will be based on various
criteria. A company proposed for investment should have a good
market position in a fast-growing segment of the economy, strong
management, preferably a leading position in its business,
prospects of superior financial returns, ability to self-finance,
and securities available for purchase at a reasonable market
valuation. Because of the foreign domicile of such companies,
however, information on some of the above factors may be difficult,
if not impossible, to obtain.
To the extent portfolio securities are issued by foreign issuers or
denominated in foreign currencies, investment performance is
affected by the strength or weakness of the U.S. dollar against
these currencies. If the dollar falls relative to the Japanese
yen, for example, the dollar value of a yen-denominated stock held
in the portfolio will rise even though the price of the stock
remains unchanged. Conversely, if the dollar rises in value
relative to the yen, the dollar value of the yen-denominated stock
will fall.
Investment Restrictions
- -----------------------
No Portfolio may invest more than 5% of its assets in the
securities of any one issuer. This restriction applies only to 75%
of its investment portfolio, but does not apply to securities of
the U.S. Government or repurchase agreements for such securities
(in the case
<PAGE> 26
of a Municipal Portfolio, guarantees or letters of credit of a
single guarantor may exceed this limit). /6/
No Portfolio may (1) invest 25% or more of its total assets in the
securities of non-governmental issuers whose principal business
activities are in the same industry, except that Cash Reserves
Portfolio may invest at least 25% of its assets in securities of
issuers in the financial services industry; (2) acquire more than
10% of the outstanding voting securities of any one issuer; or (3)
make loans, except that it may (a) purchase money market
instruments and enter into repurchase agreements; (b) acquire
publicly distributed or privately placed debt securities; (c)
participate in an interfund lending program with other Stein Roe
Funds; and (d) in the case of each Bond and Equity Portfolio, lend
its portfolio securities under certain conditions. No Portfolio
may borrow money, except for nonleveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither a Portfolio's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate loans
at any one time may exceed 33 1/3% of the value of its total
assets. Additional securities may not be purchased when
borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
The policies summarized in this section are fundamental policies of
each Portfolio and, as such, can be changed only with the approval
of a "majority of the outstanding voting securities" as defined in
the Investment Company Act of 1940. Each Portfolio's objective is
nonfundamental and, as such, may be changed by the Board of
Trustees without shareholder approval. Investors will be notified
of any material change in such policies. All of the investment
restrictions are set forth in Part B, the Statement of Additional
Information.
Nothing in the investment restrictions outlined here shall be
deemed to prohibit International Portfolio from purchasing the
securities of any issuer pursuant to the exercise of subscription
rights distributed to International Portfolio by the issuer. No
such purchase may be made if, as a result, International Portfolio
will no longer be a diversified investment company as defined in
the Investment Company Act of 1940 or if International Portfolio
will fail to meet the diversification requirements of the Internal
Revenue Code of 1986, as amended (the "Code").
Item 5. Management of Base Trust.
Trustees
- --------
The Board of Trustees of Base Trust has overall management
responsibility for the Trust and each Portfolio. See Part B for
the names of and other information about the trustees and officers.
- -------
/6/ Notwithstanding the foregoing, and in accordance with Rule 2a-7
of the Investment Company Act of 1940 (the "Rule"), Cash Reserves
Portfolo and Municipal Money Portfolio will not, immediately after
the acquisition of any security (other than a Government Security
or certain other securities as permitted under the Rule), invest
more than 5% of its total assets in the securities of any one
issuer; provided, however, that each may invest up to 25% of its
total assets in First Tier Securities (as that term is defined in
the Rule) of a single issuer for a period of up to three business
days after the purchase thereof.
- -------
<PAGE> 27
Adviser
- -------
Base Trust has retained the services of Stein Roe & Farnham
Incorporated (the "Adviser"), One South Wacker Drive, Chicago,
Illinois 60606, as investment adviser and administrator of each
Portfolio. The Adviser is responsible for the investment
management and administration of each Portfolio, subject to the
direction of the Board. The Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940. The Adviser was
organized in 1986 to succeed to the business of Stein Roe &
Farnham, a partnership that had advised and managed mutual funds
since 1949. The Adviser is a wholly owned indirect subsidiary of
Liberty Mutual Insurance Company ("Liberty Mutual").
Investor Services
- -----------------
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned indirect subsidiary of Liberty
Mutual, pursuant to a separate service agreement, also provides
certain investor accounting and recordkeeping services for each
Portfolio.
Portfolio Managers
- ------------------
Jane M. Naeseth has been manager of Cash Reserves Portfolio since
its inception in February 1998. She is a senior vice president of
the Adviser.
<.R>
Veronica M. Wallace has been manager of Municipal Money Portfolio
since September 1995. Ms. Wallace was formerly a trader in taxable
money market instruments for the Adviser.
M. Jane McCart has been manager of High-Yield Municipals Portfolio
since its inception in February 1998. Ms. McCart is a senior vice
president of the Adviser.
Michael T. Kennedy has been manager of Intermediate Bond Portfolio
since its inception in February 1998. He is a senior vice
president of the Adviser.
Stephen F. Lockman has been manager of High Yield Portfolio since
March 1997 (he had previously been associate manager since its
inception in 1996) and of Income Portfolio since its inception in
February 1998. Mr. Lockman is a senior vice president of the
Adviser and has been employed by the Adviser since January 1994.
He served as a portfolio manager for the Illinois State Board of
Investment from 1987 to 1994.
Erik P. Gustafson and David P. Brady have been co-managers of
Growth Investor Portfolio since its inception in 1997. Mr.
Gustafson is a senior vice president of the Adviser and Mr. Brady
is a vice president of the Adviser.
Growth Stock Portfolio has been managed by Mr. Gustafson since its
inception in 1997.
Daniel K. Cantor has been manager of Growth & Income Portfolio
since its inception in 1997. He is a senior vice president of the
Adviser.
Harvey B. Hirschhorn has been manager of Balanced Portfolio since
its inception in 1997. He is executive vice president and chief
economist and investment strategist of the Adviser.
<PAGE> 28
Richard B. Peterson has been co-manager of Special Venture
Portfolio since its inception in 1997. He is a senior vice
president of the Adviser. John S. McLandsborough has been has co-
manager since July 1997. Prior to joining the Adviser in April
1996, Mr. McLandsborough was an equity research analyst with CS
First Boston from June 1994 until January 1996 and with National
City Bank of Cleveland prior thereto.
M. Gerard Sandel has been manager of Special Portfolio and senior
vice president of the Adviser since July 1997. Prior to joining
the Adviser, Mr. Sandel was portfolio manager of the Marshall Mid-
Cap Value Fund and its predecessor fund and vice president of M&I
Investment Management Corporation since October 1993. Prior
thereto, Mr. Sandel was vice president of Acorn Asset Management
Corporation.
Bruno Bertocci and David P. Harris have been co-managers of
International Portfolio since its inception in 1997. They joined
the Adviser in 1995 as senior vice president and vice president,
respectively. Messrs. Bertocci and Harris are also employed by
Colonial Management Associates, Inc., a subsidiary of Liberty
Financial, as vice presidents, effective January, 1996. Prior to
joining the Adviser, Messrs. Bertocci and Harris were senior
global equity portfolio manager and portfolio manager,
respectively, with Rockefeller & Co.
Fees and Expenses
- -----------------
In return for its services, the Adviser receives a monthly fee from
each Portfolio, computed and accrued daily. The annualized rates
of fees are as follows:
Annual Management Fee
Portfolio (as a percentage of average net assets)
- ------------------------- --------------------------------------
Cash Reserves Portfolio 0.25% up to $500 million,
0.225% thereafter
Municipal Money Portfolio 0.25%
High-Yield Municipals
Portfolio 0.45% up to $100 million,
0.425% next $100 million,
0.40% thereafter
Intermediate Bond Portfolio 0.350%
Income Portfolio 0.50% up to $100 million,
0.475% thereafter
High Yield Portfolio 0.50% up to $500 million,
0.475% thereafter
Balanced Portfolio 0.55% up to $500 million,
0.50% next $500 million,
0.45% thereafter
Growth & Income Portfolio 0.60% up to $500 million,
0.55% next $500 million,
0.50% thereafter
Growth Stock Portfolio 0.60% up to $500 million,
0.55% next $500 million,
0.50% thereafter
Growth Investor Portfolio 0.60% up to $500 million,
0.55% next $500 million,
0.50% thereafter
Special Portfolio 0.75% up to $500 million,
0.70% next $500 million,
0.65% next $500 million,
0.60% thereafter
Special Venture Portfolio 0.75%
International Portfolio 0.85%
Under a separate agreement with Base Trust, the Adviser provides
certain accounting and bookkeeping services to each Portfolio,
including computation of net asset value and calculation of net
income and capital gains and losses on disposition of assets.
<PAGE> 29
Portfolio Transactions
- ----------------------
The Adviser places the orders for the purchase and sale of
portfolio securities and any options and futures transactions. In
doing so, the Adviser seeks to obtain the best combination of price
and execution, which involves a number of judgmental factors.
Custodian
- ---------
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02101, is the custodian for each Portfolio.
Item 5A. Management's Discussion of Fund Performance.
A response to Item 5A has been omitted pursuant to paragraph 4 of
Instruction F of the General Instructions to Form N-1A.
Item 6. Capital Stock and Other Securities.
Investments in Base Trust have no preemptive or conversion rights
and are fully paid and nonassessable, except as set forth below.
Base Trust is not required to hold annual meetings of investors,
and has no current intention to do so, but Base Trust will hold
special meetings of investors when, in the judgment of the
trustees, it is necessary or desirable to submit matters for an
investor vote. Changes in fundamental policies will be submitted
to investors for approval. An investors' meeting will be held upon
the written, specific request to the trustees of investors holding
in the aggregate not less than 10% of the Interests in a series.
Investors have under certain circumstances (e.g., upon application
and submission of certain specified documents to the trustees by a
specified number of shareholders) the right to communicate with
other investors in connection with requesting a meeting of
investors for the purpose of removing one or more trustees.
Investors also have the right to remove one or more trustees
without a meeting by a declaration in writing by a specified number
of investors. Upon liquidation of Base Trust or a series thereof,
investors would be entitled to share pro rata in the net assets
available for distribution to investors (unless another sharing
method is required for federal income tax reasons, in accordance
with the sharing method adopted by the trustees).
Base Trust reserves the right to create and issue a number of
series, in which case investors in each series would participate
solely in the earnings, dividends, and assets of the particular
series. Interests in any series of Base Trust may be divided into
two or more classes of Interests having such preferences or special
or relative rights or privileges as the trustees of Base Trust may
determine. Currently, Base Trust has nine series, each with only
one class.
Base Trust is organized as a common law trust under the laws of the
Commonwealth of Massachusetts. Under the Declaration of Trust, the
trustees are authorized to issue Interests in Base Trust. Each
investor in a series is entitled to vote in proportion to the
amount of its investment in the series. Investments in Base Trust
may not be transferred, but an investor may withdraw all or a
portion of his investment at any time at net asset value.
Investors in any series of Base Trust (e.g., investment companies,
insurance company separate accounts, and common and commingled
trust funds or similar
<PAGE> 30
organizations or entities that are "accredited investors" within
the meaning of Regulation D under the 1933 Act) may be held
personally, jointly and severally liable for all obligations of
that series of Base Trust. However, the risk of an investor in a
series incurring financial loss on account of such liability is
limited to circumstances in which both inadequate insurance exists
and Base Trust itself is unable to meet its obligations.
It is intended that the assets, income, and distributions will be
managed in such a way that an investor in a series will be able to
satisfy the requirements of Subchapter M of the Code for
qualification as a regulated investment company, assuming that the
investor invested all of its assets in the series.
The net income of a series of Base Trust shall consist of (1) all
income accrued less the amortization of any premium, on the assets
of the series, less (2) all actual and any accrued expenses of the
series determined in accordance with generally accepted accounting
principles. Income includes discount earned (including both
original issue and, by election, market discount) on discount paper
accrued ratably to the date of maturity and any net realized gains
or losses on the assets of the series. All of the net income of a
series is allocated among the investors in the series in accordance
with their Interests (unless another sharing method is required for
federal income tax reasons, in accordance with the sharing method
adopted by the trustees).
Under the anticipated method of operation of Base Trust, the Trust
will not be subject to any federal income tax. However, each
investor in a series of Base Trust will be taxed on its share (as
determined in accordance with the governing instruments of Base
Trust) of the series' ordinary income and capital gain in
determining its income tax liability. The determination of such
share will be made in accordance with an allocation method designed
to satisfy the Code and regulations promulgated thereunder.
Distributions of net income and capital gain are to be made pro
rata to investors in accordance with their investment in a
Portfolio. For federal income tax purposes, however, income, gain,
or loss may be allocated in a manner other than pro rata, if
necessary to reflect gains or losses properly allocable to fewer
than all investors as a result of contributions of securities to a
series or redemptions of portions of an investor's unrealized gain
or loss in series assets.
Item 7. Purchase of Securities.
Interests in a Portfolio are issued solely in private placement
transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in a
Portfolio may be made only by investment companies, insurance
company separate accounts, common or commingled trust funds, or
similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell or the
solicitation of any offer to buy any "security" within the meaning
of the 1933 Act.
An investment in a Portfolio may be made without a sales load. All
investments are made at net asset value next determined if an order
is received by SteinRoe Services Inc., the Portfolios' investor
accounting and recordkeeping agent, by the designated cutoff time.
The net asset value of each Portfolio is determined as of the close
of trading on the New York Stock Exchange ("NYSE") (currently 3:00
p.m., central time) every day
<PAGE> 31
the NYSE is open for trading ("business day"); the net asset value
of Cash Reserves Portfolio is also determined at 11:00 a.m.,
central time, on any such day. If trading is closed prior to 3:00
p.m., central time, solely in response to market conditions, the
net asset value will be determined at 3:00 p.m., central time,
unless, in the judgment of the Board of Trustees, the net asset
value should be determined at an earlier time. Net asset value is
determined by dividing the difference between the values of the
Portfolio's assets and liabilities by the number of shares
outstanding. Net asset value will not be determined on days when
the NYSE is closed unless, in the judgment of the Board of
Trustees, the net asset value should be determined on any such day,
in which case the determination will be made at 3:00 p.m., central
time.
The valuation of portfolio securities of Municipal Money Portfolio
and Cash Reserves Portfolio is based on their amortized cost,
which does not take into account unrealized gains or losses, in an
attempt to maintain its net asset value at $1.00 per share. The
extent of any deviation between the Portfolio's net asset value
based upon market quotations or equivalents and $1.00 per share
based on amortized cost will be examined by the Board of Trustees.
If such deviation were to exceed 1/2 of 1%, the Board would
consider what action, if any, should be taken, including selling
portfolio instruments, increasing, reducing or suspending
distributions, or redeeming shares in kind. Other assets and
securities of the Portfolio for which this valuation method does
not produce a fair value are valued at a fair value determined by
the Board.
Securities held by High-Yield Municipals Portfolio are valued based
on valuations provided by a pricing service. These valuations are
reviewed by the Adviser. If the Adviser believes that a valuation
received from the service does not represent a fair value, it
values the obligation by a method that the Board of Trustees
believes will determine a fair value. The Board may approve the
use of another pricing service and any pricing service used may
employ electronic data processing techniques, including a so-called
"matrix" system, to determine valuations. Other assets and
securities are valued by a method that the Board believes will
determine a fair value.
For a Bond Portfolio, securities for which market quotations are
readily available at the time of valuation are valued on that
basis. Long-term straight-debt securities for which market
quotations are not readily available are valued at a fair value
based on valuations provided by pricing services approved by the
Board, which may employ electronic data processing techniques,
including a matrix system, to determine valuations. Short-term
debt securities with remaining maturities of 60 days or less are
valued at their amortized cost, which does not take into account
unrealized gains or losses. The Board believes that the amortized
cost represents a fair value for such securities. Short-term debt
securities with remaining maturities of more than 60 days for which
market quotations are not readily available are valued by use of a
matrix prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by a Bond Portfolio
for which these valuation methods do not produce a fair value are
valued by a method that the Board believes will determine a fair
value.
For each Equity Portfolio other than International Portfolio, each
security traded on a national stock exchange is valued at its last
sale price on that exchange on the day of valuation or, if there
are no sales that day, at the latest bid quotation. Each over-the-
counter security for which the last sale price on the day of
valuation is available from
<PAGE> 32
Nasdaq is valued at that price. All other over-the-counter
securities for which reliable quotations are available are valued
at the latest bid quotation.
In computing the net asset value of International Portfolio, the
values of portfolio securities are generally based upon market
quotations. Depending upon local convention or regulation, these
market quotations may be the last sale price, last bid or asked
price, or the mean between the last bid and asked prices as of, in
each case, the close of the appropriate exchange or other
designated time. Trading in securities on European and Far Eastern
securities exchanges and over-the-counter markets is normally
completed at various times before the close of business on each day
on which the NYSE is open. Trading of these securities may not
take place on every NYSE business day. In addition, trading may
take place in various foreign markets on Saturdays or on other days
when the NYSE is not open and on which International Portfolio's
net asset value is not calculated. Therefore, such calculation
does not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such calculation
and the value of International Portfolio's portfolio may be
significantly affected on days when shares of International
Portfolio may not be purchased or redeemed.
Each investor in a Portfolio may add to or reduce its investment in
the Portfolio on each business day. The investor's percentage of
the aggregate Interests in the Portfolio will be computed as the
percentage equal to the fraction (1) the numerator of which is the
beginning of the day value of such investor's investment in the
Portfolio, on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (2) the
denominator of which is the aggregate beginning of the day net
asset value of the Portfolio on such day plus or minus, as the case
may be, the amount of the net additions to or withdrawals from the
aggregate investments in the Portfolio by all investors in the
Portfolio. The percentage so determined will then be applied to
determine the value of the investor's Interest in the Portfolio as
of the close of business.
There is no minimum initial or subsequent investment in a
Portfolio.
Each Portfolio and SteinRoe Services Inc. reserve the right to
cease accepting investments at any time or to reject any investment
order.
Item 8. Redemption or Repurchase.
An investor in a Portfolio may redeem all or any portion of its
investment at the next determined net asset value if a withdrawal
request in proper form is furnished by the investor to SteinRoe
Services Inc., the Portfolios' investor accounting agent, by the
designated cutoff time. The proceeds of a withdrawal will be paid
by the Portfolio in federal funds normally on the business day the
withdrawal is effected, but in any event within seven days.
Investments in a Portfolio may not be transferred.
The right of any investor to receive payment with respect to any
withdrawal may be suspended or the payment of the withdrawal
proceeds postponed during any period in which the NYSE is closed
(other than weekends or holidays) or trading on the NYSE is
restricted, or, to the extent otherwise permitted by the Investment
Company Act of 1940 if an emergency exists.
<PAGE> 33
Item 9. Pending Legal Proceedings.
Not applicable.
<PAGE> 34
PART B
Item 10. Cover Page.
SR&F BASE TRUST
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
800-338-2550
Statement of Additional Information Dated December 8, 1997
This Statement of Additional Information is not a prospectus but
provides additional information that should be read in conjunction
with the prospectus contained in Part A of this Registration
Statement, which may be obtained at no charge by telephoning 800-
338-2550.
Item 11. Table of Contents.
Item 12. General Information and History......................34
Item 13. Investment Objective and Policies....................34
Item 14. Management of Base Trust.............................62
Item 15. Control Persons and Principal Holders of Securities..64
Item 16. Investment Management and Administrative Services....65
Item 17. Brokerage Allocation and Other Practices.............67
Item 18. Capital Stock and Other Securities...................69
Item 19. Purchase, Redemption, and Pricing of Securities......71
Item 20. Tax Status...........................................73
Item 21. Underwriters.........................................76
Item 22. Calculation of Performance Data......................76
Item 23. Financial Statements.................................76
Glossary.......................................................76
Appendix.......................................................78
Item 12. General Information and History.
