STEIN ROE MUTUAL FUNDS
ANNUAL REPORT
JUNE 30, 1997
Photo of: Various Bonds
Stein Roe Fixed Income Funds
TAXABLE BOND FUNDS
INTERMEDIATE BOND FUND
INCOME FUND
HIGH YIELD FUND
LOGO:
STEIN ROE MUTUAL FUNDS
BUILDING WEALTH FOR GENERATIONS(SM)
<PAGE>
Contents
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From the President................................................ 1
Tim Armour's thoughts on the markets and investing
Fund Performance.................................................. 3
How the Stein Roe bond funds have done over time
Q&A
Intermediate Bond Fund............................................ 7
Income Fund....................................................... 11
High Yield Fund................................................... 14
Interviews with the portfolio managers and
a summary of investment activity
Investments....................................................... 19
A complete list of investments with market values
Financial Statements.............................................. 32
Balance sheets, statements of operations
and changes in net assets
Notes to Financial Statements..................................... 41
Financial Highlights.............................................. 46
Selected per-share data
Report of Independent Auditors.................................... 52
General Information............................................... 53
A guide to products and services
Must be accompanied or preceded by a prospectus.
<PAGE>
From the President
Photo of: Tim Armour
To Our Shareholders
We are pleased to present this annual report for the Stein Roe bond funds --
Stein Roe Intermediate Bond Fund, Stein Roe Income Fund and Stein Roe High Yield
Fund. In the following pages, we will provide you with an overview of the
economic events that occurred over the past year and explain how we positioned
the funds to respond to these events.
Will the Real Economic Numbers Please Stand Up?
The past 12 months were an event ful period for the U.S. bond market as
investors reacted nervously to the release of each economic report, particularly
the monthly employ ment report, which investors tend to use as a gauge of U.S.
economic strength. Despite some lingering concerns, it finally seemed as if
things were starting to look up for the bond market by October of 1996.
In early December, however, the good news dried up. First, comments voiced by
ranking Federal Reserve officials left many bond traders once again fearing a
possible rate hike. Next, foreign buyers started to cut back on their purchases
of U.S. government securities, crimping liquidity and depriving the market of a
key source of demand. Finally, year-end trading sent the bond markets reeling,
as investors pushed a glut of fixed income issues onto the market, while
potential buyers -- figuring they had little to gain by venturing into a shaky
market -- stood on the sidelines.
In the end, however, economic reports showed no discernible increase in
inflation and only a modest uptick in job growth, suggesting there was little,
if any, need for a rate hike. Federal Reserve Chairman Alan Greenspan echoed
this belief when he told the Senate Budget Committee that he saw few signs of
the "inflationary tensions" that had hampered past economic expansions. It
appeared that Greenspan's comments were enough to calm bond investors' fears.
In fact, many even started to believe that economic growth would slow in 1997,
helping to resolve many of the conflicts that had plagued them in 1996.
Yet as the new year unfolded, that notion was quickly dispelled. A wide range
of indicators -- including stronger-than-anticipated growth in durable goods
orders and personal income, a surprisingly resilient housing market and a
10-year high in consumer confidence levels -- suggested that the economy was
actually gaining momentum. Despite this strong economic growth, inflation
remained relatively tame as lower health care and benefits costs helped keep
overall labor costs in check and a stronger dollar helped make imported goods
less expensive for U.S. consumers. Nonetheless, many believed the overwhelming
evidence of more robust economic growth would force the Federal Reserve to raise
interest rates in an effort to preempt higher inflation going forward. As a
result, few were surprised when, in late March, the Federal Reserve raised the
federal funds rate -- the rate large commercial banks charge one another for
overnight loans -- from 5.25 percent to 5.50 percent.
<PAGE>
Although most reports now suggest that inflation is under control, we think
there may be some continued pressure on interest rates going forward. We do not,
however, expect rates to move sharply higher. That's because the "real" federal
funds rate -- the federal funds rate minus the rate of inflation -- is already
at a level that would typically discourage economic growth. So while we think
it's possible the Federal Reserve may raise interest rates again, we think the
economy will slow enough to quell any remaining inflationary pressures.
Consequently, we believe a strong case can be made for bonds. First, we
expect continued low inflation, accompanied by a potentially significant decline
in long-term interest rates. In addition, declining budget deficits, both here
and abroad, also could help create an extremely bullish backdrop for bonds. And
finally, as long as the Federal Reserve remains vigilant against the ghost of
inflation past, we think this backdrop will become even more powerful.
The Basics
Although no one can predict what might happen to the markets in the future,
we believe investors must understand the factors that move the markets, not just
to profit from them, but to gain the patience to ride out short-term volatility.
As always, no matter what direction you think the economy is heading, it's
important to remember the basics. Think long term and re-evaluate your
investment portfolio from time to time to make sure it continues to match your
goals, risk tolerance and time horizon.