Not applicable.
Item 13. Investment Objectives and Policies.
The basic investment policies and strategies of each Portfolio are
described in Part A, Item 4. The following supplements the
information contained in Part A regarding certain miscellaneous
investment practices in which a Portfolio may engage and the risks
associated therewith.
AMT Securities. Although each Municipal Portfolio currently limits
its investments in Municipal Securities to those the interest on
which is exempt from the regular federal income tax, it may invest
100% of its total assets in Municipal Securities the interest on
which is subject to the federal alternative minimum tax ("AMT").
Convertible Securities. By investing in convertible securities, a
Bond Portfolio or an Equity Portfolio obtains the right to benefit
from the capital appreciation potential in the
<PAGE> 35
underlying stock upon exercise of the conversion right, while
earning higher current income than would be available if the stock
were purchased directly. In determining whether to purchase a
convertible, the Adviser will consider substantially the same
criteria that would be considered in purchasing the underlying
stock. While convertible securities purchased by a Portfolio are
frequently rated investment grade, a Portfolio may purchase unrated
securities or securities rated below investment grade if the
securities meet the Adviser's other investment criteria.
Convertible securities rated below investment grade (a) tend to be
more sensitive to interest rate and economic changes, (b) may be
obligations of issuers who are less creditworthy than issuers of
higher quality convertible securities, and (c) may be more thinly
traded due to such securities being less well known to investors
than either common stock or conventional debt securities. As a
result, the Adviser's own investment research and analysis tend to
be more important in the purchase of such securities than other
factors.
Debt Securities. In pursuing its investment objective, each
Portfolio may invest in debt securities of corporate and
governmental issuers. The risks inherent in debt securities depend
primarily on the term and quality of the obligations in the
investment portfolio as well as on market conditions. A decline in
the prevailing levels of interest rates generally increases the
value of debt securities, while an increase in rates usually
reduces the value of those securities.
Investments in debt securities by Growth & Income Portfolio,
Balanced Portfolio, Growth Stock Portfolio, and International
Portfolio are limited to those that are within the four highest
grades (generally referred to as "investment grade") assigned by a
nationally recognized statistical rating organization or, if
unrated, deemed to be of comparable quality by the Adviser. Each
of Special Venture Portfolio, Growth Investor Portfolio, and
Special Portfolio may invest up to 35% of its net assets in debt
securities, but does not expect to invest more than 5% of net
assets in debt securities that are rated below investment grade.
Securities in the fourth highest grade may possess speculative
characteristics, and changes in economic conditions are more likely
to affect the issuer's capacity to pay interest and repay
principal. If the rating of a security held by a Portfolio is lost
or reduced below investment grade, the Portfolio is not required to
dispose of the security, but the Adviser will consider that fact in
determining whether that Portfolio should continue to hold the
security.
Securities that are rated below investment grade are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and therefore carry greater investment risk, including
the possibility of issuer default and bankruptcy.
Defensive Investments. When the Adviser considers a temporary
defensive position advisable, each Bond Portfolio and each Equity
Portfolio may invest, without limitation, in high-quality fixed
income securities or hold assets in cash or cash equivalents.
Derivatives. Consistent with its objective, each Bond Portfolio,
each Equity Portfolio and, to a lesser extent, High-Yield
Municipals Portfolio may invest in a broad array of financial
instruments and securities, such as conventional exchange-traded
and non-exchange-
<PAGE> 36
traded options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other
receivables, floating rate instruments, and other instruments that
securitize assets of various types ("Derivatives"). In each case,
the value of the instrument or security is "derived" from the
performance of an underlying asset or a "benchmark" such as a
security index, an interest rate, or a currency.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment that cannot be
readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an effort
to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less marketable
than exchange-traded Derivatives.
No Bond Portfolio intends to invest more than 5% of its assets in
any type of Derivative. No Equity Portfolio currently intends to
invest more than 5% of its net assets in any type of Derivative,
except for options, futures contracts, futures options, and, in the
case of International Portfolio, forward contracts. (See Options
and Futures below.)
Some mortgage-backed debt securities are of the "modified pass-
through type," which means the interest and principal payments on
mortgages in the pool are "passed through" to investors. During
periods of declining interest rates, there is increased likelihood
that mortgages will be prepaid, with a resulting loss of the full-
term benefit of any premium paid by a Portfolio on purchase of such
securities; in addition, the proceeds of prepayment would likely be
invested at lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs") that represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities, and are usually issued in multiple classes each
of which has different payment rights, prepayment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
prepayment on the underlying mortgages at a faster or slower rate
than the established schedule. Prepayments generally increase with
falling interest rates and decrease with rising rates but they also
are influenced by economic, social, and market factors. If
mortgages are prepaid during periods of declining interest rates,
there would be a resulting loss of the full-term benefit of any
premium paid by a Portfolio on purchase of the CMO, and the
proceeds of prepayment would likely be invested at lower interest
rates.
Non-mortgage asset-backed securities usually have less prepayment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans that finance payments on the securities
themselves.
<PAGE> 37
Floating rate instruments provide for periodic adjustments in
coupon interest rates that are automatically reset based on changes
in amount and direction of specified market interest rates. In
addition, the adjusted duration of some of these instruments may be
materially shorter than their stated maturities. To the extent
such instruments are subject to lifetime or periodic interest rate
caps or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted
duration is an inverse relationship between market price and
interest rates and refers to the approximate percentage change in
price for a 100 basis point change in yield. For example, if
interest rates decrease by 100 basis points, a market price of a
security with an adjusted duration of 2 would increase by
approximately 2%.
Interfund Borrowing and Lending Program. Pursuant to an exemptive
order issued by the Securities and Exchange Commission, each
Portfolio has received permission to lend money to, and borrow
money from, other mutual funds advised by the Adviser. A Portfolio
will borrow through the program when borrowing is necessary and
appropriate and the costs are equal to or lower than the costs of
bank loans.
Lending of Portfolio Securities. Subject to the restriction on
lending under Investment Restrictions in this Part B, each Bond
Portfolio and each Equity Portfolio may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by a Portfolio. Cash
collateral for securities loaned will be invested in liquid high-
grade debt securities. A Portfolio would continue to receive the
equivalent of the interest or dividends paid by the issuer on the
securities loaned, and would also receive an additional return that
may be in the form of a fixed fee or a percentage of the
collateral. A Portfolio would have the right to call the loan and
obtain the securities loaned at any time on notice of not more than
five business days. A Portfolio would not have the right to vote
the securities during the existence of the loan but would call the
loan to permit voting of the securities if, in the Adviser's
judgment, a material event requiring a shareholder vote would
otherwise occur before the loan was repaid. In the event of
bankruptcy or other default of the borrower, a Portfolio could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses, including (a) possible
decline in the value of the collateral or in the value of the
securities loaned during the period while the Portfolio seeks to
enforce its rights thereto, (b) possible subnormal levels of income
and lack of access to income during this period, and (c) expenses
of enforcing its rights.
Line of Credit. Subject to its restriction on borrowing under
Investment Restrictions, each Portfolio may establish and maintain
a line of credit with a major bank in order to permit borrowing on
a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to
liquidation of portfolio securities.
Participation Interests. Each Municipal Portfolio may purchase
participation interests in all or part of specific holdings of
Municipal Securities, but does not intend to do so unless the tax-
exempt status of those participation interests or certificates of
participation is confirmed to the satisfaction of the Board of
Trustees, which may include consideration of an opinion of counsel
as to the tax-exempt status. Each participation interest
<PAGE> 38
would meet the prescribed quality standards of the Portfolio or be
backed by an irrevocable letter of credit or guarantee of a bank
that meets the prescribed quality standards of the Portfolio. Some
participation interests are illiquid securities.
Each Municipal Portfolio may also purchase participations in lease
obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal
authorities or entities. Although lease obligations do not
constitute general obligations of the municipality for which the
municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for,
appropriate, and make the payments due under the lease obligation.
However, certain lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to
make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In
addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet
developed the depth of marketability associated with more
conventional bonds. Although "non-appropriation" lease obligations
are secured by leased property, disposition of the property in the
event of foreclosure might prove difficult. The Portfolio will
seek to minimize these risks by investing primarily in those "non-
appropriation" lease obligations where (1) the nature of the leased
equipment or property is such that its ownership or use is
essential to a governmental function of the municipality, (2) the
lease obligor has maintained good market acceptability in the past,
(3) the investment is of a size that will be attractive to
institutional investors, and (4) the underlying leased equipment
has elements of portability and/or use that enhance its
marketability in the event foreclosure on the underlying equipment
were ever required.
The Board of Trustees has delegated to the Adviser the
responsibility to determine the credit quality of participation
interests. The determinations concerning the liquidity and
appropriate valuation of a municipal lease obligation, as with any
other municipal security, are made based on all relevant factors.
These factors may include, among others: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers
willing to purchase or sell the security and the number of other
potential buyers; (3) the willingness of dealers to undertake to
make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of
transfer.
PIK and Zero Coupon Bonds. Each Bond Portfolio may invest up to
20% of its assets in zero coupon bonds and bonds the interest on
which is payable in kind ("PIK bonds"). A zero coupon bond is a
bond that does not pay interest for its entire life. A PIK bond
pays interest in the form of additional securities. The market
prices of both zero coupon and PIK bonds are affected to a greater
extent by changes in prevailing levels of interest rates and
thereby tend to be more volatile in price than securities that pay
interest periodically and in cash. In addition, because a Bond
Portfolio accrues income with respect to these securities prior to
the receipt of such interest in cash, it may have to dispose of
portfolio securities under disadvantageous circumstances in order
to obtain cash needed to pay income dividends in amounts necessary
to avoid unfavorable tax consequences.
Private Placements. Each Municipal Portfolio may invest in
securities that are purchased in private placements (including
privately placed securities eligible for purchase and
<PAGE> 39
sale under Rule 144A of the Securities Act of 1933 ["1933 Act"])
and, accordingly, are subject to restrictions on resale as a matter
of contract or under federal securities laws. Because there may be
relatively few potential purchasers for such investments,
especially under adverse market or economic conditions or in the
event of adverse changes in the financial condition of the issuer,
a Portfolio could find it more difficult to sell such securities
when the Adviser believes it is advisable to do so or may be able
to sell such securities only at prices lower than if such
securities were more widely held. At times, it may also be more
difficult to determine the fair value of such securities for
purposes of computing net asset value.
Rated Securities. For a description of the ratings applied by
rating services to Municipal Securities and other debt securities,
please refer to the Appendix. Except with respect to debt
securities with a demand feature (see the definition of "short-
term" in the Glossary) acquired by Municipal Money Portfolio, the
fact that the rating of a debt security held by a Portfolio may be
lost or reduced below the minimum level applicable to its original
purchase by the Portfolio does not require that obligation to be
sold, but the Adviser will consider such fact in determining
whether the Portfolio should continue to hold the obligation. In
the case of Municipal Securities with a demand feature acquired by
Municipal Money Portfolio, if the quality of such a security falls
below the minimum level applicable at the time of acquisition, the
Portfolio must dispose of the security within a reasonable period
of time either by exercising the demand feature or by selling the
security in the secondary market, unless the Board of Trustees
determines that it is in the best interests of the Portfolio and
its shareholders to retain the security.
To the extent that the ratings accorded by Moody's, S&P, or Fitch
Investors Service for debt securities may change as a result of
changes in such organizations, or changes in their rating systems,
the Portfolios will attempt to use comparable ratings as standards
for its investments in accordance with its investment policies.
The Board of Trustees is required to review such ratings with
respect to Municipal Money Portfolio.
REMICs. Each Bond Portfolio may invest in real estate mortgage
investment conduits ("REMICs"). REMICs, which were authorized
under the Tax Reform Act of 1986, are private entities formed for
the purpose of holding a fixed pool of mortgages secured by an
interest in real property. REMICs are similar to CMOs in that they
issue multiple classes of securities. A REMIC is a CMO that
qualifies for special tax treatment under the Internal Revenue Code
and invests in certain mortgages principally secured by interests
in real property. Investors may purchase beneficial interests in
REMICs, which are known as "regular" interests, or "residual"
interests. Guaranteed REMIC pass-through certificates ("REMIC
Certificates") issued by FNMA or FHLMC represent beneficial
ownership interests in a REMIC trust consisting principally of
mortgage loans or FNMA-, FHLMC- or GNMA-guaranteed mortgage pass-
through certificates. For FHLMC REMIC Certificates, FHLMC
guarantees the timely payment of interest and also guarantees the
payment of principal as payments are required to be made on the
underlying mortgage participation certificates. FNMA REMIC
Certificates are issued and guaranteed as to timely distribution
and principal and interest by FNMA.
Repurchase Agreements. Each Portfolio may invest in repurchase
agreements, provided that an Equity Portfolio and High-Yield
Municipals Portfolio may not invest more than 15% and Cash Reserves
Portfolio, Municipal Money Portfolio and each Bond Portfolio
<PAGE> 40
may not invest more than 10% of net assets in repurchase agreements
maturing in more than seven days and any other illiquid securities.
A repurchase agreement is a sale of securities to a Portfolio in
which the seller agrees to repurchase the securities at a higher
price, which includes an amount representing interest on the
purchase price, within a specified time. In the event of
bankruptcy of the seller, a Portfolio could experience both losses
and delays in liquidating its collateral.
Reverse Repurchase Agreements. Each Portfolio may enter into
reverse repurchase agreements with banks and securities dealers. A
reverse repurchase agreement is a repurchase agreement in which a
Portfolio is the seller of, rather than the investor in, securities
and agrees to repurchase them at an agreed-upon time and price.
Use of a reverse repurchase agreement may be preferable to a
regular sale and later repurchase of the securities because it
avoids certain market risks and transaction costs.
At the time a Portfolio enters into a reverse repurchase agreement,
liquid assets (cash, U.S. Government securities or other "high-
grade" debt obligations) of the Portfolio having a value at least
as great as the purchase price of the securities to be purchased
will be segregated on the books of the Portfolio and held by the
custodian throughout the period of the obligation. The use of this
investment strategy may increase net asset value fluctuation.
Rule 144A Securities. Each Portfolio other than Cash Reserves
Portfolio may purchase securities that have been privately placed
but that are eligible for purchase and sale under Rule 144A under
the 1933 Act. That Rule permits certain qualified institutional
buyers, such as the Portfolios, to trade in privately placed
securities that have not been registered for sale under the 1933
Act. The Adviser, under the supervision of the Board of Trustees,
will consider whether securities purchased under Rule 144A are
illiquid and thus subject to the restriction of investing no more
than 15% (each Equity Portfolio and High-Yield Municipals
Portfolio) or 10% (Municipal Money Portfolio and each Bond
Portfolio) of net assets in illiquid securities. A determination
of whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, the Adviser will consider the
trading markets for the specific security, taking into account the
unregistered nature of a Rule 144A security. In addition, the
Adviser could consider the (1) frequency of trades and quotes, (2)
number of dealers and potential purchasers, (3) dealer undertakings
to make a market, and (4) nature of the security and of marketplace
trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer). The
liquidity of Rule 144A securities would be monitored and if, as a
result of changed conditions, it is determined that a Rule 144A
security is no longer liquid, the Portfolios' holdings of illiquid
securities would be reviewed to determine what, if any, steps are
required to assure that the Portfolio does not invest more than 5%
of its assets in illiquid securities. Investing in Rule 144A
securities could have the effect of increasing the amount of a
Portfolio's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
The Portfolios do not expect to invest as much as 5% of its total
assets in Rule 144A securities that have not been deemed liquid by
the Adviser. (See Investment Restrictions.)
Short Sales "Against the Box." Each Portfolio may sell securities
short against the box; that is, enter into short sales of
securities that it currently owns or has the right to
<PAGE> 41
acquire through the conversion or exchange of other securities that
it owns at no additional cost. A Portfolio may make short sales of
securities only if at all times when a short position is open the
Portfolio owns at least an equal amount of such securities or
securities convertible into or exchangeable for securities of the
same issue as, and equal in amount to, the securities sold short,
at no additional cost.
In a short sale against the box, a Portfolio does not deliver from
its portfolio the securities sold. Instead, the Portfolio borrows
the securities sold short from a broker-dealer through which the
short sale is executed, and the broker-dealer delivers such
securities, on behalf of the Portfolio, to the purchaser of such
securities. The Portfolio is required to pay to the broker-dealer
the amount of any dividends paid on shares sold short. Finally, to
secure its obligation to deliver to such broker-dealer the
securities sold short, the Portfolio must deposit and continuously
maintain in a separate account with its custodian an equivalent
amount of the securities sold short or securities convertible into
or exchangeable for such securities at no additional cost. A
Portfolio is said to have a short position in the securities sold
until it delivers to the broker-dealer the securities sold. A
Portfolio may close out a short position by purchasing on the open
market and delivering to the broker-dealer an equal amount of the
securities sold short, rather than by delivering portfolio
securities.
Short sales may protect a Portfolio against the risk of losses in
the value of its portfolio securities because any unrealized losses
with respect to such portfolio securities should be wholly or
partially offset by a corresponding gain in the short position.
However, any potential gains in such portfolio securities should be
wholly or partially offset by a corresponding loss in the short
position. The extent to which such gains or losses are offset will
depend upon the amount of securities sold short relative to the
amount the Portfolio owns, either directly or indirectly, and, in
the case where the Portfolio owns convertible securities, changes
in the conversion premium.
Short sale transactions involve certain risks. If the price of the
security sold short increases between the time of the short sale
and the time a Portfolio replaces the borrowed security, the
Portfolio will incur a loss and if the price declines during this
period, the Portfolio will realize a short-term capital gain. Any
realized short-term capital gain will be decreased, and any
incurred loss increased, by the amount of transaction costs and any
premium, dividend or interest which the Portfolio may have to pay
in connection with such short sale. Certain provisions of the Code
may limit the degree to which a Portfolio is able to enter into
short sales. There is no limitation on the amount of each
Portfolio's assets that, in the aggregate, may be deposited as
collateral for the obligation to replace securities borrowed to
effect short sales and allocated to segregated accounts in
connection with short sales. Balanced Portfolio may invest up to
20% of its total assets in short sales against the box; no other
Portfolio will invest more than 5% of its total assets in short
sales against the box.
Standby Commitments. Cash Reserves Portfolio, each Municipal
Portfolio and each Bond Portfolio may obtain standby commitments
when purchasing securities. A standby commitment gives the holder
the right to sell the underlying security to the seller at an
agreed-upon price on certain dates or within a specified period. A
Municipal Portfolio will acquire standby commitments solely to
facilitate portfolio liquidity and not with a view to exercising
them at a time when the exercise price may exceed the current value
<PAGE> 42
of the underlying securities. If the exercise price of a standby
commitment held by a Municipal Portfolio should exceed the current
value of the underlying securities, the Portfolio may refrain from
exercising the standby commitment in order to avoid causing the
issuer of the standby commitment to sustain a loss and thereby
jeopardizing the Portfolio's business relationship with the issuer.
A Municipal Portfolio will enter into standby commitments only with
banks and securities dealers that, in the opinion of the Adviser,
present minimal credit risks. However, if a securities dealer or
bank is unable to meet its obligation to repurchase the security
when a Municipal Portfolio exercises a standby commitment, the
Portfolio might be unable to recover all or a portion of any loss
sustained from having to sell the security elsewhere. Standby
commitments will be valued at zero in determining a Municipal
Portfolio's net asset value.
Standby commitment agreements create an additional risk for a Bond
Portfolio because the other party to the standby agreement
generally will not be obligated to deliver the security, but the
Portfolio will be obligated to accept it if delivered. Depending
on market conditions, the Portfolio may receive a commitment fee
for assuming this obligation. If prevailing market interest rates
increase during the period between the date of the agreement and
the settlement date, the other party can be expected to deliver the
security and, in effect, pass any decline in value to the
Portfolio. If the value of the security increases after the
agreement is made, however, the other party is unlikely to deliver
the security. In other words, a decrease in the value of the
securities to be purchased under the terms of a standby commitment
agreement will likely result in the delivery of the security, and,
therefore, such decrease will be reflected in the Portfolio's net
asset value. However, any increase in the value of the securities
to be purchased will likely result in the non-delivery of the
security and, therefore, such increase will not affect the net
asset value unless and until the Portfolio actually obtains the
security.
Taxable Securities. Assets of a Municipal Portfolio that are not
invested in Municipal Securities may be held in cash or invested in
short-term taxable investments /7/ such as: (1) U.S. Government
bills, notes and bonds; (2) obligations of agencies and
instrumentalities of the U.S. Government (including obligations not
backed by the full faith and credit of the U.S. Government); (3)
other money market instruments such as certificates of deposit and
bankers' acceptances of domestic banks having total assets in
excess of $1 billion, and corporate commercial paper rated Prime-1
by Moody's or A-1 by S&P at the time of purchase, or, if unrated,
issued or guaranteed by an issuer with outstanding debt rated Aa or
better by Moody's or AA or better by S&P; and (4) repurchase
agreements with banks and securities dealers. Each Municipal
Portfolio limits repurchase agreements to those that are short-
term, subject to its restriction (g) under Investment Restrictions
(although the underlying securities may not be short-term).
Tender Option Bonds; Trust Receipts. Each Municipal Portfolio may
purchase tender option bonds and trust receipts. A tender option
bond is a Municipal Security (generally held pursuant to a
custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than
prevailing short-term tax-exempt rates, that has been coupled with
the agreement of a third party, such as a bank, broker-dealer or
other financial institution, pursuant to which such institution
grants the security holders the option, at periodic intervals, to
tender their securities to the institution
- ------------
/7/ The policies described in this paragraph are fundamental for
Municipal Money Portfolio.
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<PAGE> 43
and receive the face value thereof. As consideration for providing
the option, the financial institution receives periodic fees equal
to the difference between the Municipal Security's fixed coupon
rate and the rate, as determined by a remarketing or similar agent
at or near the commencement of such period, that would cause the
securities, coupled with the tender option, to trade at par on the
date of such determination. Thus, after payment of this fee, the
security holder effectively holds a demand obligation that bears
interest at the prevailing short-term tax-exempt rate. The Adviser
will consider on an ongoing basis the creditworthiness of the
issuer of the underlying Municipal Securities, of any custodian,
and of the third-party provider of the tender option. In certain
instances and for certain tender option bonds, the option may be
terminable in the event of a default in payment of principal or
interest on the underlying Municipal Securities and for other
reasons. No Municipal Portfolio intends to invest more than 10% of
net assets in tender option bonds or trust receipts.
Variable and Floating Rate Instruments. Each Bond Portfolio may
also invest in floating rate instruments which provide for periodic
adjustments in coupon interest rates that are automatically reset
based on changes in amount and direction of specified market
interest rates. In addition, the adjusted duration of some of
these instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to lifetime
or periodic interest rate caps or floors, such instruments may
experience greater price volatility than debt instruments without
such features. Adjusted duration is an inverse relationship
between market price and interest rates and refers to the
approximate percentage change in price for a 100 basis point change
in yield. For example, if interest rates decrease by 100 basis
points, a market price of a security with an adjusted duration of 2
would increase by approximately 2%. Neither Income Portfolio nor
High Yield Portfolio intends to invest more than 5% of its net
assets in floating rate instruments. Intermediate Bond Portfolio
does not intend to invest more than 10% of its net assets in
floating rate instruments.
In accordance with its investment objective and policies, Cash
Reserves Portfolio may invest in variable and floating rate money
market instruments which provide for periodic or automatic
adjustments in coupon interest rates that are reset based on
changes in amount and direction of specified short-term interest
rates. Cash Reserves Portfolio will not invest in a variable or
floating rate instrument unless the Adviser determines that as of
any reset date the market value of the instrument can reasonably be
expected to approximate its par value.
When-Issued and Delayed-Delivery Securities; Forward Commitments.
Each Portfolio may purchase securities on a when-issued or delayed-
delivery basis, and each Municipal Portfolio may purchase forward
commitments. Although the payment and interest terms of these
securities are established at the time a Portfolio enters into the
commitment, the securities may be delivered and paid for a month or
more after the date of purchase, when their value may have changed.
The Portfolios make such commitments only with the intention of
actually acquiring the securities, but may sell the securities
before settlement date if the Adviser deems it advisable for
investment reasons. No Portfolio currently intends to make
commitments to purchase when-issued securities in excess of 5% of
its net assets. International Portfolio may utilize spot and
forward foreign currency exchange transactions to reduce the risk
inherent in fluctuations in the
<PAGE> 44
exchange rate between one currency and another when securities are
purchased or sold on a when-issued or delayed-delivery basis.
Securities purchased by a Bond Portfolio on a when-issued or
delayed-delivery basis are sometimes done on a "dollar roll" basis.
Dollar roll transactions consist of the sale by the Portfolio of
securities with a commitment to purchase similar but not identical
securities, generally at a lower price at a future date. A dollar
roll may be renewed after cash settlement and initially may involve
only a firm commitment agreement by the Portfolio to buy a
security. A dollar roll transaction involves the following risks:
if the broker-dealer to whom the Portfolio sells the security
becomes insolvent, the Portfolio's right to purchase or repurchase
the security may be restricted; the value of the security may
change adversely over the term of the dollar roll; the security
which the Portfolio is required to repurchase may be worth less
than a security which the Portfolio originally held; and the return
earned by the Portfolio with the proceeds of a dollar roll may not
exceed transaction costs.
At the time a Municipal Portfolio or Bond Portfolio enters into a
binding obligation to purchase securities on a when-issued basis,
liquid assets (cash, U.S. Government or other "high grade" debt
obligations) of the Portfolio having a value of at least as great
as the purchase price of the securities to be purchased will be
segregated on the books of the Portfolio and held by the custodian
throughout the period of the obligation.
Foreign Securities. International Portfolio invests primarily in
foreign securities and each Bond Portfolio and each Equity
Portfolio may invest up to 25% of its total assets in foreign
securities, which may entail a greater degree of risk (including
risks relating to exchange rate fluctuations, tax provisions, or
expropriation of assets) than does investment in securities of
domestic issuers. For this purpose, foreign securities do not
include American Depositary Receipts (ADRs) or securities
guaranteed by a United States person. ADRs are receipts typically
issued by an American bank or trust company evidencing ownership of
the underlying securities. A Portfolio may invest in sponsored or
unsponsored ADRs. In the case of an unsponsored ADR, a Portfolio
is likely to bear its proportionate share of the expenses of the
depository and it may have greater difficulty in receiving
shareholder communications than it would have with a sponsored ADR.
International Portfolio may also purchase foreign securities in the
form of European Depositary Receipts (EDRs) or other securities
representing underlying shares of foreign issuers. Positions in
these securities are not necessarily denominated in the same
currency as the common stocks into which they may be converted.
ADRs are receipts typically issued by an American bank or trust
company evidencing ownership of the underlying securities. EDRs
are European receipts evidencing a similar arrangement. Generally,
ADRs, in registered form, are designed for the U.S. securities
markets and EDRs, in bearer form, are designed for use in European
securities markets.
With respect to portfolio securities that are issued by foreign
issuers or denominated in foreign currencies, a Portfolio's
investment performance is affected by the strength or weakness of
the U.S. dollar against these currencies. For example, if the
dollar falls in value relative to the Japanese yen, the dollar
value of a yen-denominated stock held in a Portfolio will rise even
though the price of the stock remains unchanged. Conversely, if
the dollar rises in value relative to the yen, the dollar value of
the yen-denominated
<PAGE> 45
stock will fall. (See discussion of transaction hedging and
portfolio hedging under Currency Exchange Transactions.)
Investors should understand and consider carefully the risks
involved in foreign investing. Investing in foreign securities,
positions in which are generally denominated in foreign currencies,
and utilization of forward foreign currency exchange contracts
involve certain considerations comprising both risks and
opportunities not typically associated with investing in U.S.
securities. These considerations include: fluctuations in exchange
rates of foreign currencies; possible imposition of exchange
control regulation or currency restrictions that would prevent cash
from being brought back to the United States; less public
information with respect to issuers of securities; less
governmental supervision of stock exchanges, securities brokers,
and issuers of securities; lack of uniform accounting, auditing,
and financial reporting standards; lack of uniform settlement
periods and trading practices; less liquidity and frequently
greater price volatility in foreign markets than in the United
States; possible imposition of foreign taxes; possible investment
in securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational, and
financial protections applicable to foreign sub-custodial
arrangements.
Although a Portfolio will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory taxation,
seizure or nationalization of foreign bank deposits or other
assets, establishment of exchange controls, the adoption of foreign
government restrictions, or other adverse political, social or
diplomatic developments that could affect investment in these
nations.
Currency Exchange Transactions. Currency exchange transactions may
be conducted either on a spot (i.e., cash) basis at the spot rate
for purchasing or selling currency prevailing in the foreign
exchange market or through forward currency exchange contracts
("forward contracts"). Forward contracts are contractual
agreements to purchase or sell a specified currency at a specified
future date (or within a specified time period) and price set at
the time of the contract. Forward contracts are usually entered
into with banks and broker-dealers, are not exchange traded, and
are usually for less than one year, but may be renewed.
A Portfolio's foreign currency exchange transactions are limited to
transaction and portfolio hedging involving either specific
transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward contracts with respect to specific
receivables or payables of a Portfolio arising in connection with
the purchase and sale of its portfolio securities. Portfolio
hedging is the use of forward contracts with respect to portfolio
security positions denominated or quoted in a particular foreign
currency. Portfolio hedging allows a Portfolio to limit or reduce
its exposure in a foreign currency by entering into a forward
contract to sell such foreign currency (or another foreign currency
that acts as a proxy for that currency) at a future date for a
price payable in U.S. dollars so that the value of the foreign-
denominated portfolio securities can be approximately matched by a
foreign-denominated liability. A Portfolio may not engage in
portfolio hedging with respect to the currency of a particular
country to an extent greater than the aggregate market value (at
the time of making such sale) of the securities held in its
portfolio denominated or quoted in that particular currency, except
that a Portfolio may
<PAGE> 46
hedge all or part of its foreign currency exposure through the use
of a basket of currencies or a proxy currency where such currencies
or currency act as an effective proxy for other currencies. In
such a case, a Portfolio may enter into a forward contract where
the amount of the foreign currency to be sold exceeds the value of
the securities denominated in such currency. The use of this
basket hedging technique may be more efficient and economical than
entering into separate forward contracts for each currency held in
a Portfolio. A Portfolio may not engage in "speculative" currency
exchange transactions.
At the maturity of a forward contract to deliver a particular
currency, a Portfolio may either sell the security related to such
contract and make delivery of the currency, or it may retain the
security and either acquire the currency on the spot market or
terminate its contractual obligation to deliver the currency by
purchasing an offsetting contract with the same currency trader
obligating it to purchase on the same maturity date the same amount
of the currency.
It is impossible to forecast with absolute precision the market
value of portfolio securities at the expiration of a forward
contract. Accordingly, it may be necessary for a Portfolio to
purchase additional currency on the spot market (and bear the
expense of such purchase) if the market value of the security is
less than the amount of currency a Portfolio is obligated to
deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to sell
on the spot market some of the currency received upon the sale of a
Portfolio security if its market value exceeds the amount of
currency a Portfolio is obligated to deliver.
If a Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio will incur a gain or a loss
to the extent that there has been movement in forward contract
prices. If a Portfolio engages in an offsetting transaction, it
may subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period between
a Portfolio's entering into a forward contract for the sale of a
currency and the date it enters into an offsetting contract for the
purchase of the currency, the Portfolio will realize a gain to the
extent the price of the currency it has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward
prices increase, a Portfolio will suffer a loss to the extent the
price of the currency it has agreed to purchase exceeds the price
of the currency it has agreed to sell. A default on the contract
would deprive a Portfolio of unrealized profits or force the
Portfolio to cover its commitments for purchase or sale of
currency, if any, at the current market price.
Hedging against a decline in the value of a currency does not
eliminate fluctuations in the prices of portfolio securities or
prevent losses if the prices of such securities decline. Such
transactions also preclude the opportunity for gain if the value of
the hedged currency should rise. Moreover, it may not be possible
for a Portfolio to hedge against a devaluation that is so generally
anticipated that a Portfolio is not able to contract to sell the
currency at a price above the devaluation level it anticipates.
The cost to a Portfolio of engaging in currency exchange
transactions varies with such factors as the currency involved, the
length of the contract period, and prevailing market conditions.
Since currency exchange transactions are usually conducted on a
principal basis, no fees or commissions are involved.
<PAGE> 47
Synthetic Foreign Money Market Positions. Each Bond Portfolio and
International Portfolio may invest in money market instruments
denominated in foreign currencies. In addition to, or in lieu of,
such direct investment, such Portfolio may construct a synthetic
foreign money market position by (a) purchasing a money market
instrument denominated in one currency, generally U.S. dollars, and
(b) concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange. For
example, a synthetic money market position in Japanese yen could be
constructed by purchasing a U.S. dollar money market instrument,
and entering concurrently into a forward contract to deliver a
corresponding amount of U.S. dollars in exchange for Japanese yen
on a specified date and at a specified rate of exchange. Because
of the availability of a variety of highly liquid short-term U.S.
dollar money market instruments, a synthetic money market position
utilizing such U.S. dollar instruments may offer greater liquidity
than direct investment in foreign currency money market
instruments. The result of a direct investment in a foreign
currency and a concurrent construction of a synthetic position in
such foreign currency, in terms of both income yield and gain or
loss from changes in currency exchange rates, in general should be
similar, but would not be identical because the components of the
alternative investments would not be identical. Except to the
extent a synthetic foreign money market position consists of a
money market instrument denominated in a foreign currency, the
synthetic foreign money market position shall not be deemed a
"foreign security" for purposes of the policy that, under normal
conditions, International Portfolio will invest at least 65% of its
total assets in foreign securities.
A Bond Portfolio may also construct a synthetic foreign position by
entering into a swap arrangement. A swap is a contractual
agreement between two parties to exchange cash flows--at the time
of the swap agreement and again at maturity, and, with some swaps,
at various intervals through the period of the agreement. The use
of swaps to construct a synthetic foreign position would generally
entail the swap of interest rates and currencies. A currency swap
is a contractual arrangement between two parties to exchange
principal amounts in different currencies at a predetermined
foreign exchange rate. An interest rate swap is a contractual
agreement between two parties to exchange interest payments on
identical principal amounts. An interest rate swap may be between
a floating and a fixed rate instrument, a domestic and a foreign
instrument, or any other type of cash flow exchange. A currency
swap generally has the same risk characteristics as a forward
currency contract, and all types of swaps have counter-party risk.
Depending on the facts and circumstances, swaps may be considered
illiquid. Illiquid securities usually have greater investment risk
and are subject to greater price volatility. The net amount of the
excess, if any, of the Portfolio's obligations over which it is
entitled to receive with respect to an interest rate or currency
swap will be accrued daily and liquid assets (cash, U.S. Government
securities, or other "high grade" debt obligations) of the
Portfolio having a value at least equal to such accrued excess will
be segregated on the books of the Portfolio and held by the
Custodian for the duration of the swap. A Bond Portfolio may also
construct a synthetic foreign position by purchasing an instrument
whose return is tied to the return of the desired foreign position.
An investment in these "principal exchange rate linked securities"
(often called PERLS) can produce a return similar to a direct
investment in a foreign security.
<PAGE> 48
Options on Securities and Indexes. Each Bond Portfolio and each
Equity Portfolio may purchase and sell put options and call options
on securities, indexes or foreign currencies in standardized
contracts traded on recognized securities exchanges, boards of
trade, or similar entities, or quoted on Nasdaq. High-Yield
Municipals Portfolio is permitted to purchase and to write both
call options and put options on debt or other securities or indexes
in standardized contracts traded on U.S. securities exchanges,
boards of trade, or similar entities, or quoted on Nasdaq. High-
Yield Municipals Portfolio and each Bond and Equity Portfolio also
may purchase agreements, sometimes called cash puts, that may
accompany the purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives the
purchaser (holder) of the option, in return for a premium, the
right to buy from (call) or sell to (put) the seller (writer) of
the option the security underlying the option (or the cash value of
the index) at a specified exercise price at any time during the
term of the option (normally not exceeding nine months). The
writer of an option on an individual security or on a foreign
currency has the obligation upon exercise of the option to deliver
the underlying security or foreign currency upon payment of the
exercise price or to pay the exercise price upon delivery of the
underlying security or foreign currency. Upon exercise, the writer
of an option on an index is obligated to pay the difference between
the cash value of the index and the exercise price multiplied by
the specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial or
securities market, a specific group of financial instruments or
securities, or certain economic indicators.)
A Portfolio will write call options and put options only if they
are "covered." For example, in the case of a call option on a
security, the option is "covered" if a Portfolio owns the security
underlying the call or has an absolute and immediate right to
acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or cash equivalents
in such amount are held in a segregated account by its custodian)
upon conversion or exchange of other securities held in its
portfolio.
If an option written by a Portfolio expires, the Portfolio realizes
a capital gain equal to the premium received at the time the option
was written. If an option purchased by a Portfolio expires, the
Portfolio realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the
same series (type, exchange, underlying security or index, exercise
price, and expiration). There can be no assurance, however, that a
closing purchase or sale transaction can be effected when a
Portfolio desires.
A Portfolio will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the
Portfolio will realize a capital loss. If the premium received
from a closing sale transaction is more than the premium paid to
purchase the option, the Portfolio will realize a capital gain or,
if it is less, the Portfolio will realize a capital loss. The
principal factors affecting the market value of a put or a call
option include supply and demand, interest rates, the current
market price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
<PAGE> 49
A put or call option purchased by a Portfolio is an asset of the
Portfolio, valued initially at the premium paid for the option.
The premium received for an option written by a Portfolio is
recorded as a deferred credit. The value of an option purchased or
written is marked-to-market daily and is valued at the closing
price on the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between the
last bid and asked prices.
Risks Associated with Options. There are several risks associated
with transactions in options. For example, there are significant
differences between the securities markets, the currency markets,
and the options markets that could result in an imperfect
correlation between these markets, causing a given transaction not
to achieve its objectives. A decision as to whether, when and how
to use options involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist when a
Portfolio seeks to close out an option position. If a Portfolio
were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to realize
any profit or the option would expire and become worthless. If a
Portfolio were unable to close out a covered call option that it
had written on a security, it would not be able to sell the
underlying security until the option expired. As the writer of a
covered call option on a security, a Portfolio foregoes, during the
option's life, the opportunity to profit from increases in the
market value of the security covering the call option above the sum
of the premium and the exercise price of the call.
If trading were suspended in an option purchased or written by a
Portfolio, the Portfolio would not be able to close out the option.
If restrictions on exercise were imposed, the Portfolio might be
unable to exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts. High-Yield
Municipals Portfolio, each Bond Portfolio and each Equity Portfolio
may use interest rate futures contracts, and index futures
contracts; and the Bond and Equity Portfolios may use foreign
currency futures contracts. An interest rate, index or foreign
currency futures contract provides for the future sale by one party
and purchase by another party of a specified quantity of a
financial instrument or the cash value of an index /8/ at a
specified price and time. A public market exists in futures
contracts covering a number of indexes (including, but not limited
to: the Standard & Poor's 500 Index; the Value Line Composite
Index; and the New York Stock Exchange Composite Index) as well as
financial instruments (including, but not limited to: U.S. Treasury
bonds; U.S. Treasury notes; Eurodollar certificates of deposit; and
foreign currencies). Other index and financial instrument futures
contracts are available and it is expected that additional futures
contracts will be developed and traded.