Please call us at 800-338-2550 with your comments and suggestions. As always,
we look forward to serving your investment needs.
Sincerely,
Timothy K. Armour
President
July 30, 1997
<PAGE>
Fund Performance
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There are several ways to evaluate a fund's historical performance. You can look
at the cumulative return percentage, the average annual return percentage or the
growth of a hypothetical $10,000 investment. Each performance figure includes
changes in a fund's share price, plus reinvestment of any dividends (net
investment income) and capital gains (the profits the fund earns when fixed
income securities grow in value).
<TABLE>
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Average Annual Total Returns
Periods ended June 30, 1997
<CAPTION>
PAST 1 PAST 3 PAST 5 PAST 10
YEAR YEARS YEARS YEARS
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<S> <C> <C> <C> <C>
Intermediate Bond Fund 9.31% 8.38% 6.98% 8.25%
Lehman Intermediate Government/
Corporate Bond Index 7.22 7.51 6.49 8.16
Income Fund 10.34 9.57 8.41 8.92
Lehman Intermediate
Corporate Bond Index 8.13 8.74 7.49 8.93
<CAPTION>
PERIOD ENDED
JUNE 30, 1997*
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<S> <C>
High Yield Fund 10.88%
Merrill Lynch High-Yield Master IIIndex 8.98
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL SHARES. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions. The Lehman Intermediate Government/Corporate
Bond Index, Lehman Intermediate Corporate Bond Index and Merrill Lynch
High-Yield Master II Index are unmanaged groups of fixed income securities that
differ from the composition of each Stein Roe fund; they are not available for
direct investment. *The Fund commenced operations November 1, 1996.
</TABLE>
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Investment Comparison
Comparison of change in value of a $10,000 investment.
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Intermediate Bond Fund
LINE CHART:
<TABLE>
<CAPTION>
YEAR ENDED INTERMEDIIATE LEHMAN INTERMEDIATE GOVERNMENT/
BOND FUND CORPORATE BOND INDEX
<S> <C> <C>
6/30/87 10000 10000
6/30/88 10692 10766
6/30/89 11685 11866
6/30/90 12497 12974
6/30/91 13824 14140
6/30/92 15762 16002
6/30/93 17431 17681
6/30/94 17349 17636
6/30/95 19103 19466
6/30/96 20203 20441
6/30/97 22084 21916
</TABLE>
Income Fund
<TABLE>
LINE CHART:
<CAPTION>
YEAR ENDED INCOME FUND LEHMAN INTERMEDIATE CORPORATE
BOND INDEX
<S> <C> <C>
6/30/87 10000 10000
6/30/88 10938 10829
6/30/89 12148 11986
6/30/90 12449 12969
6/30/91 13608 14324
6/30/92 15960 16388
6/30/93 17987 18397
6/30/94 17863 18293
6/30/95 20148 20651
6/30/96 21296 21753
6/30/97 23498 23521
</TABLE>
<PAGE>
Investment Comparison
Comparison of change in value of a $10,000 investment.
High Yield Fund*
<TABLE>
LINE CHART:
<CAPTION>
YEAR ENDED HIGH YIELD FUND MERRILL LYNCH HIGH-YIELD
MASTER II INDEX
<S> <C> <C>
11/1/96 10000 10000
11/30/96 10076 10201
12/31/96 10271 10286
1/31/97 10393 10363
2/28/97 10620 10523
3/31/97 10423 10378
4/30/97 10590 10511
5/31/97 10910 10733
6/30/97 11088 10899
</TABLE>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL
SHARES. TOTAL RETURN PERFORMANCE INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF INCOME AND CAPITAL GAINS DISTRIBUTIONS. The Merrill Lynch
High-Yield Master II Index is an unmanaged group of high-yield bonds that
differs from the composition of the Fund; it is not available for direct
investment.
<PAGE>
Investment Comparison CONTINUED
Making the Most of Performance
The wide assortment of performance data available today can be a mixed
blessing. On one hand, a fund's performance results can be a valuable source of
information when considering an investment. On the other hand, even seasoned
investors may find the wide array of data and the different methods of
interpretation confusing.
That's why one of the most important pieces of advice we can give you is to
remember that a fund's past performance is just that -- past. While a fund's
past performance is not a guarantee of how it will perform in the future, it can
help you make rational decisions about the funds you currently hold or about
funds you might be considering. Owning bond funds helps to provide
diversification and, as a result, can help to reduce a portfolio's risks. And
because bond funds have an income component, their returns tend to be less
volatile than stock funds' returns. Nonetheless, bond funds' share prices will
fluctuate as interest rates change. The price and total return of a mutual fund
will change daily and if you sell your shares during a downturn in the market,
you might lose money. If you can ride out the market's ups and downs, however,
your fund might achieve a gain.