- ----------
/8/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at
which the index contract was originally written. Although the
value of a securities index is a function of the value of certain
specified securities no physical delivery of those securities is
made.
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<PAGE> 50
A Portfolio may purchase and write call and put futures options.
Futures options possess many of the same characteristics as options
on securities, indexes and foreign currencies (discussed above). A
futures option gives the holder the right, in return for the
premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any
time during the period of the option. Upon exercise of a call
option, the holder acquires a long position in the futures contract
and the writer is assigned the opposite short position. In the
case of a put option, the opposite is true. A Portfolio might, for
example, use futures contracts to hedge against or gain exposure to
fluctuations in the general level of stock prices, anticipated
changes in interest rates or currency fluctuations that might
adversely affect either the value of a Portfolio's securities or
the price of the securities that the Portfolio intends to purchase.
Although other techniques could be used to reduce or increase a
Portfolio's exposure to stock price, interest rate, and currency
fluctuations, the Portfolio may be able to achieve its exposure
more effectively and perhaps at a lower cost by using futures
contracts and futures options.
A Portfolio will only enter into futures contracts and futures
options that are standardized and traded on an exchange, board of
trade, or similar entity, or quoted on an automated quotation
system.
The success of any futures transaction depends on the Adviser
correctly predicting changes in the level and direction of stock
prices, interest rates, currency exchange rates and other factors.
Should those predictions be incorrect, a Portfolio's return might
have been better had the transaction not been attempted; however,
in the absence of the ability to use futures contracts, the Adviser
might have taken portfolio actions in anticipation of the same
market movements with similar investment results but, presumably,
at greater transaction costs.
When a purchase or sale of a futures contract is made by a
Portfolio, the Portfolio is required to deposit with its custodian
(or broker, if legally permitted) a specified amount of cash or
U.S. Government securities or other securities acceptable to the
broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded and
may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit
on the futures contract, which is returned to a Portfolio upon
termination of the contract, assuming all contractual obligations
have been satisfied. A Portfolio expects to earn interest income
on its initial margin deposits. A futures contract held by a
Portfolio is valued daily at the official settlement price of the
exchange on which it is traded. Each day a Portfolio pays or
receives cash, called "variation margin," equal to the daily change
in value of the futures contract. This process is known as
"marking-to-market." Variation margin paid or received by a
Portfolio does not represent a borrowing or loan by the Portfolio
but is instead settlement between the Portfolio and the broker of
the amount one would owe the other if the futures contract had
expired at the close of the previous day. In computing daily net
asset value, a Portfolio will mark-to-market its open futures
positions.
A Portfolio is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by it.
Such margin deposits will vary depending on the nature of the
underlying futures contract (and the related initial margin
requirements),
<PAGE> 51
the current market value of the option, and other futures positions
held by a Portfolio.
Although some futures contracts call for making or taking delivery
of the underlying securities, usually these obligations are closed
out prior to delivery by offsetting purchases or sales of matching
futures contracts (same exchange, underlying security or index, and
delivery month). If an offsetting purchase price is less than the
original sale price, a Portfolio realizes a capital gain, or if it
is more, the Portfolio realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price, a
Portfolio realizes a capital gain, or if it is less, the Portfolio
realizes a capital loss. The transaction costs must also be
included in these calculations.
Risks Associated with Futures. There are several risks associated
with the use of futures contracts and futures options. A purchase
or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. In trying to increase or
reduce market exposure, there can be no guarantee that there will
be a correlation between price movements in the futures contract
and in a Portfolio exposure sought. In addition, there are
significant differences between the securities and futures markets
that could result in an imperfect correlation between the markets,
causing a given transaction not to achieve its objectives. The
degree of imperfection of correlation depends on circumstances such
as: variations in speculative market demand for futures, futures
options and the related securities, including technical influences
in futures and futures options trading and differences between the
securities market and the securities underlying the standard
contracts available for trading. For example, in the case of index
futures contracts, the composition of the index, including the
issuers and the weighting of each issue, may differ from the
composition of a Portfolio's portfolio, and, in the case of
interest rate futures contracts, the interest rate levels,
maturities, and creditworthiness of the issues underlying the
futures contract may differ from the financial instruments held in
the Portfolio's portfolio. A decision as to whether, when and how
to use futures contracts involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful
to some degree because of market behavior or unexpected stock price
or interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The
daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's
settlement price at the end of the current trading session. Once
the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond
that limit. The daily limit governs only price movements during a
particular trading day and therefore does not limit potential
losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures
contracts to substantial losses. Stock index futures contracts are
not normally subject to such daily price change limitations.
There can be no assurance that a liquid market will exist at a time
when a Portfolio seeks to close out a futures or futures option
position. A Portfolio would be exposed to possible loss on the
position during the interval of inability to close, and would
<PAGE> 52
continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts discussed
above are relatively new instruments without a significant trading
history. As a result, there can be no assurance that an active
secondary market will develop or continue to exist.
Limitations on Options and Futures. If other options, futures
contracts, or futures options of types other than those described
herein are traded in the future, High-Yield Municipals Portfolio,
each Bond Portfolio and each Equity Portfolio may also use those
investment vehicles, provided the Board of Trustees determines that
their use is consistent with the Portfolio's investment objective.
A Portfolio will not enter into a futures contract or purchase an
option thereon if, immediately thereafter, the initial margin
deposits for futures contracts held by the Portfolio plus premiums
paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," /9/ would exceed 5% of
a Portfolio's total assets.
When purchasing a futures contract or writing a put option on a
futures contract, a Portfolio must maintain with its custodian (or
broker, if legally permitted) cash or cash equivalents (including
any margin) equal to the market value of such contract. When
writing a call option on a futures contract, a Portfolio similarly
will maintain with its custodian cash or cash equivalents
(including any margin) equal to the amount by which such option is
in-the-money until the option expires or is closed out by the
Portfolio.
A Portfolio may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market value
of all such open positions exceeds the current value of the
securities in its portfolio, plus or minus unrealized gains and
losses on the open positions, adjusted for the historical relative
volatility of the relationship between a Portfolio and the
positions. For this purpose, to the extent a Portfolio has written
call options on specific securities in its portfolio, the value of
those securities will be deducted from the current market value of
the securities portfolio.
In order to comply with Commodity Futures Trading Commission
Regulation 4.5 and thereby avoid being deemed a "commodity pool
operator," a Portfolio will use commodity futures or commodity
options contracts solely for bona fide hedging purposes within the
meaning and intent of Regulation 1.3(z), or, with respect to
positions in commodity futures and commodity options contracts that
do not come within the meaning and intent of 1.3(z), the aggregate
initial margin and premiums required to establish such positions
will not exceed 5% of the fair market value of the assets of a
Portfolio, after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into [in the
case of an option that is in-the-money at the time of purchase, the
in-the-money amount (as defined in Section 190.01(x) of the
Commission Regulations) may be excluded in computing such 5%].
- ---------
/9/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- ---------
<PAGE> 53
Taxation of Options and Futures. If a Portfolio exercises a call
or put option that it holds, the premium paid for the option is
added to the cost basis of the security purchased (call) or
deducted from the proceeds of the security sold (put). For cash
settlement options and futures options exercised by a Portfolio,
the difference between the cash received at exercise and the
premium paid is a capital gain or loss.
If a call or put option written by a Portfolio is exercised, the
premium is included in the proceeds of the sale of the underlying
security (call) or reduces the cost basis of the security purchased
(put). For cash settlement options and futures options written by
a Portfolio, the difference between the cash paid at exercise and
the premium received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital
gain or loss. If an option written by a Portfolio was in-the-money
at the time it was written and the security covering the option was
held for more than the long-term holding period prior to the
writing of the option, any loss realized as a result of a closing
purchase transaction will be long-term. The holding period of the
securities covering an in-the-money option will not include the
period of time the option is outstanding.
If a Portfolio writes an equity call option /10/ other than a
"qualified covered call option," as defined in the Code, any loss
on such option transaction, to the extent it does not exceed the
unrealized gains on the securities covering the option, may be
subject to deferral until the securities covering the option have
been sold.
A futures contract held until delivery results in capital gain or
loss equal to the difference between the price at which the futures
contract was entered into and the settlement price on the earlier
of delivery notice date or expiration date. If a Portfolio
delivers securities under a futures contract, the Portfolio also
realizes a capital gain or loss on those securities.
For federal income tax purposes, a Portfolio generally is required
to recognize as income for each taxable year its net unrealized
gains and losses as of the end of the year on futures, futures
options and non-equity options positions ("year-end mark-to-
market"). Generally, any gain or loss recognized with respect to
such positions (either by year-end mark-to-market or by actual
closing of the positions) is considered to be 60% long-term and 40%
short-term, without regard to the holding periods of the contracts.
However, in the case of positions classified as part of a "mixed
straddle," the recognition of losses on certain positions
(including options, futures and futures options positions, the
related securities and certain successor positions thereto) may be
deferred to a later taxable year. Sale of futures contracts or
writing of call options (or futures call options) or buying put
options (or futures put options) that are intended to hedge against
a change in the value of securities held by a Portfolio: (1) will
affect the holding period of the
- ------------
/10/ An equity option is defined to mean any option to buy or sell
stock, and any other option the value of which is determined by
reference to an index of stocks of the type that is ineligible to
be traded on a commodity futures exchange (e.g., an option contract
on a sub-index based on the price of nine hotel-casino stocks).
The definition of equity option excludes options on broad-based
stock indexes (such as the Standard & Poor's 500 index).
- ------------
<PAGE> 54
hedged securities; and (2) may cause unrealized gain or loss on
such securities to be recognized upon entry into the hedge.
If a Portfolio were to enter into a short index future, short index
futures option or short index option position and a Portfolio's
portfolio were deemed to "mimic" the performance of the index
underlying such contract, the option or futures contract position
and the Portfolio's stock positions would be deemed to be positions
in a mixed straddle, subject to the above-mentioned loss deferral
rules.
In order for a Portfolio to continue to qualify for federal income
tax treatment as a regulated investment company, at least 90% of
its gross income for a taxable year must be derived from qualifying
income; i.e., dividends, interest, income derived from loans of
securities, and gains from the sale of securities or foreign
currencies, or other income (including but not limited to gains
from options, futures, or forward contracts). Any net gain
realized from futures (or futures options) contracts will be
considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement.
Each Portfolio distributes to investors annually any net capital
gains that have been recognized for federal income tax purposes
(including year-end mark-to-market gains) on options and futures
transactions. Such distributions are combined with distributions
of capital gains realized on other investments, and investors are
advised of the nature of the payments.
The Taxpayer Relief Act of 1997 (the "Act") imposed constructive
sale treatment for federal income tax purposes on certain hedging
strategies with respect to appreciated securities. Under these
rules, taxpayers will recognize gain, but not loss, with respect to
securities if they enter into short sales of "offsetting notional
principal contracts" (as defined by the Act) or futures or "forward
contracts" (as defined by the Act) with respect to the same or
substantially identical property, or if they enter into such
transactions and then acquire the same or substantially identical
property. These changes generally apply to constructive sales
after June 8, 1997. Furthermore, the Secretary of the Treasury is
authorized to promulgate regulations that will treat as
constructive sales certain transactions that have substantially the
same effect as short sales, offsetting notional principal
contracts, and futures or forward contracts to deliver the same or
substantially similar property.
Investment Risks--Municipal Portfolios
- --------------------------------------
The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide
that, in certain circumstances, such subdivisions or authorities
may be authorized to initiate bankruptcy proceedings without prior
notice to or consent of creditors, which proceedings could result
in material and adverse changes in the rights of holders of their
obligations.
Lawsuits challenging the validity under state constitutions of
present systems of financing public education have been initiated
or adjudicated in a number of states, and legislation has been
introduced to effect changes in public school financing in some
states. In other instances there have been lawsuits challenging
the issuance of pollution control revenue bonds or the validity of
their issuance under state or federal law which could
<PAGE> 55
ultimately affect the validity of those Municipal Securities or the
tax-free nature of the interest thereon. In addition, from time to
time proposals have been introduced in Congress to restrict or
eliminate the federal income tax exemption for interest on
Municipal Securities, and similar proposals may be introduced in
the future. Some of the past proposals would have applied to
interest on Municipal Securities issued before the date of
enactment, which would have adversely affected their value to a
material degree. If such proposals are enacted, the availability
of Municipal Securities for investment by a Municipal Portfolio and
the value of its portfolio would be affected and, in such an event,
the Portfolio would reevaluate its investment objectives and
policies.
Because each Municipal Portfolio may invest in industrial
development bonds, its shares may not be an appropriate investment
for "substantial users" of facilities financed by industrial
development bonds or for "related persons of substantial users."
In addition, each Municipal Portfolio may invest in Municipal
Securities issued after the effective date of the Tax Reform Act of
1986 (the "1986 Act"), which may be subject to retroactive taxation
if they fail to continue to comply after issuance with certain
requirements imposed by the 1986 Act.
Although the banks and securities dealers from which the Municipal
Portfolios may acquire repurchase agreements and standby
commitments, and the entities from which they may purchase
participation interests in Municipal Securities, will be those that
the Adviser believes to be financially sound, there can be no
assurance that they will be able to honor their obligations to the
Portfolio.
Investment Restrictions
- -----------------------
Fundamental policies may be changed only with the approval of a
"majority of the outstanding voting securities" of a Portfolio, as
defined in the Investment Company Act of 1940. Nonfundamental
investment restrictions, which may be required by various laws and
administrative positions, may be changed by the Board of Trustees
without a vote of shareholders.
The following investment restrictions (other than material within
brackets) are fundamental policies of each Municipal Portfolio.
They may not:
(1) invest in a security if, with respect to 75% of its assets, as
a result of such investment, more than 5% of its total assets
(taken at market value at the time of investment) would be
invested in the securities of any one issuer (for this purpose,
the issuer(s) of a security being deemed to be only the entity
or entities whose assets or revenues are subject to the
principal and interest obligations of the security), other than
obligations issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities or repurchase agreements for
such securities [however, in the case of a guarantor of
securities (including an issuer of a letter of credit), the
value of the guarantee (or letter of credit) may be excluded
from this computation if the aggregate value of securities
owned by the Portfolio and guaranteed by such guarantor
<PAGE> 56
(plus any other investments of the Portfolio in securities
issued by the guarantor) does not exceed 10% of the Portfolio's
total assets]; /11/ /12/
(2) purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of
portfolio securities (this restriction does not apply to
securities purchased on a when-issued or delayed-delivery basis
or to reverse repurchase agreements), [High-Yield Municipals
Portfolio only] but it may make margin deposits in connection
with futures and options transactions;
(3) make loans, although it may (a) participate in an interfund
lending program with other Stein Roe Funds and Portfolios
provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of
its total assets; (b) purchase money market instruments and
enter into repurchase agreements; and (c) acquire publicly
distributed or privately placed debt securities;
(4) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes and (b) engage in reverse
repurchase agreements and make other borrowings, provided that
the combination of (a) and (b) shall not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law; it may borrow from banks, other Stein Roe
Funds and Portfolios, and other persons to the extent permitted
by applicable law;
(5) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the
Portfolio except (a) as may be necessary in connection with
borrowings mentioned in (4) above, and [High-Yield Municipals
Portfolio only] (b) it may enter futures and options
transactions;
(6) invest more than 25% of its total assets (taken at market value
at the time of each investment) in securities of non-
governmental issuers whose principal business activities are in
the same industry;
(7) purchase portfolio securities for the Portfolio from, or sell
portfolio securities to, any of the officers, directors, or
trustees of the Trust or of its investment adviser;
(8) purchase or sell commodities or commodities contracts or oil,
gas, or mineral programs;
(9) [Municipal Money Portfolio only] purchase any securities other
than those described in Part A under Objectives and Basic
Investment Strategy and Other Investment Practices;
(10) issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
Following are the nonfundamental investment restrictions of each
Municipal Portfolio. They may not:
(a) own more than 10% of the outstanding voting securities of an
issuer;
(b) invest in companies for the purpose of exercising control or
management;
- --------------
/11/ In the case of a security that is insured as to payment of
principal and interest, the related insurance policy is not deemed
a security, nor is it subject to this investment restriction.
/12/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Municipal
Money Portfolio and Cash Reserves Portfolio will not, immediately
after the acquisition of any security (other than a Government
Security or certain other securities as permitted under the Rule),
invest more than 5% of its total assets in the securities of any
one issuer; provided, however, that it may invest up to 25% of its
total assets in First Tier Securities (as that term is defined in
the Rule) of a single issuer for a period of up to three business
days after the purchase thereof.
- --------------
<PAGE> 57
(c) make investments in the securities of other investment
companies, except in connection with a merger, consolidation,
or reorganization;
(d) purchase or sell real estate (other than Municipal Securities
or money market securities secured by real estate or interests
therein or such securities issued by companies which invest in
real estate or interests therein);
(e) act as an underwriter of securities, except that it may
participate as part of a group in bidding, or bid alone, for
the purchase of Municipal Securities directly from an issuer
for the its own portfolio;
(f) sell securities short unless (1) the Portfolio owns or has the
right to obtain securities equivalent in kind and amount to
those sold short at no added cost or (2) the securities sold
are "when issued" or "when distributed" securities which the
Portfolio expects to receive in a recapitalization,
reorganization, or other exchange for securities the Portfolio
contemporaneously owns or has the right to obtain and provided
that it may purchase standby commitments and securities subject
to a demand feature entitling the Portfolio to require sellers
of securities to the Portfolio to repurchase them upon demand
by the Portfolio, [High-Yield Municipals Portfolio only] and
that transactions in options, futures and options on futures
are not treated as short sales;
(g) [Municipal Money Portfolio only] invest more than 10% of its
net assets (taken at market value at the time of a particular
investment) in illiquid securities, including repurchase
agreements maturing in more than seven days; [High-Yield
Municipals Portfolio only] invest more than 15% of its net
assets (taken at market value at the time of a particular
investment) in illiquid securities, including repurchase
agreements maturing in more than seven days;
(h) purchase shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization;
(i) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants that are not listed on the New York or American stock
exchange;
(j) [High-Yield Municipals Portfolio only] write an option on a
security unless the option is issued by the Options Clearing
Corporation, an exchange, or similar entity;
(k) [High-Yield Municipals Portfolio only] urchase a put or call
option if the aggregate premiums paid for all put and call
options exceed 20% of its net assets (less the amount by which
any such positions are in-the-money), excluding put and call
options purchased as closing transactions.
Following are the fundamental investment restrictions of Cash
Reserves Portfolio and each Bond Portfolio. They may not:
(1) invest in a security if, as a result of such investment, more
than 25% of its total assets (taken at market value at the time
of such investment) would be invested in the securities of
issuers in any particular industry, except that this
restriction does not apply to (i) U.S. Government Securities,
[Cash Reserves Portfolio only] (ii) repurchase agreements, or
(iii) securities of issuers in the financial services industry;
(2) invest in a security if, with respect to 75% of its assets, as
a result of such investment, more than 5% of its total assets
(taken at market value at the time of such investment) would be
invested in the securities of any one issuer, except that this
restriction does not apply to U.S. Government Securities or
repurchase agreements for such securities;
<PAGE> 58
(3) invest in a security if, as a result of such investment, it
would hold more than 10% (taken at the time of such investment)
of the outstanding voting securities of any one issuer;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein);
(5) purchase or sell commodities or commodities contracts or oil,
gas or mineral programs, [Bond Portfolios only] except that it
may enter into (a) futures and options on futures and (b)
forward contracts;
(6) purchase securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of
portfolio securities, [Bond Portfolios only] but it may make
margin deposits in connection with transactions in options,
futures, and options on futures;
(7) make loans, although it may (a) [Bond Portfolios only] lend
portfolio securities and participate in an interfund lending
program with other Stein Roe Funds and Portfolios, provided
that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33 1/3% of the value of its total
assets (taken at market value at the time of such loans); (b)
[all Portfolios] purchase money market instruments and enter
into repurchase agreements; and (c) acquire publicly
distributed or privately placed debt securities;
(8) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes, (b) engage in reverse
repurchase agreements and make other borrowings, provided that
the combination of (a) and (b) shall not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and [Bond Portfolios only] (c) enter into
futures and options transactions; [all Portfolios] it may
borrow from banks, other Stein Roe Funds and Portfolios, and
other persons to the extent permitted by applicable law;
(9) act as an underwriter of securities, except insofar as it may
be deemed to be an "underwriter" for purposes of the Securities
Act of 1933 on disposition of securities acquired subject to
legal or contractual restrictions on resale;
(10) issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
Following are the nonfundamental investment restrictions of Cash
Reserves Portfolio and each Bond Portfolio. They may not:
(a) invest for the purpose of exercising control or management;
(b) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal
to more than 5% of its total assets (valued at time of
purchase) in the case of any one other investment company and
10% of such assets (valued at time of purchase) in the case of
all other investment companies in the aggregate; any such
purchases are to be made in the open market where no profit to
a sponsor or dealer results from the purchase, other than the
customary broker's commission, except for securities acquired
as part of a merger, consolidation or acquisition of assets;
/13/
- ------------
/13/ Stein Roe Funds have been informed that the staff of the
Securities and Exchange Commission takes the position that the
issuers of certain CMOs and certain other collateralized assets are
investment companies and that subsidiaries of foreign banks may be
investment companies for purposes of Section 12(d)(1) of the
Investment Company Act of 1940, which limits the ability of one
investment company to invest in another investment company.
Accordingly, the Portfolios intend to operate within the applicable
limitations under Section 12(d)(1)(A) of that Act.
- ------------
<PAGE> 59
(c) purchase portfolio securities from, or sell portfolio
securities to, any of the officers and directors or trustees of
the Trust or of its investment adviser;
(d) purchase shares of other open-end investment companies, except
in connection with a merger, consolidation, acquisition, or
reorganization;
(e) invest more than 5% of its net assets (valued at time of
investment) in warrants, nor more than 2% of its net assets in
warrants which are not listed on the New York or American Stock
Exchange;
(f) [Bond Portfolios only] purchase a put or call option if the
aggregate premiums paid for all put and call options exceed 20%
of its net assets (less the amount by which any such positions
are in-the-money), excluding put and call options purchased as
closing transactions;
(g) [Bond Portfolios only] write an option on a security unless the
option is issued by the Options Clearing Corporation, an
exchange, or similar entity;
(h) [Bond Portfolios only] invest in limited partnerships in real
estate unless they are readily marketable;
(i) sell securities short unless (1) it owns or has the right to
obtain securities equivalent in kind and amount to those sold
short at no added cost or (2) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other
exchange for securities it contemporaneously owns or has the
right to obtain and [Bond Portfolios only] provided that
transactions in options, futures, and options on futures are
not treated as short sales;
(j) [Bond Portfolios only] invest more than 15% of its total assets
(taken at market value at the time of a particular investment)
in restricted securities, other than securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933;
(k) invest more than 10% of its net assets (taken at market value
at the time of a particular investment) in illiquid securities
/14/, including repurchase agreements maturing in more than
seven days.
Following are the fundamental investment restrictions of each
Equity Portfolio (except that (1) and (2) are nonfundamental
restrictions for Special Portfolio). An Equity Portfolio may not:
(1) with respect to 75% of its total assets, invest more than 5% of
its total assets, taken at market value at the time of a
particular purchase, in the securities of a single issuer,
except for securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities or
repurchase agreements for such securities;
(2) acquire more than 10%, taken at the time of a particular
purchase, of the outstanding voting securities of any one
issuer;
(3) act as an underwriter of securities, except insofar as it may
be deemed an underwriter for purposes of the Securities Act of
1933 on disposition of securities acquired subject to legal or
contractual restrictions on resale;
- --------
/14/ In the judgment of the Adviser, Private Placement Notes, which
are issued pursuant to Section 4(2) of the Securities Act of 1933,
generally are readily marketable even though they are subject to
certain legal restrictions on resale. As such, they are not
treated as being subject to the limitation on illiquid securities.
- --------
<PAGE> 60
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate or
interests therein), commodities, or commodity contracts, except
that it may enter into (a) futures and options on futures and
(b) forward contracts;
(5) make loans, although it may (a) lend portfolio securities and
participate in an interfund lending program with other Stein
Roe Funds and Portfolios provided that no such loan may be made
if, as a result, the aggregate of such loans would exceed 33
1/3% of the value of its total assets (taken at market value at
the time of such loans); (b) purchase money market instruments
and enter into repurchase agreements; and (c) acquire publicly
distributed or privately placed debt securities;
(6) borrow except that it may (a) borrow for nonleveraging,
temporary or emergency purposes, (b) engage in reverse
repurchase agreements and make other borrowings, provided that
the combination of (a) and (b) shall not exceed 33 1/3% of the
value of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law, and (c) enter into futures and options
transactions; it may borrow from banks, other Stein Roe Funds
and Portfolios, and other persons to the extent permitted by
applicable law;
(7) invest in a security if more than 25% of its total assets
(taken at market value at the time of a particular purchase)
would be invested in the securities of issuers in any
particular industry, /15/ except that this restriction does not
apply to securities issued or guaranteed by the U.S. Government
or its agencies or instrumentalities; or
(8) issue any senior security except to the extent permitted under
the Investment Company Act of 1940.
Following are the nonfundamental investment objectives of each
Equity Portfolio. An Equity Portfolio may not:
(a) invest in any of the following: (1) interests in oil, gas, or
other mineral leases or exploration or development programs
(except readily marketable securities, including but not
limited to master limited partnership interests, that may
represent indirect interests in oil, gas, or other mineral
exploration or development programs); (2) puts, calls,
straddles, spreads, or any combination thereof (except that it
may enter into transactions in options, futures, and options on
futures); (3) shares of other open-end investment companies,
except in connection with a merger, consolidation, acquisition,
or reorganization; and (4) limited partnerships in real estate
unless they are readily marketable;
(b) invest in companies for the purpose of exercising control or
management;
(c) purchase more than 3% of the stock of another investment
company or purchase stock of other investment companies equal
to more than 5% of its total assets (valued at time of
purchase) in the case of any one other investment company and
10% of such assets (valued at time of purchase) in the case of
all other investment companies in the aggregate; any such
purchases are to be made in the open market where no profit to
a sponsor or dealer results from the purchase, other than the
customary broker's commission, except for securities acquired
as part of a merger, consolidation or acquisition of assets;
- ---------
/15/ For purposes of this investment restriction, International
Portfolio uses industry classifications contained in Morgan Stanley
Capital International Perspective, which is published by Morgan
Stanley, an international investment banking and brokerage firm.
- ---------
<PAGE> 61
(d) invest more than 5% of its net assets (valued at time of
purchase) in warrants, nor more than 2% of its net assets in
warrants that are not listed on the New York or American Stock
Exchange or [International Portfolio only] a recognized foreign
exchange;
(e) write an option on a security unless the option is issued by
the Options Clearing Corporation, an exchange, or similar
entity;
(f) [all except International Portfolio] invest more than 25% of
its total assets (valued at time of purchase) in securities of
foreign issuers (other than securities represented by American
Depositary Receipts (ADRs) or securities guaranteed by a U.S.
person);
(g) purchase a put or call option if the aggregate premiums paid
for all put and call options exceed 20% of its net assets (less
the amount by which any such positions are in-the-money),
excluding put and call options purchased as closing
transactions;
(h) purchase securities on margin (except for use of short-term
credits as are necessary for the clearance of transactions), or
sell securities short unless (1) it owns or has the right to
obtain securities equivalent in kind and amount to those sold
short at no added cost or (2) the securities sold are "when
issued" or "when distributed" securities which it expects to
receive in a recapitalization, reorganization, or other
exchange for securities it contemporaneously owns or has the
right to obtain and provided that transactions in options,
futures, and options on futures are not treated as short sales;
(i) [all except International Portfolio] invest more than 5% of its
total assets (taken at market value at the time of a particular
investment) in restricted securities, other than securities
eligible for resale pursuant to Rule 144A under the Securities
Act of 1933; [International Portfolio only] invest more than
10% of its total assets (taken at market value at the time of a
particular investment) in restricted securities, other than
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933;
(j) invest more than 15% of its net assets (taken at market value
at the time of a particular investment) in illiquid securities,
including repurchase agreements maturing in more than seven
days.
Notwithstanding the foregoing investment restrictions,
International Portfolio may purchase securities pursuant to the
exercise of subscription rights, subject to the condition that such
purchase will not result in International Portfolio's ceasing to be
a diversified investment company. Far Eastern and European
corporations frequently issue additional capital stock by means of
subscription rights offerings to existing shareholders at a price
substantially below the market price of the shares. The failure to
exercise such rights would result in International Portfolio's
interest in the issuing company being diluted. The market for such
rights is not well developed in all cases and, accordingly,
International Portfolio may not always realize full value on the
sale of rights. The exception applies in cases where the limits
set forth in the investment restrictions would otherwise be
exceeded by exercising rights or would have already been exceeded
as a result of fluctuations in the market value of International
Portfolio's portfolio securities with the result that International
Portfolio would be forced either to sell securities at a time when
it might not otherwise have done so, to forego exercising the
rights.
<PAGE> 62
Item 14. Management of Base Trust.
The officers and trustees of Base Trust are listed below.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AGE WITH BASE TRUST DURING PAST FIVE YEARS
- ------------------- --- ---------------------- ----------------------------------------------------------------
<S> <C> <C> <C>
William D. Andrews 50 Executive Vice-President Executive vice president of Stein Roe & Farnham Incorporated
(the "Adviser")
Gary A. Anetsberger 42 Senior Vice-President Chief financial officer of the Mutual Funds division of the
Adviser; senior vice president of the Adviser since Apr. 1996;
vice president of the Adviser prior thereto
Timothy K. Armour 49 President; Trustee President of the Mutual Fund division of the Adviser and
(1)(2) director of the Adviser
Jilaine Hummel Bauer 42 Executive Vice-President; General counsel and secretary (since November, 1995) and
Secretary senior vice president of the Adviser
Kenneth L. Block (3) 77 Trustee Chairman emeritus of A. T. Kearney, Inc. (international
management consultants)
William W. Boyd (3) 71 Trustee Chairman and director of Sterling Plumbing Group, Inc.
(manufacturer of plumbing products)
Thomas W. Butch 40 Executive Vice-President Senior vice president of the Adviser since September, 1994;
first vice president, corporate communications, of Mellon Bank
Corporation prior thereto
Lindsay Cook (1) 45 Trustee Executive vice president of Liberty Financial Companies, Inc.
(the indirect parent of the Adviser) since March, 1997; senior
vice president prior thereto
Douglas A. Hacker(3) 42 Trustee Senior vice president and chief financial officer of United
Airlines since July, 1994; senior vice president - finance of
United Airlines, February, 1993 to July, 1994; vice president
of American Airlines prior thereto
Loren A. Hansen 49 Executive Vice-President Executive vice president of the Adviser since Dec., 1995; vice
president of The Northern Trust (bank) prior thereto
Janet Langford Kelly 40 Trustee Senior vice president, secretary and general counsel of Sara
(3) Lee Corporation (branded, packaged, consumer-products
manufacturer), since 1995; partner of Sidley & Austin (law
firm) prior thereto
Francis W. Morley 77 Trustee Chairman of Employer Plan Administrators and Consultants Co.
(2)(3) (designer, administrator, and communicator of employee benefit
plans)
Charles R. Nelson(3) 55 Trustee Van Voorhis Professor of Political Economy of the University
of Washington
Nicolette D. Parrish 48 Vice-President; Senior compliance administrator for the Adviser since
Assistant Secretary November, 1995; senior legal assistant prior thereto
Sharon R. Robertson 36 Controller Accounting manager for the Adviser's Mutual Funds division
<PAGE> 63
Janet B. Rysz 42 Assistant Secretary Senior compliance administrator and assistant secretary of the
Adviser
Thomas C. Theobald 60 Trustee Managing director of William Blair Capital Partners (private
(3) equity fund) since 1994; chief executive officer and chairman
of the Board of Directors of Continental Bank Corporation
prior thereto
Scott E. Volk 26 Treasurer Financial reporting manager for the Adviser's Mutual Funds
division since Oct. 1997; senior auditor with Ernst & Young
LLP from Sept. 1993 to Apr. 1996 and from Oct. 1996 to Sept.
1997; financial analyst with John Nuveen & Company Inc. from
May 1996 to Sept. 1996; full-time student prior to Sept. 1993
Heidi J. Walter 30 Vice-President Legal counsel for the Adviser since March, 1995; associate
with Beeler Schad & Diamond PC (law firm), prior thereto
Stacy H. Winick 32 Vice-President Senior legal counsel for the Adviser since October, 1996;
associate of Bell, Boyd & Lloyd (law firm) from June, 1993 to
September, 1996; associate of Debevoise & Plimpton (law firm)
prior thereto
Hans P. Ziegler 56 Executive Vice-President Chief executive officer of the Adviser since May, 1994;
president of the Investment Counsel division of the Adviser
from July, 1993 to June, 1994; president and chief executive
officer of Pitcairn Financial Management Group prior thereto
Margaret O. Zwick 31 Assistant Treasurer Project manager for the Adviser since April 1997; compliance
manager, August 1995 to April 1997; compliance accountant,
January 1995 to July 1995; section manager, January 1994 to
January 1995; supervisor prior thereto
<FN>
____________________________________
(1) Trustee who is an "interested person" of Base Trust and of the
Adviser, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
</TABLE>
Each trustee and officer of Base Trust holds the same position with
Stein Roe Municipal Trust, Stein Roe Investment Trust, Stein Roe
Income Trust, Stein Roe Advisor Trust, Stein Roe Institutional
Trust and Stein Roe Trust, other investment companies managed by
the Adviser. The address of Mr. Block is 11 Woodley Road,
Winnetka, Illinois 60093; that of Mr. Boyd is 2900 Golf Road,
Rolling Meadows, Illinois 60008; that of Mr. Cook is 600 Atlantic
Avenue, Boston, Massachusetts 02210; that of Mr. Hacker is P.O. Box
66100, Chicago, IL 60666; that of Ms. Kelly is Three First National
Plaza, Chicago, IL 60602; that of Mr. Morley is 20 North Wacker
Drive, Suite 2275, Chicago, Illinois 60606; that of Mr. Nelson is
Department of Economics, University of Washington, Seattle,
Washington 98195; that of Mr. Theobald is Suite 3300, 222 West
Adams Street, Chicago, IL 60606; and that of the officers is One
South Wacker Drive, Chicago, Illinois 60606.
<PAGE> 64
Officers and trustees affiliated with the Adviser serve without any
compensation from Base Trust. In compensation for their services
to Base Trust, trustees who are not "interested persons" of Base
Trust or the Adviser are paid an attendance fee from each series of
Base Trust for each meeting of the Board or standing committee
thereof attended at which business for that series is conducted
and, effective August 1996, are paid an annual retainer of $8,000
(divided equally among the Portfolios). The attendance fees (other
than for a Nominating Committee or Compensation Committee meeting)
are based on each series' net assets as of the preceding December
31. For a series with net assets of less than $50 million, the fee
is $50 per meeting; with $51 to $250 million, the fee is $200 per
meeting; with $251 million to $500 million, $350; with $501 million
to $750 million, $500; with $751 million to $1 billion, $650; and
with over $1 billion in net assets, $800. Each non-interested
trustee also receives an aggregate of $500 for attending each
meeting of the Nominating Committee and Compensation Committee.
Base Trust has no retirement or pension plan. The following table
sets forth compensation paid during the year ended September 30,
1997 to the trustees:
Total Compensation
Aggregate Compensation from the Stein Roe
Name of Trustee from Base Trust Fund Complex*
- ------------------- ----------------------- ------------------
Timothy K. Armour 0 0
Lindsay Cook 0 0
Kenneth L. Block $17,650 $84,743
William W. Boyd 20,850 92,643
Douglas A. Hacker 20,350 90,643
Janet Langford Kelly 19,750 77,500
Francis W. Morley 20,350 90,993
Charles R. Nelson 20,850 92,643
Thomas C. Theobald 20,350 90,643
____________________
*At Sept. 30, 1997, the Stein Roe Fund Complex consisted of nine
series of Base Trust, four series of Stein Roe Municipal Trust, six
series of Stein Roe Income Trust, ten series of Stein Roe
Investment Trust, seven series of Stein Roe Advisor Trust, one
series of Stein Roe Institutional Trust, and one series of Stein
Roe Trust.
Item 15. Control Persons and Principal Holders of Securities.
As of Nov. 28, 1997, the only persons known by Base Trust to own of
record or "beneficially" 5% or more of the outstanding interests of
a Portfolio within the definition of that term as contained in Rule
13d-3 under the Securities Exchange Act of 1934 were as follows:
Percentage of
Outstanding
Name Portfolio Interests Held
- ------------------------------------ ------------------------ --------------
Colonial Municipal Money Market Fund Municipal Money Portfolio 14.62%
Stein Roe Municipal Money Market Fund Municipal Money Portfolio 85.38
Stein Roe Institutional Client
High Yield Fund High Yield Portfolio 49.76
Stein Roe High Yield Fund High Yield Portfolio 50.05
Stein Roe Growth & Income Fund Growth & Income Portfolio 99.97
Stein Roe International Fund International Portfolio 99.93
Stein Roe Young Investor Fund Growth Investor Portfolio 99.98
Stein Roe Special Venture Fund Special Venture Portfolio 99.95
Stein Roe Balanced Fund Balanced Portfolio 99.96
<PAGE> 65
Stein Roe Growth Stock Fund Growth Stock Portfolio 96.99
Stein Roe Special Fund Special Portfolio 99.99
The address of Colonial Municipal Money Market Fund is One
Financial Center, Boston, Massachusetts 02111, and the address of
the other entities is One South Wacker Drive, Chicago, Illinois
60606.
Item 16. Investment Management and Administrative Services.
Base Trust has retained the services of Stein Roe & Farnham
Incorporated (the "Adviser") as investment adviser and
administrator for each Portfolio. The Adviser is a wholly owned
subsidiary of SteinRoe Services Inc. ("SSI"), which is a wholly
owned subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority owned subsidiary of LFC Holdings,
Inc., which is a wholly owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly owned subsidiary of Liberty Mutual
Insurance Company. Liberty Mutual Insurance Company is a mutual
insurance company, principally in the property/casualty insurance
field, organized under the laws of Massachusetts in 1912.
The directors of the Adviser are Kenneth R. Leibler, Harold W.
Cogger, C. Allen Merritt, Jr., Timothy K. Armour, and Hans P.
Ziegler. Mr. Leibler is President and Chief Executive Officer of
Liberty Financial; Mr. Cogger is Executive Vice President of
Liberty Financial; Mr. Merritt is Executive Vice President and
Treasurer of Liberty Financial; Mr. Armour is President of the
Adviser's Mutual Funds division; and Mr. Ziegler is Chief Executive
Officer of the Adviser. The business address of Messrs. Leibler,
Cogger, and Merritt is Federal Reserve Plaza, Boston, Massachusetts
02210; and that of Messrs. Armour, and Ziegler is One South Wacker
Drive, Chicago, Illinois 60606.
Please refer to the description of the Adviser, management
agreement and fees in Part A, Item 5. The Adviser provides office
space and executive and other personnel to Base Trust. Each
Portfolio pays all expenses other than those paid by the Adviser,
including but not limited to printing and postage charges and
securities registration and custodian fees and expenses incidental
to its organization. The tables below show management fees paid by
the Portfolios over the last three fiscal years:
Year Ended Year Ended Year Ended
Portfolio 6/30/97 6/30/96 6/30/95
- ------------------------------- ---------- ---------- ----------
Municipal Money Portfolio $351,742 $290,904 0
High Yield Portfolio 52,997 N/A N/A
Year Ended Year Ended Year Ended
Portfolio 6/30/97 6/30/96 6/30/95
- ------------------------------- ---------- ---------- ----------
Growth & Income Portfolio 1,191,731 N/A N/A
Growth Stock Portfolio 2,119,803 N/A N/A
Growth Investor Portfolio 1,567,638 N/A N/A
Special Portfolio 5,249,468 N/A N/A
Special Venture Portfolio 942,785 N/A N/A
International Portfolio 838,780 N/A N/A
<PAGE> 66
The management agreement also provides that neither the Adviser nor
any of its directors, officers, stockholders (or partners of
stockholders), agents, or employees shall have any liability to
Base Trust or any shareholder for any error of judgment, mistake of
law or any loss arising out of any investment, or for any other act
or omission in the performance by the Adviser of its duties under
the management agreement, except for liability resulting from
willful misfeasance, bad faith or gross negligence on the Adviser's
part in the performance of its duties or from reckless disregard by
the Adviser of the Adviser's obligations and duties under that
agreement.
Any expenses that are attributable solely to the organization,
operation, or business of a Portfolio shall be paid solely out of
that Portfolio's assets. Any expenses incurred by Base Trust that
are not solely attributable to a particular series of Base Trust
are apportioned in such manner as the Adviser determines is fair
and appropriate, unless otherwise specified by the Board of
Trustees.
Bookkeeping and Accounting Agreement
- ------------------------------------
Pursuant to a separate agreement with Base Trust, the Adviser
receives a fee for performing certain bookkeeping and accounting
services for each Portfolio. For these services, the Adviser
receives an annual fee of $25,000 plus .0025 of 1% of average net
assets over $50 million. The tables below show fees paid under
this agreement by the Portfolios over the last three fiscal years:
Year Ended Year Ended Year Ended
Portfolio 6/30/97 6/30/96 6/30/95
- ------------------------------- ---------- ---------- ----------
Municipal Money Portfolio $27,274 $20,746 N/A
High Yield Portfolio 16,664 N/A N/A
Year Ended Year Ended Year Ended
Portfolio 6/30/97 6/30/96 6/30/95
- ------------------------------- ---------- ---------- ----------
Balanced Portfolio $20,314 N/A N/A
Growth & Income Portfolio 20,935 N/A N/A
Growth Stock Portfolio 24,844 N/A N/A
Growth Investor Portfolio 22,443 N/A N/A
Special Portfolio 35,230 N/A N/A
Special Venture Portfolio 19,000 N/A N/A
International Portfolio 18,344 N/A N/A
Custodian
- ---------
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for Base
Trust. It is responsible for holding all securities and cash of
each Portfolio, receiving and paying for securities purchased,
delivering against payment securities sold, receiving and
collecting income from investments, making all payments covering
expenses of each Portfolio, and performing other administrative
duties, all as directed by authorized persons. The Bank does not
exercise any supervisory function in such matters as purchase and
sale of portfolio securities, payment of dividends, or payment of
expenses of a Portfolio. A Portfolio may invest in obligations of
the Bank and may purchase or sell securities from or to the Bank.
<PAGE> 67
Independent Auditors
- --------------------
The independent auditors for Cash Reserves Portfolio, the Municipal
Portfolios and the Bond Portfolios are Ernst & Young LLP, 233 South
Wacker Drive, Chicago, Illinois 60606; the independent public
accountants for each Equity Portfolio are Arthur Andersen LLP, 33
West Monroe Street, Chicago, Illinois 60603. The auditors audit
and report on the Portfolios' annual financial statements, review
certain regulatory reports and the Portfolios' federal income tax
returns, and perform other professional accounting, auditing, tax
and advisory services when engaged to do so by Base Trust.
Item 17. Brokerage Allocation and Other Practices.
The Adviser places the orders for the purchase and sale of
portfolio securities for each Portfolio, including any options and
futures transactions.
The Municipal Portfolios purchase portfolio securities both in
underwritings and in the over-the-counter market. Included in the
price paid to an underwriter of a portfolio security is the spread
between the price paid by the underwriter to the issuer and the
price paid by the purchaser. The Portfolio's purchases and sales
of portfolio securities in the over-the-counter market usually are
transacted with a broker or dealer on a net basis, without any
brokerage commission being paid by the Portfolio, but do reflect
the spread between the bid and asked prices. The Adviser may also
transact purchases of portfolio securities directly with the
issuers.
Purchases and sales of portfolio securities for the Bond Portfolios
are ordinarily transacted with the issuer or with a primary market
maker acting as principal or agent for the securities on a net
basis, with no brokerage commission being paid by a Portfolio.
Transactions placed through dealers reflect the spread between the
bid and asked prices. Occasionally, a Portfolio may make purchases
of underwritten issues at prices that include underwriting
discounts or selling concessions.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price and
execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important factor
in this decision, but a number of other judgmental factors may also
enter into the decision. These include: the Adviser's knowledge of
current transaction costs; the nature of the security being traded;
the size of the transaction; the desired timing of the trade; the
activity existing and expected in the market for the particular
security; confidentiality; the execution, clearance and settlement
capabilities of the broker or dealer selected and others that are
considered; the Adviser's knowledge of the financial stability of
the broker or dealer selected and such other brokers or dealers;
and the Adviser's knowledge of actual or apparent operational
problems of any broker or dealer. Recognizing the value of these
factors, a Portfolio may incur a transaction charge in excess of
that which another broker or dealer may have charged for effecting
the same transaction. Evaluations of the reasonableness of the
costs of portfolio transactions, based on the foregoing factors,
are made on an ongoing basis by the Adviser's staff and reports are
made annually to the Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to be
capable of providing the best combination of price
<PAGE> 68
and execution with respect to a particular portfolio transaction
for a Portfolio, the Adviser often selects a broker or dealer that
has furnished it with research products or services such as
research reports, subscriptions to financial publications and
research compilations, compilations of securities prices, earnings,
dividends and similar data, and computer data bases, quotation
equipment and services, research-oriented computer software and
services, and services of economic and other consultants.
Selection of brokers or dealers is not made pursuant to an
agreement or understanding with any of the brokers or dealers;
however, the Adviser uses an internal allocation procedure to
identify those brokers or dealers who provide it with research
products or services and the amount of research products or
services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate,
including the Portfolios, to such brokers or dealers to ensure the
continued receipt of research products or services the Adviser
feels are useful. In certain instances, the Adviser receives from
brokers and dealers products or services which are used both as
investment research and for administrative, marketing, or other
non-research purposes. In such instances, the Adviser makes a good
faith effort to determine the relative proportions of such products
or services which may be considered as investment research. The
portion of the costs of such products or services attributable to
research usage may be defrayed by the Adviser (without prior
agreement or understanding, as noted above) through brokerage
commissions generated by transactions of clients (including the
Portfolios), while the portion of the costs attributable to non-
research usage of such products or services is paid by the Adviser
in cash. No person acting on behalf of a Portfolio is authorized,
in recognition of the value of research products or services, to
pay a price in excess of that which another broker or dealer might
have charged for effecting the same transaction. The Adviser may
also receive research in connection with selling concessions and
designations in fixed price offerings in which the Portfolios
participate. Research products or services furnished by brokers
and dealers through whom transactions are effected may be used in
servicing any or all of the clients of the Adviser and not all such
research products or services are used in connection with the
management of the Portfolios.
With respect to each Equity Portfolio's purchases and sales of
portfolio securities transacted with a broker or dealer on a net
basis, the Adviser may also consider the part, if any, played by
the broker or dealer in bringing the security involved to the
Adviser's attention, including investment research related to the
security and provided to the Portfolio.
The Board has reviewed the legal developments pertaining to and the
practicability of attempting to recapture underwriting discounts or
selling concessions when portfolio securities are purchased in
underwritten offerings. The Board has been advised by counsel that
recapture by a mutual fund currently is not permitted under the
Rules of Fair Practice of the National Association of Securities
Dealers ("NASD"). Therefore, except with respect to purchases of
Municipal Securities which are not subject to NASD Rules, Municipal
Money Portfolio will not attempt to recapture underwriting
discounts or selling concessions. Municipal Money Portfolio
attempts to recapture selling concessions on purchases during
underwritten offerings; however, the Adviser will not be able to
negotiate discounts from the fixed offering price for those issues
for which there is a strong demand, and will not allow the failure
to obtain a discount to prejudice its ability to purchase an issue
for the Portfolio. The Board periodically reviews Municipal
<PAGE> 69
Money Portfolio's efforts to recapture concessions and whether it
is in the best interests of the Portfolio to continue to attempt to
recapture underwriting discounts or selling concessions.
The table below shows information on any brokerage commissions paid
by the Portfolios:
<TABLE>
Growth & Growth Growth Special Inter-
Income Balanced Stock Investor Special Venture national
Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio Portfolio
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Total amount of brokerage commissions paid
during period ended 9/30/97 $76,712 $101,876 $178,057 $333,709 $458,431 $240,637 $188,068
Amount of commissions paid to brokers or
dealers who supplied research services
to the Adviser 68,011 101,526 174,017 323,977 416,739 214,303 182,656
Total dollar amount involved in such
transactions (000 omitted) 50,869 65,427 163,280 235,885 240,500 90,582 43,434
Amount of commissions paid to brokers or
dealers that were allocated to such
brokers or dealers by the portfolio
manager because of research services
provided to the Portfolio 22,206 33,903 17,400 86,659 125,948 58,243 60,424
Total dollar amount involved in such
transactions (000 omitted) 16,168 24,728 10,320 75,667 69,680 58,845 13,543
</TABLE>
Base Trust has arranged for its custodian to act as a soliciting
dealer to accept any fees available to the custodian as a
soliciting dealer in connection with any tender offer for portfolio
securities. The custodian will credit any such fees received
against its custodial fees. In addition, the Board of Trustees has
reviewed the legal developments pertaining to and the
practicability of attempting to recapture underwriting discounts or
selling concessions when portfolio securities are purchased in
underwritten offerings. However, the Board has been advised by
counsel that recapture by a mutual fund currently is not permitted
under the Rules of Fair Practice of the National Association of
Securities Dealers.
Item 18. Capital Stock and Other Securities.
Under the Declaration of Trust, the trustees are authorized to
issue Interests in Base Trust. Investors are entitled to
participate pro rata in distributions of taxable income, loss,
gain, and credit of Base Trust (unless another sharing method is
required for federal income tax reasons in accordance with the
sharing method adopted by the trustees). Upon liquidation or
dissolution of Base Trust, investors are entitled to share pro rata
in the net assets available for distribution to its investors
(unless another sharing method is required for federal income tax
reasons, in accordance with the sharing method adopted by the
trustees).
<PAGE> 70
Investments in Base Trust have no preferences, preemptive,
conversion, or similar rights and are fully paid and nonassessable,
except as set forth below. Investments in Base Trust may not be
transferred. No certificates representing an investor's Interest
in Base Trust will be issued.
Each whole Interest (or fractional Interest) outstanding on the
record date established in accordance with the By-Laws shall be
entitled to a number of votes on any matter on which it is entitled
to vote equal to the net asset value of the Interest (or fractional
Interest) in United States dollars determined at the close of
business on the record date (for example, an Interest having a net
asset value of $10.50 would be entitled to 10.5 votes). As a
common law trust, Base Trust is not required to hold annual
shareholder meetings. However, special meetings may be called for
purposes such as electing or removing trustees, changing
fundamental policies, or approving an investment advisory contract.
If requested to do so by the holders of at least 10% of its
outstanding Interests, Base Trust will call a special meeting for
the purpose of voting upon the question of removal of a trustee or
trustees and will assist in the communications with other holders
as required by Section 16(c) of the Investment Company Act of 1940.
All Interests of Base Trust are voted together in the election of
trustees. On any other matter submitted to a vote of holders,
Interests are voted by individual series and not in the aggregate,
except that Interests are voted in the aggregate when required by
the Investment Company Act of 1940 or other applicable law. When
the Board of Trustees determines that the matter affects only the
interests of one or more series, holders of the unaffected series
are not entitled to vote on such matters.
Base Trust may enter into a merger or consolidation or sell all or
substantially all of its assets if approved by the vote of two-
thirds of its investors (with the vote of each being in proportion
to the respective percentages of the Interests in Base Trust),
except that if the trustees recommend such sale of assets, the
approval by vote of a majority of the investors (with the votes of
each being in proportion to their respective percentages of the
Interests of Base Trust) will be sufficient. Base Trust, or a
series thereof, will dissolve upon the complete withdrawal,
resignation, retirement, or bankruptcy of any investor and will
terminate unless reconstituted and continued with the consent of
all remaining investors. Base Trust, or a series thereof, may also
be terminated (1) if approved by the vote of two-thirds of its
investors (with the votes of each being in proportion to the amount
of their investment), or (2) by the trustees by written notice to
its investors. The Declaration of Trust contains a provision
limiting the life of Base Trust to a term of years; consequently,
Base Trust will terminate on December 31, 2080.
Base Trust is organized as a common law trust under the laws of the
Commonwealth of Massachusetts. Investors in any series of Base
Trust may be held personally liable, jointly and severally, for the
obligations and liabilities of that series, subject, however, to
indemnification by that series in the event that there is imposed
upon an investor a greater portion of the liabilities and
obligations of the series than its proportionate Interest in the
series. The Declaration of Trust also provides that Base Trust
shall maintain appropriate insurance (for example, fidelity bonding
and errors and omissions insurance) for the protection of Base
Trust, its investors, trustees, officers, employees, and agents
covering possible tort and other liabilities. Thus, the risk of an
investor incurring financial loss on account of investor liability
is limited to circumstances in which both inadequate insurance
exists and Base Trust itself is unable to meet its obligations.
<PAGE> 71
The Declaration of Trust further provides that obligations of Base
Trust are not binding upon the trustees individually but only upon
the property of Base Trust and that the trustees will not be liable
for any action or failure to act, but nothing in the Declaration of
Trust protects a trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office.
Base Trust reserves the right to create and issue any number of
series, in which case investors in each series would participate
only in the earnings and assets of the particular series.
Investors in each series would be entitled to vote separately to
approve advisory agreements or changes in investment policy, but
investors of all series may vote together in election or selection
of trustees, principal underwriters, and accountants for Base
Trust. Upon liquidation or dissolution of Base Trust, the
investors in each series would be entitled to share pro rata in the
net assets of their respective series available for distribution to
investors (unless another sharing method is required for federal
income tax reasons, in accordance with the sharing method adopted
by the trustees). Interests of any series of Base Trust may be
divided into two or more classes of Interests having such
preferences or special or relative privileges as the trustees of
Base Trust may determine.
Base Trust will in no case have more than 500 investors in order to
satisfy certain tax requirements. This number may be increased or
decreased should such requirements change. Similarly, if Congress
enacts certain proposed amendments to the Code, it may be desirable
for Base Trust to elect the status of a regulated investment
company ("RIC") as that term is defined in Subchapter M of the
Code, which would require that Base Trust first change its
organizational status from that of a Massachusetts trust to that of
a Massachusetts business trust ("MBT") or other entity treated as a
corporation under the Code. Base Trust's Declaration of Trust
empowers the trustees, on behalf of the Trust, to change Base
Trust's organizational form to that of a MBT or otherwise
reorganize as an entity treated as a corporation under the Code and
to elect RIC status without a vote of the investors. Any such
action on the part of the trustees on behalf of Base Trust would be
contingent upon there being no adverse tax consequences to such
action.
Item 19. Purchase, Redemption, and Pricing of Securities.
Interests in a Portfolio will be issued solely in private placement
transactions that do not involve any "public offering" within the
meaning of Section 4(2) of the 1933 Act. Investments in a
Portfolio may only be made by investment companies, insurance
company separate accounts, common or commingled trust funds, or
similar organizations or entities that are "accredited investors"
within the meaning of Regulation D under the 1933 Act. This
Registration Statement does not constitute an offer to sell or the
solicitation of an offer to buy any "security" within the meaning
of the 1933 Act.
The net asset value per share of each Portfolio is determined by
dividing its total assets (i.e., the total current market value of
its investment in the Portfolio) less its liabilities (including
accrued expenses and dividends payable), by the total number of
shares of the Portfolio outstanding at the time of the
determination. Each Portfolio's net asset value per share is
calculated as of 3:00 p.m. (central time) on each day the New York
Stock Exchange is open for trading.
<PAGE> 72
The value of each investor's investment in a Portfolio will be
based on its pro rata share of the total net asset value of the
Portfolio (i.e., the value of its portfolio securities and other
assets less its liabilities) as of the same date and time.
Please refer to Purchase of Securities in Part A, which is
incorporated herein by reference. Each of Cash Reserves Portfolio
and Municipal Money Portfolio values its portfolio by the
"amortized cost method" by which it attempts to maintain its net
asset value at $1.00 per share. This involves valuing an
instrument at its cost and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the
instrument. Although this method provides certainty in valuation,
it may result in periods during which value as determined by
amortized cost is higher or lower than the price the Portfolio
would receive if it sold the instrument. Other assets are valued
at a fair value determined in good faith by the Board of Trustees.
In connection with the use of amortized cost and the maintenance of
its per share net asset value of $1.00, Base Trust has agreed, with
respect to Cash Reserves Portfolio and Municipal Money Portfolio:
(1) to seek to maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining relative
stability of principal and not in excess of 90 days; (2) not to
purchase a portfolio instrument with a remaining maturity of
greater than thirteen months (for this purpose a Portfolio
considers that an instrument has a maturity of thirteen months or
less if it is a "short-term" obligation as defined in the
Glossary); and (3) to limit its purchase of portfolio instruments
to those instruments that are denominated in U.S. dollars which the
Board of Trustees determines present minimal credit risks and that
are of eligible quality as determined by any major rating service
as defined under SEC Rule 2a-7 or, in the case of any instrument
that is not rated, of comparable quality as determined by the
Board.
Cash Reserves Portfolio and Municipal Money Portfolio have
established procedures reasonably designed to stabilize its price
per share as computed for the purpose of sales and redemptions at
$1.00. Such procedures include review of its portfolio holdings by
the Board of Trustees, at such intervals as it deems appropriate,
to determine whether its net asset value calculated by using
available market quotations or market equivalents deviates from
$1.00 per share based on amortized cost. Calculations are made to
compare the value of its investments valued at amortized cost with
market value. Market values are obtained by using actual
quotations provided by market makers, estimates of market value,
values from yield data obtained from reputable sources for the
instruments, values obtained from the Adviser's matrix, or values
obtained from an independent pricing service. Any such service
might value a Portfolio's investments based on methods which
include consideration of: yields or prices of Municipal Securities
of comparable quality, coupon, maturity and type; indications as to
values from dealers; and general market conditions. The service
may also employ electronic data processing techniques, a matrix
system, or both to determine valuations.
In connection with the use of the amortized cost method of
portfolio valuation to maintain its net asset value at $1.00 per
share, Cash Reserves Portfolio and Municipal Money Portfolio might
incur or anticipate an unusual expense, loss, depreciation, gain or
appreciation that would affect its net asset value per share or
income for a particular
<PAGE> 73
period. The extent of any deviation between the net asset value
based upon available market quotations or market equivalents and
$1.00 per share based on amortized cost will be examined by the
Board of Trustees as it deems appropriate. If such deviation
exceeds 1/2 of 1%, the Board of Trustees will promptly consider
what action, if any, should be initiated. In the event the Board
of Trustees determines that a deviation exists that may result in
material dilution or other unfair results to investors or existing
shareholders, it will take such action as it considers appropriate
to eliminate or reduce to the extent reasonably practicable such
dilution or unfair results. Actions which the Board might take
include: selling portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average portfolio
maturity; increasing, reducing, or suspending dividends or
distributions from capital or capital gains; or redeeming shares in
kind. The Board might also establish a net asset value per share
by using market values, as a result of which the net asset value
might deviate from $1.00 per share.
Item 20. Tax Status.
Base Trust is organized as a common law trust under the laws of the
Commonwealth of Massachusetts. Under the anticipated method of
operation of Base Trust, Base Trust will not be subject to any
federal income tax, nor is it expected to have any Massachusetts
income tax liability. Base Trust has received a private letter
ruling from the Internal Revenue Service to confirm its federal tax
treatment in certain respects. Each investor in a Portfolio will
be taxed on its share (as determined in accordance with the
governing instruments of Base Trust) of the Portfolio's ordinary
income and capital gain in determining its income tax liability.
The determination of such share will be made in accordance with a
method designed to satisfy the Code and regulations promulgated
thereunder. There can be no assurance, however, that the Internal
Revenue Service will agree with such a method of allocation.
The fiscal year end of Cash Reserves Portfolio, each Municipal
Portfolio and each Bond Portfolio is June 30, and that of each
Equity Portfolio is September 30. Although, as described above,
the Portfolios will not be subject to federal income tax, they will
file appropriate income tax returns.
It is intended that each Portfolio's assets, income, and
distributions will be managed in such a way that an investor in the
Portfolio will be able to satisfy the requirements of Subchapter M
of the Code for qualification as a RIC, assuming that the investor
invests all of its assets in the Portfolio.
There are certain tax issues that will be relevant to only certain
of the investors, specifically investors that are segregated asset
accounts and investors who contribute assets rather than cash to a
Portfolio. It is intended that such segregated asset accounts will
be able to satisfy diversification requirements applicable to them
and that such contributions of assets will not be taxable provided
certain requirements are met. Such investors are advised to
consult their own tax advisors as to the tax consequences of an
investment in a Portfolio.
Additional Income Tax Considerations
In order for an investment company investing in a Portfolio to
qualify for federal income tax treatment as a regulated investment
company, at least 90% of its gross income
<PAGE> 74
for a taxable year must be derived from qualifying income; i.e.,
dividends, interest, income derived from loans of securities, gains
from the sale of stock or securities or foreign currencies, or
other income (including but not limited to gains from options,
futures, or forward contracts) derived with respect to its business
of investing in stock, securities, or currencies. For certain
Portfolios with fiscal years beginning before August 5, 1997, gains
realized on the sale or other disposition of any of the following
held for less than three months must be limited to less than 30% of
its annual gross income: (1) stock or securities, (2) options,
futures, or forward contracts (other than on foreign currencies),
and (3) foreign currencies and currency forward contracts that are
not directly related to its principal business of investing in
stocks, securities, and options and futures with respect to stocks
or securities. Each such investment company will also be required
to distribute each year at least 90% of its investment company
taxable income (in order to escape federal income tax on
distributed amounts) and to meet certain tax diversification
requirements. Because such investment companies may invest all of
their assets in a Portfolio, the Portfolio must satisfy all of
these tax requirements in order for such other investment company
to satisfy them. In order to avoid realizing excessive gains on
securities held less than three months, a Portfolio may be required
to defer the closing out of certain positions beyond the time when
it would otherwise be advantageous to do so. For certain
Portfolios with fiscal years beginning before August 5, 1997,
year-end mark-to-market gains on positions open for less than three
months as of the end of a Portfolio's fiscal year are not
considered gains on securities held for less than three months for
purposes of the 30% test. The 30% test is no longer applicable to
Portfolios with fiscal years beginning after August 5, 1997.
Each Portfolio will allocate at least annually to its shareholders
its distributive share of any net investment income and net capital
gains which have been recognized for federal income tax purposes
(including unrealized gains at the end of the Portfolio's taxable
year on certain options and futures transactions that are required
to be marked-to-market).
Each Portfolio intends to distribute substantially all of its
income, tax-exempt and taxable, including any net realized capital
gains, and thereby be relieved of any federal income tax liability
to the extent of such distributions. Each Municipal Portfolio
intends to retain for its shareholders the tax-exempt status with
respect to tax-exempt income received by the Portfolio. The
distributions will be designated as "exempt-interest dividends,"
taxable ordinary income, and capital gains. Each Municipal
Portfolio may also invest in Municipal Securities the interest on
which is subject to the federal alternative minimum tax. The
source of exempt-interest dividends on a state-by-state basis and
the federal income tax status of all distributions will be reported
to shareholders annually. Such report will allocate income
dividends between tax-exempt, taxable income, and alternative
minimum taxable income in approximately the same proportions as the
Portfolio's total income during the year. Accordingly, income
derived from each of these sources by the Portfolio may vary
substantially in any particular distribution period from the
allocation reported to shareholders annually. The proportion of
such dividends that constitutes taxable income will depend on the
relative amounts of assets invested in taxable securities, the
yield relationships between taxable and tax-exempt securities, and
the period of time for which such securities are held. The
Portfolio may, under certain circumstances, temporarily invest its
assets so that less than 80% of gross income during such temporary
period will be exempt from federal income taxes.
<PAGE> 75
Because capital gain distributions reduce net asset value, if a
shareholder purchases shares shortly before a record date he will,
in effect, receive a return of a portion of his investment in such
distribution. The distribution would nonetheless be taxable to
him, even if the net asset value of shares were reduced below his
cost. However, for federal income tax purposes the shareholder's
original cost would continue as his tax basis.
Because the taxable portion of the Municipal Portfolios' investment
income consists primarily of interest, none of its dividends,
whether or not treated as "exempt-interest dividends," will qualify
under the Code for the dividends received deduction available to
corporations.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of a Portfolio is not deductible for
federal income tax purposes. Under rules applied by the Internal
Revenue Service to determine whether borrowed funds are used for
the purpose of purchasing or carrying particular assets, the
purchase of shares may, depending upon the circumstances, be
considered to have been made with borrowed funds even though the
borrowed funds are not directly traceable to the purchase of
shares.
If you redeem at a loss shares of a Municipal Portfolio held for
six months or less, that loss will not be recognized for federal
income tax purposes to the extent of exempt-interest dividends you
have received with respect to those shares. If any such loss
exceeds the amount of the exempt-interest dividends you received,
that excess loss will be treated as a long-term capital loss to the
extent you receive any long-term capital gain distribution with
respect to those shares.
Cash Reserves Portfolio, each Bond Portfolio, and each Equity
Portfolio expect that less than 100% of dividends will qualify for
the deduction for dividends received by corporate shareholders.
To the extent a Portfolio invests in foreign securities, it may be
subject to withholding and other taxes imposed by foreign
countries. Tax treaties between certain countries and the United
States may reduce or eliminate such taxes. Investors may be
entitled to claim U.S. foreign tax credits with respect to such
taxes, subject to certain provisions and limitations contained in
the Code. Specifically, if more than 50% of a Portfolio's total
assets at the close of any fiscal year consist of stock or
securities of foreign corporations, a Portfolio may file an
election with the Internal Revenue Service pursuant to which
shareholders of a Portfolio will be required to (1) include in
ordinary gross income (in addition to taxable dividends actually
received) their pro rata shares of foreign income taxes paid by a
Portfolio even though not actually received, (2) treat such
respective pro rata shares as foreign income taxes paid by them,
and (3) deduct such pro rata shares in computing their taxable
incomes, or, alternatively, use them as foreign tax credits,
subject to applicable limitations, against their United States
income taxes. Shareholders who do not itemize deductions for
federal income tax purposes will not, however, be able to deduct
their pro rata portion of foreign taxes paid by a Portfolio,
although such shareholders will be required to include their share
of such taxes in gross income. Shareholders who claim a foreign
tax credit may be required to treat a portion of dividends received
from a Portfolio as separate category income for purposes of
<PAGE> 76
computing the limitations on the foreign tax credit available to
such shareholders. Tax-exempt shareholders will not ordinarily
benefit from this election relating to foreign taxes. Each year, a
Portfolio will notify shareholders of the amount of (1) each
shareholder's pro rata share of foreign income taxes paid by the
Portfolio and (2) the portion of dividends which represents income
from each foreign country, if the Portfolio qualifies to pass along
such credit.
Passive Foreign Investment Companies. International Portfolio may
purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies ("PFICs"). In
addition to bearing their proportionate share of International
Portfolio's expenses (management fees and operating expenses),
shareholders will also indirectly bear similar expenses of PFICs.
Capital gains on the sale of PFIC holdings will be deemed to be
ordinary income regardless of how long International Portfolio
holds its investment. In addition, International Portfolio may be
subject to corporate income tax and an interest charge on certain
dividends and capital gains earned from PFICs, regardless of
whether such income and gains are distributed to shareholders.
Item 21. Underwriters.
Inapplicable.
Item 22. Calculation of Performance Data.
Inapplicable.
Item 23. Financial Statements
Please refer to the Financial Statements (investments as of June
30, 1997, balance sheet as of June 30, 1997, statement of
operations and statement of changes in net assets for the period
ended June 30, 1997, and notes thereto) and reports of independent
auditors of SR&F Municipal Money Market Portfolio and SR&F High
Yield Portfolio included in the June 30, 1997 annual report of
Stein Roe Municipal Trust and the June 30, 1997 annual report of
the Bond Funds of Stein Roe Income Trust, respectively; and the
Financial Statements (investments as of September 30, 1997, balance
sheet as of September 30, 1997, statement of operations and
statement of changes in net assets for the period ended September
30, 1997, and notes thereto) and reports of independent public
accountants for each of the Equity Portfolios included in the
September 30, 1997 annual reports of Stein Roe Investment Trust.
The Financial Statements (but no other material from the reports)
are incorporated herein by reference. The reports may be obtained
at no charge by telephoning 800-338-2550.
Glossary
- --------
Issuer. For purposes of diversification under the Investment
Company Act of 1940, identification of the issuer (or issuers) of a
Municipal Security depends on the terms and conditions of the
obligation. If the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation
is backed only by the assets and revenues of the subdivision, such
subdivision would be regarded as the sole issuer. Similarly, if
the obligation is backed only by the assets and revenues of the
<PAGE> 77
non-governmental user, the non-governmental user would be deemed to
be the sole issuer. In addition, if the bond is backed by the full
faith and credit of the U.S. Government, agencies or
instrumentalities of the U.S. Government or U.S. Government
Securities, the U.S. Government or the appropriate agency or
instrumentality would be deemed to be the sole issuer, and would
not be subject to the 5% limitation applicable to investments in a
single issuer as described under Investment Restrictions in Part A
and restriction number (1) under Investment Restrictions in this
Part B. If, in any case, the creating municipal government or
another entity guarantees an obligation or issues a letter of
credit to secure the obligation, the guarantee (or letter of
credit) would be considered a separate security issued by such
government or entity and would be separately valued and included in
the issuer limitation. In the case of Municipal Money Portfolio,
guarantees and letters of credit described in this paragraph from
banks whose credit is acceptable to the Portfolio are not
restricted in amount by the restriction against investing more than
25% of their total assets in securities of non-governmental issuers
whose principal business activities are in the same industry.
Short-term. This term, as used with respect to Municipal Money
Portfolio, refers to an obligation of one of the following types,
measured from the date of an investment by the Portfolio in the
obligation (regardless of the duration of the obligation from the
date of original issuance):
1. An obligation of the issuer to pay the entire principal and
accrued interest in no more than thirteen months;
2. An obligation (regardless of the duration before its maturity)
issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities, bearing a variable rate of interest providing
for automatic establishment, no less frequently than annually, of a
new rate or successive new rates of interest by a formula, that can
reasonably be expected to have a market value approximating its
principal amount (a) whenever a new interest rate is established,
in the case of an obligation having a variable rate of interest, or
(b) at any time, in the case of an obligation having a "floating
rate of interest" that changes concurrently with any change in an
identified market interest rate to which it is pegged;
3. Any other obligation (regardless of the duration before its
maturity) that: (a) has a demand feature entitling the holder to
receive from an issuer the entire principal [or, under the
circumstances described under Basic Investment Strategy in Part A
for Municipal Money Portfolio, the issuer of a guarantee or a
letter of credit with respect to a participation interest in the
obligation (acquired from such issuer)], (i) at any time upon no
more than thirty days' notice or (ii) at specified intervals not
exceeding thirteen months and upon no more than thirty days'
notice, (b)(i) has a variable rate of interest that changes on set
dates or (ii) has a floating rate of interest (as defined in 2
above), and (c) can reasonably be expected to have a market value
approximating its principal amount (i) whenever a new rate of
interest is established, in the case of an obligation having a
variable rate of interest, or (ii) at any time, in the case of an
obligation having a floating rate of interest; provided that, with
respect to each such obligation that is not rated eligible quality
by Moody's or S&P, the Board of Trustees has determined that the
obligation is of eligible quality; or
<PAGE> 78
4. A repurchase agreement that is to be fully performed (or that
the Portfolio may require be performed) in not more than thirteen
months (regardless of the maturity of the obligation to which the
repurchase agreement relates).
Variable Rate Demand Security. This type of security is a Variable
Rate Security (as defined in Part A under Municipal Securities)
which has a demand feature entitling the purchaser to resell the
security to the issuer of the demand feature at an amount
approximately equal to amortized cost or the principal amount
thereof, which may be more or less than the price the Portfolio
paid for it. The interest rate on a Variable Rate Demand Security
also varies either according to some objective standard, such as an
index of short-term tax-exempt rates, or according to rates set by
or on behalf of the issuer.
Appendix--Ratings
- -----------------
Ratings In General
A rating of a rating service represents the service's opinion as to
the credit quality of the security being rated. However, the
ratings are general and are not absolute standards of quality or
guarantees as to the creditworthiness of an issuer. Consequently,
the Adviser believes that the quality of debt securities should be
continuously reviewed and that individual analysts give different
weightings to the various factors involved in credit analysis. A
rating is not a recommendation to purchase, sell or hold a
security, because it does not take into account market value or
suitability for a particular investor. When a security has
received a rating from more than one service, each rating should be
evaluated independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be changed,
suspended or withdrawn as a result of changes in or unavailability
of such information, or for other reasons. The Adviser, through
independent analysis, attempts to discern variations in credit
ratings of the published services, and to anticipate changes in
credit ratings. The following is a description of the
characteristics of certain ratings used by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
and Fitch Investors Service, L.P. ("Fitch").
Ratings By Moody's
Corporate and Municipal Bonds:
Aaa. Bonds rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
Although the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such bonds.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa bonds or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the
long term risks appear somewhat larger than in Aaa bonds.
<PAGE> 79
A. Bonds rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
Baa. Bonds rated Baa are considered medium grade obligations;
i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often
the protection of interest and principal payments may be very
moderate, and thereby not well safeguarded during both good and bad
times over the future. Uncertainty of position characterizes bonds
in this class.
B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long
period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues
may be in default or there may be present elements of danger with
respect to principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds,
and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Conditional Ratings. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned in
operating experience, (c) rentals which begin when facilities are
completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature
upon completion of construction or elimination of basis of
condition.
Notes: Those bonds in the Aa, A, Baa, Ba, and B groups which
Moody's believes possess the strongest investment attributes are
designated by the symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from Aa through B in its corporate bond
rating system. The modifier 1 indicates that the security ranks in
the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end of its generic rating category.
<PAGE> 80
Municipal Notes:
MIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
MIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
MIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
Demand Feature of Variable Rate Demand Securities:
Moody's may assign a separate rating to the demand feature of a
variable rate demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for
refinancing.
VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding
group.
VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable
strength of the preceding grades. Liquidity and cash flow
protection may be narrow and market access for refinancing is
likely to be less well established.
Commercial Paper:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of
rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or
entities, Moody's, in assigning ratings to such issuers, evaluates
the financial strength of the indicated affiliated corporations,
commercial banks, insurance companies, foreign governments, or
other entities, but only as one factor in the total rating
assessment.
RATINGS BY S&P:
Corporate and Municipal Bonds:
AAA. Debt rated AAA has the highest rating. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in
small degree.
<PAGE> 81
A. Debt rated A has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
BBB. Debt rated BBB is regarded as having an adequate capacity to
pay interest and repay principal. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay principal and interest for debt in this category
than for debt in higher-rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk exposures
to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. The D rating also is issued
upon the filing of a bankruptcy petition if debt service payments
are jeopardized.
NOTES: The ratings from AA to CCC may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within
the major rating categories. Foreign debt is rated on the same
basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account currency
exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or
interest return is indexed to equities, commodities, or currencies;
certain swaps and options; and interest only and principal only
mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no
volatility or variability in total return.
Provisional Ratings. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful
completion of the project being financed by the debt being rated
and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful and timely completion of
the project. This rating, however, although addressing credit
quality subsequent to completion of the project, makes no comment
on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
Municipal Notes:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess
overwhelming safety characteristics are designated as SP-1+.
<PAGE> 82
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal
and interest.
Notes due in three years or less normally receive a note rating.
Notes maturing beyond three years normally receive a bond rating,
although the following criteria are used in making that assessment:
- - Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a
note).
- - Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be rated as a note).
Demand Feature of Variable Rate Demand Securities:
S&P assigns dual ratings to all long-term debt issues that have as
part of their provisions a demand feature. The first rating
addresses the likelihood of repayment of principal and interest as
due, and the second rating addresses only the demand feature. The
long-term debt rating symbols are used for bonds to denote the
long-term maturity and the commercial paper rating symbols are
usually used to denote the put (demand) option (for example, AAA/A-
1+). Normally, demand notes receive note rating symbols combined
with commercial paper symbols (for example, SP-1+/A-1+).
Commercial Paper:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designations 1, 2, and 3 to indicate the
relative degree to safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety
characteristics are designed A-1+.
RATINGS BY FITCH
Investment Grade Bond and Preferred Stock Ratings
Fitch investment grade bond and preferred stock ratings provide a
guide to investors in determining the credit risk associated with a
particular security. The ratings represent Fitch's assessment of
the issuer's ability to meet the obligations of a specific debt or
preferred issue in a timely manner. The rating takes into
consideration special features of the issue, its relationship to
other obligations of the issuer, the current and prospective
financial condition and operating performance of the issuer and any
guarantor, as well as the economic and political environment that
might affect the issuer's future financial strength and credit
quality.
Fitch ratings do not reflect any credit enhancement that may be
provided by insurance policies or financial guaranties unless
otherwise indicated. Bonds and preferred stock carrying the same
rating are of similar but not necessarily identical credit quality
since the rating categories do not fully reflect small differences
in the degrees of credit risk.
Fitch ratings are not recommendations to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price,
the suitability of any security for a particular investor, or the
tax-exempt nature or taxability of payments made in respect of any
<PAGE> 83
security. Fitch ratings are based on information obtained from
issuers, other obligors, underwriters, their experts, and other
sources Fitch believes to be reliable Fitch does not audit or
verify the truth or accuracy of such information. Ratings may be
changed, suspended, or withdrawn as a result of changes in, or the
unavailability of, information or for other reasons.
AAA. Bonds and preferred stock considered to be investment grade
and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and/or dividends and
repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA. Bonds and preferred stock considered to be investment grade
and of very high credit quality. The obligor's ability to pay
interest and/or dividends and repay principal is very strong,
although not quite as strong as bonds rated AAA. Because bond and
preferred rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of
these issuers is generally rated F-1+.
A. Bonds and preferred stock considered to be investment grade and
of high quality. The obligor's ability to pay interest and/or
dividends and repay principal is considered to be strong, but may
be more vulnerable to adverse changes in economic conditions and
circumstances than debt or preferred securities with higher
ratings.
BBB. Bonds and preferred stock considered to be investment grade
and of satisfactory credit quality. The obligor's ability to pay
interest or dividends and repay principal is considered to be
adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these securities and, therefore, impair timely payment. The
likelihood that the ratings of these bonds or preferred will fall
below investment grade is higher than for securities with higher
ratings.
Plus (+) or Minus (-). Plus and minus signs are used with a rating
symbol to indicate the relative position of a credit within the
rating category. Plus and minus signs, however, are not used in
the AAA category.
NR. Indicates that Fitch does not rate the specific issue.
Conditional. A conditional rating is premised on the successful
completion of a project or the occurrence of a specific event.
Suspended. A rating is suspended when Fitch deems the amount of
information available from the issuer to be inadequate for rating
purposes.
Withdrawn. A rating will be withdrawn when an issue matures or is
called or refinanced, and, at Fitch's discretion, when an issuer
fails to furnish proper and timely information.
FitchAlert. Ratings are placed on FitchAlert to notify investors
of an occurrence that is likely to result in a rating change and
the likely direction of such change. These are designated as
"Positive," indicating a potential upgrade, "Negative," for
potential downgrade, or "Evolving," where ratings may be raised or
lowered. FitchAlert is relatively short-term and should be
resolved within 12 months.
<PAGE> 84
Ratings Outlook. An outlook is used to describe the most likely
direction of any rating change over the intermediate term. It is
described as "Positive" or "Negative." The absence of a
designation indicates a stable outlook.
Short-Term Ratings
F-1+. Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1. Very Strong Credit Quality. Issues assigned this rating
reflect an assurance of timely payment only slightly less in degree
than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin
of safety is not as great as for issues assigned F-1+ and F-1
ratings.
F-3. Fair Credit Quality. Issues assigned this rating have
characteristics suggesting that the degree of assurance for timely
payment is adequate; however, near-term adverse changes could cause
these securities to be rated below investment grade.
F-S. Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in
financial and economic conditions.
D. Default. Issues assigned this rating are in actual or imminent
payment default.
<PAGE> 85
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
1. Financial statements included in Part A: None.
2. Financial statements included in Part B: Audited financial
statements (investments as of 6/30/97, balance sheet as of
6/30/97, statement of operations for the periods ended
6/30/97, statement of changes in net assets and financial
highlights for the period ended 6/30/97 [periods ended
6/30/97 and 6/30/96 for SR&F Municipal Money Market
Portfolio], and notes thereto) of SR&F Municipal Money
Market Portfolio and SR&F High Yield Portfolio are
incorporated by reference to those portions of the 6/30/97
annual report of Stein Roe Municipal Trust and the 6/30/97
annual report of the Bond Funds of Stein Roe Income Trust,
respectively. Audited financial statements (investments as
of 9/30/97, balance sheet as of 9/30/97, statement of
operations and statement of changes in net assets for the
period ended 9/30/97, and notes thereto) for each of the
Equity Portfolios are incorporated by reference to those
portions of the 9/30/97 annual reports of Stein Roe
Investment Trust.
(b) Exhibits [Note: As used herein, the term "Registration
Statement" refers to the Registration Statement of the
Registrant on Form N-1A filed under the Investment Company Act
of 1940, File No. 811-7996.]
1. Declaration of Trust of Registrant as amended through
August 1, 1995. (Exhibit 1 to Amendment No. 2 to
Registration Statement.)*
2. By-Laws of Registrant. (Exhibit 2 to Amendment No. 2 to
Registration Statement.)*
3. Inapplicable.
4. Inapplicable.
5. Management Agreement between Registrant and Stein Roe &
Farnham Incorporated as amended through 11/1/96. (Exhibit
5 to Amendment No. 5 to Registration Statement.)*
6. Inapplicable pursuant to Instruction F.4 to Form N-1A.
7. Inapplicable.
8. Custodian Agreement between Registrant and State Street
Bank and Trust Company. (Exhibit 8 to Amendment No. 2 to
Registration Statement.)*
9. (a) Investor Service Agreement between Registrant and
SteinRoe Services Inc. as amended through 11/1/96.
(Exhibit 9(a) to Amendment No. 5 to Registration
Statement.)*
(b) Bookkeeping and Accounting Agreement between Registrant
and Stein Roe & Farnham Incorporated as amended through
11/1/96. (Exhibit 9(b) to Amendment No. 6 to
Registration Statement.)*
10. Inapplicable pursuant to Instruction F.4 of Form N-1A.
(Exhibit 9(b) to Amendment No. 5 to Registration
Statement.)*
11. Consents of Ernst & Young LLP and Arthur Andersen LLP.
12. Inapplicable pursuant to Instruction F.4 of Form N-1A.
13. Inapplicable.
14. Inapplicable.
<PAGE> 86
15. Inapplicable.
16. Inapplicable.
17. (a) Financial data schedule--SR&F Municipal Money Market
Portfolio.
(b) Financial data schedule--SR&F Growth & Income
Portfolio.
(c) Financial data schedule--SR&F International Portfolio.
(d) Financial data schedule--SR&F Growth Investor
Portfolio.
(e) Financial data schedule--SR&F Special Venture
Portfolio.
(f) Financial data schedule--SR&F Balanced Portfolio.
(g) Financial data schedule--SR&F Growth Stock Portfolio.
(h) Financial data schedule--SR&F Special Portfolio.
(i) Financial data schedule--SR&F High Yield Portfolio.
18. Inapplicable
________________________________
*Incorporated by reference.
Item 25. Persons Controlled by or Under Common Control with
Registrant.
The Registrant does not consider that it is directly or indirectly
controlled by, or under common control with, other persons within
the meaning of this Item.
Item 26. Number of Holders of Securities.
Number of Record Holders as
Title of Class of November 15, 1997
- ---------------------------------- --------------------------
SR&F Cash Reserves Portfolio 0
SR&F Municipal Money Market Portfolio 2
SR&F High-Yield Municipals Portfolio 0
SR&F Intermediate Bond Portfoli0 0
SR&F Income Portfolio 0
SR&F High Yield Portfolio 3
SR&F Balanced Portfolio 2
SR&F Growth & Income Portfolio 2
SR&F Growth Stock Portfolio 2
SR&F Growth Investor Portfolio 2
SR&F Special Portfolio 2
SR&F Special Venture Portfolio 2
SR&F International Portfolio 2
Item 27. Indemnification.
Reference is made to Article X of the Registrant's Declaration of
Trust (Exhibit 1) with respect to indemnification of the trustees
and officers of Registrant against liabilities which may be
incurred by them in such capacities.
Registrant, its trustees and officers, its investment adviser, the
other investment companies advised by the adviser, and persons
affiliated with them are insured against certain expenses in
connection with the defense of actions, suits, or proceedings, and
certain liabilities that might be imposed as a result of such
actions, suits, or proceedings.
<PAGE> 87
Registrant will not pay any portion of the premiums for coverage
under such insurance that would (1) protect any trustee or officer
against any liability to Registrant or its shareholders to which he
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office or (2) protect its investment
adviser or principal underwriter, if any, against any liability to
Registrant or its shareholders to which such person would otherwise
be subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of its duties, or by reason of its
reckless disregard of its duties and obligations under its contract
or agreement with the Registrant; for this purpose the Registrant
will rely on an allocation of premiums determined by the insurance
company.
Colonial Tax-Exempt Money Market Fund ("Colonial Fund"), a series
of Colonial Trust IV ("Colonial Trust") invests substantially all
of its assets in Municipal Money Portfolio. In that connection,
trustees and officers of Registrant have signed the registration
statement of Colonial Trust ("Colonial Registration Statement") on
behalf of Registrant insofar as the Colonial Registration Statement
relates to Colonial Fund, and Colonial Trust, on behalf of Colonial
Fund, has agreed to indemnify Registrant and its trustees and
officers against certain liabilities which may be incurred by them.
Item 28. Business and Other Connections of Investment Adviser.
Stein Roe & Farnham Incorporated (the "Adviser") is a wholly owned
subsidiary of SteinRoe Services Inc. ("SSI"), which is a wholly
owned subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority owned subsidiary of LFC Holdings,
Inc., which is a wholly owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly owned subsidiary of Liberty Mutual
Insurance Company. The Adviser acts as investment adviser to
individuals, trustees, pension and profit-sharing plans, charitable
organizations, and other investors. In addition to Registrant, it
also acts as investment adviser to other investment companies
having different investment policies.
For a two-year business history of officers and directors of the
Adviser, please refer to the Form ADV of Stein Roe & Farnham
Incorporated and to the section of the statement of additional
information (part B) entitled "Investment Advisory Services."
Certain directors and officers of the Adviser also serve and have
during the past two years served in various capacities as officers,
directors, or trustees of SSI and of the Registrant, Stein Roe
Income Trust, Stein Roe Investment Trust, Stein Roe Municipal
Trust, Stein Roe Advisor Trust, Stein Roe Institutional Trust,
SteinRoe Trust, SteinRoe Variable Investment Trust, Keyport
Variable investment Trust and LFC Utilities Trust, investment
companies managed by the Adviser. A list of such capacities is
given below. (The listed entities are located at South Wacker
Drive, Chicago, Illinois 60606, except for SteinRoe Variable
Investment Trust and Liberty Variable Investment Trust which are
located at 600 Atlantic Avenue, Boston, Massachusetts 02210, and
LFC Utilities Trust which is located at One Financial Center,
Boston, Massachusetts 02111.)
<PAGE> 88
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Gary A. Anetsberger Vice President
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President; Secretary
Kenneth J. Kozanda Vice President; Treasurer
Kenneth R. Leibler Director
C. Allen Merritt, Jr. Director; Vice President
Hans P. Ziegler Director, President, Vice Chairman
Chairman
SR&F BASE TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President; Secy.
Thomas W. Butch Executive Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INCOME TRUST; STEIN ROE INSTITUTIONAL TRUST; AND
STEIN ROE TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
<PAGE> 89
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive 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
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Joanne T. Costopoulos Vice-President
Philip J. Crosley Vice-President
<PAGE> 90
Loren A. Hansen Executive Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Hans P. Ziegler Executive Vice-President
STEINROE VARIABLE INVESTMENT TRUST
Gary A. Anetsberger Treasurer
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President
E. Bruce Dunn Vice President
Erik P. Gustafson Vice President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
Richard B. Peterson Vice President
LFC UTILITIES TRUST
Gary A. Anetsberger Vice President
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
LIBERTY VARIABLE INVESTMENT TRUST
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
Item 29. Principal Underwriters.
Inapplicable.
Item 30. Location of Accounts and Records.
Jilaine Hummel Bauer
Executive Vice-President and Secretary
SR&F Base Trust
One South Wacker Drive
Chicago, Illinois 60606
Item 31. Management Services.
None.
Item 32. Undertakings.
Inapplicable.
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Investment Company Act of
1940, the Registrant has duly caused this Registration Statement to
be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Chicago and State of Illinois on the 8th
day of December, 1997.
SR&F BASE TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
Trustee and President
<PAGE> 92
SR&F BASE TRUST
INDEX TO EXHIBITS FILED WITH THIS REGISTRATION STATEMENT
Exhibit
Number Description
- -------- ----------------------------------------------------
11 Consents of Ernst & Young LLP and Arthur Andersen LLP
17 (a) Financial data schedule--SR&F Municipal Money Market
Portfolio
(b) Financial data schedule--SR&F Growth & Income Portfolio
(c) Financial data schedule--SR&F International Portfolio
(d) Financial data schedule--SR&F Growth Investor Portfolio
(e) Financial data schedule--SR&F Special Venture Portfolio
(f) Financial data schedule--SR&F Balanced Portfolio
(g) Financial data schedule--SR&F Growth Stock Portfolio
(h) Financial data schedule--SR&F Special Portfolio
(i) Financial data schedule--SR&F High Yield Portfolio
EXHIBIT 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Independent Auditors" and to the incorporation by reference
of our reports dated August 11, 1997 with respect to SR&F
High Yield Portfolio and August 12, 1997 with respect to SR&F
Municipal Money Market Portfolio in the Registration
Statement (Form N-1A) of SR&F Base Trust, filed with the
Securities and Exchange Commission in this Amendment No. 9 to
the Registration Statement under the Investment Company Act
of 1940 (Registration No. 811-7996).
ERNST & YOUNG LLP
Chicago, Illinois
November 25, 1997
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
use of our reports dated November 7, 1997 and November 11,
1997, and to all references to our Firm included in or made a
part of this Registration Statement on Form N-1A of the SR&F
Base Trust, (comprising the SR&F Balanced Portfolio, SR&F
Growth & Income Portfolio, SR&F Growth Stock Portfolio, SR&F
Special Portfolio, SR&F Special Venture Portfolio, SR&F
International Portfolio and SR&F Growth Investor Portfolio).
ARTHUR ANDERSEN LLP
Chicago, Illinois
December 3, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> SR&F MUNICIPAL MONEY MARKET PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 144,151
<INVESTMENTS-AT-VALUE> 144,151
<RECEIVABLES> 4,077
<ASSETS-OTHER> 22
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 148,250
<PAYABLE-FOR-SECURITIES> 9,274
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 48
<TOTAL-LIABILITIES> 9,322
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 138,928
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,182
<OTHER-INCOME> 0
<EXPENSES-NET> 454
<NET-INVESTMENT-INCOME> 4,728
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,728
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 118,114
<NUMBER-OF-SHARES-REDEEMED> (126,842)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (4,000)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 352
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 454
<AVERAGE-NET-ASSETS> 140,697
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.32
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> SR&F GROWTH & INCOME PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-03-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 226,274
<INVESTMENTS-AT-VALUE> 338,244
<RECEIVABLES> 1,854
<ASSETS-OTHER> 4
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 340,102
<PAYABLE-FOR-SECURITIES> 1,990
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 367
<TOTAL-LIABILITIES> 2,357
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 337,745
<DIVIDEND-INCOME> 2,957
<INTEREST-INCOME> 2,378
<OTHER-INCOME> 0
<EXPENSES-NET> 1,287
<NET-INVESTMENT-INCOME> 4,048
<REALIZED-GAINS-CURRENT> 9,775
<APPREC-INCREASE-CURRENT> 38,203
<NET-CHANGE-FROM-OPS> 52,026
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 337,745
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,192
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,287
<AVERAGE-NET-ASSETS> 302,071
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> SR&F INTERNATIONAL PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-03-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 155,444
<INVESTMENTS-AT-VALUE> 167,699
<RECEIVABLES> 691
<ASSETS-OTHER> 6
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 168,396
<PAYABLE-FOR-SECURITIES> 1,830
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 136
<TOTAL-LIABILITIES> 1,966
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 166,430
<DIVIDEND-INCOME> 2,588
<INTEREST-INCOME> 269
<OTHER-INCOME> (322)
<EXPENSES-NET> 972
<NET-INVESTMENT-INCOME> 1,563
<REALIZED-GAINS-CURRENT> 5,995
<APPREC-INCREASE-CURRENT> 5,615
<NET-CHANGE-FROM-OPS> 13,173
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 166,430
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 839
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 972
<AVERAGE-NET-ASSETS> 150,076
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.98
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> SR&F GROWTH INVESTOR PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-03-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 365,277
<INVESTMENTS-AT-VALUE> 468,336
<RECEIVABLES> 10,367
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 478,712
<PAYABLE-FOR-SECURITIES> 2,905
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 267
<TOTAL-LIABILITIES> 3,172
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 475,540
<DIVIDEND-INCOME> 2,019
<INTEREST-INCOME> 1,233
<OTHER-INCOME> 0
<EXPENSES-NET> 1,659
<NET-INVESTMENT-INCOME> 1,593
<REALIZED-GAINS-CURRENT> 5,460
<APPREC-INCREASE-CURRENT> 61,740
<NET-CHANGE-FROM-OPS> 68,793
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 475,540
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,568
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,659
<AVERAGE-NET-ASSETS> 397,353
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> SR&F SPECIAL VENTURE PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-03-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 192,755
<INVESTMENTS-AT-VALUE> 235,083
<RECEIVABLES> 1,793
<ASSETS-OTHER> 8
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 236,884
<PAYABLE-FOR-SECURITIES> 665
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 178
<TOTAL-LIABILITIES> 843
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 236,041
<DIVIDEND-INCOME> 814
<INTEREST-INCOME> 601
<OTHER-INCOME> 0
<EXPENSES-NET> 1,028
<NET-INVESTMENT-INCOME> 387
<REALIZED-GAINS-CURRENT> 7,866
<APPREC-INCREASE-CURRENT> 27,038
<NET-CHANGE-FROM-OPS> 35,291
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 236,041
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 943
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,028
<AVERAGE-NET-ASSETS> 191,176
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 8
<NAME> SR&F BALANCED PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-03-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 213,774
<INVESTMENTS-AT-VALUE> 320,650
<RECEIVABLES> 2,309
<ASSETS-OTHER> 7
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 322,797
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 37,856
<TOTAL-LIABILITIES> 37,856
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 284,941
<DIVIDEND-INCOME> 1,884
<INTEREST-INCOME> 5,399
<OTHER-INCOME> 0
<EXPENSES-NET> 1,067
<NET-INVESTMENT-INCOME> 6,216
<REALIZED-GAINS-CURRENT> 6,044
<APPREC-INCREASE-CURRENT> 21,679
<NET-CHANGE-FROM-OPS> 33,939
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 284,941
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 971
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,067
<AVERAGE-NET-ASSETS> 268,525
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 9
<NAME> SR&F GROWTH STOCK PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-03-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 347,817
<INVESTMENTS-AT-VALUE> 613,660
<RECEIVABLES> 506
<ASSETS-OTHER> 5
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 614,171
<PAYABLE-FOR-SECURITIES> 5,450
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 350
<TOTAL-LIABILITIES> 5,800
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 608,371
<DIVIDEND-INCOME> 2,888
<INTEREST-INCOME> 1,190
<OTHER-INCOME> 0
<EXPENSES-NET> 2,236
<NET-INVESTMENT-INCOME> 1,842
<REALIZED-GAINS-CURRENT> 26,585
<APPREC-INCREASE-CURRENT> 53,294
<NET-CHANGE-FROM-OPS> 81,721
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 608,371
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,120
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,236
<AVERAGE-NET-ASSETS> 540,703
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.63
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 10
<NAME> SR&F SPECIAL PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> FEB-03-1997
<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 725,349
<INVESTMENTS-AT-VALUE> 1,327,449
<RECEIVABLES> 10,668
<ASSETS-OTHER> 15
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,338,132
<PAYABLE-FOR-SECURITIES> 8,614
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 880
<TOTAL-LIABILITIES> 9,494
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1,328,638
<DIVIDEND-INCOME> 4,635
<INTEREST-INCOME> 3,083
<OTHER-INCOME> 0
<EXPENSES-NET> 5,482
<NET-INVESTMENT-INCOME> 2,236
<REALIZED-GAINS-CURRENT> 92,652
<APPREC-INCREASE-CURRENT> 190,726
<NET-CHANGE-FROM-OPS> 285,614
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,328,638
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,249
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,482
<AVERAGE-NET-ASSETS> 1,112,856
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.75
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> SR&F HIGH YIELD PORTFOLIO
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 37,733
<INVESTMENTS-AT-VALUE> 38,282
<RECEIVABLES> 2,018
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,309
<PAYABLE-FOR-SECURITIES> 997
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 39
<TOTAL-LIABILITIES> 1,036
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 39,273
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 969
<OTHER-INCOME> 0
<EXPENSES-NET> 95
<NET-INVESTMENT-INCOME> 874
<REALIZED-GAINS-CURRENT> 336
<APPREC-INCREASE-CURRENT> 549
<NET-CHANGE-FROM-OPS> 1,759
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 38,807
<NUMBER-OF-SHARES-REDEEMED> (1,293)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 39,273
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 95
<AVERAGE-NET-ASSETS> 16,053
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0.89
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