No one can make your financial decisions better than you. We hope this
report helps you to better understand and evaluate your fund's performance, and
serves as a helpful aid in making intelligent, appropriate investment decisions.
If you have any questions, please call a Stein Roe account representative at
800-338-2550.
<PAGE>
Q&A
An Interview with Mike Kennedy, Portfolio Manager of
Stein Roe Intermediate Bond Fund
Photo of: Mike Kennedy
Fund Data
Investment Objective:
Seeks high current income consistent with capital preservation by investing
primarily in a diversified portfolio of marketable debt securities. The
dollar-weighted average life of its portfolio is expected to be between three
and 10 years.
Fund Inception:
December 5, 1978
Total Net Assets:
$328.8 million
Q: How did the Fund perform?
A: For the fiscal year ended June 30, 1997, Intermediate Bond Fund's total
return of 9.31 percent far surpassed both the 7.22 percent return of the Lehman
Intermediate Government/ Corporate Index and the 7.33 percent median return of
its Lipper intermediate investment-grade debt peer group. This performance
ranked the Fund in the 12th percentile of the Lipper peer group (#21 of 183
funds) for the year ending June 30, 1997. For the five- and 10-year periods
ending June 30, 1997, the Fund ranked in the 25th percentile (#14 of 56 funds)
and 36th percentile (#5 of 13 funds), respectively.
As of June 30, 1997, the Fund's 30-day standardized yield was 6.83 percent.
Q: What contributed to the Fund's performance?
A: Our overweighting of corporate bonds and mortgage-backed securities versus
the Fund's peer group throughout the fiscal year was the primary factor driving
performance. The Fund's high yield corporate bonds also logged particularly
strong performance. The high yield corporate bond market posted tremendous
performance in the first six months of 1997, and the Fund, with an approximately
10 percent allocation in high yield bonds, benefited accordingly.
Q: Were there any other factors that helped performance?
A: Our underweighting in certain sectors benefited the Fund. For example, we
were underweighted in U.S. Treasury securities for most of the fiscal year,
which has helped performance because Treasuries have lagged all other asset
classes in the fixed income market. In addition, near the end of the Fund's
fiscal year, we sold some mortgage-backed securities because we believed they
generally were overpriced and weren't adequately reflecting their prepayment
risks. As a result, we thought we weren't getting enough extra yield in certain
mortgages to justify the risks we were taking.
<PAGE>
Q: What are some of the purchase themes you've been pursuing?
A: We selectively have been buying asset-backed securities. We found what we
believe are some good opportunities in securities rated A or BBB -- particularly
those collateralized by manufactured-housing loans and home-equity loans.
We also purchased some trust preferred securities in the fourth quarter of
1996. While these issues carry the preferred name -- which implies a more
equity-like structure -- they are structured like standard bonds, with $1,000
par values, interest payments every six months and 30- or 40-year maturities. In
the second quarter of 1997, we added two additional trust preferred securities
to the portfolio -- Zurich Insurance, a global reinsurance provider, and
Washington Mutual, a Seattle-based savings and loan (1.9 percent and 2.0 percent
of total net assets, respectively). We think both have good fundamentals and
were attractively priced at purchase.
Q: What's been driving the corporate bond market?
A: We believe corporate bonds have been thriving because of a combination of
strong corporate fundamentals and healthy, but non-inflationary, economic
growth. Corporate earnings have been good and economic fundamentals remain very
solid. Although Federal Reserve Chairman Greenspan's comments about the stock
market being priced too high and yield spreads being too narrow momentarily
spooked the markets at the end of February, the bond market has rallied strongly
since then, and we think it's unlikely that the Federal Reserve will raise
interest rates again.
In addition, there has been a real thirst for yield among investors. With
interest rates in a fairly tight and stable range, we've seen both institutional
and retail investors assume additional credit risk in order to add
yield-producing securities to their portfolios. For example, institutional
investors who are under pressure to post better total returns are taking on more
investment risk than they normally might in an attempt to add yield potential.
At the same time, retail investors who normally trade only in high yield
corporate bonds are investing in equities, while those who usually invest only
in high-grade corporates are investing in high yield bonds, and Treasury-only
buyers are moving into corporate bonds. As a result, there has been huge
interest in any bond -- corporate or mortgage -- that can help provide extra
yield potential. This search for yield has helped several of our holdings
because the market has bid up their prices.
<PAGE>
Q: What's your outlook for the next few months?
A: There has been increased investor confidence in the entire financial
system, both because of the stock market's extraordinary performance, and
because interest rates have remained in a fairly tight and stable range. We
believe the fundamentals for corporate bonds should remain favorable as we
expect the economy to continue on its path of modest growth and low inflation.
Under these conditions, we believe investors will continue to seek investments
offering higher yield potential than Treasuries. At this time, investor
sentiment favors corporate bonds. Given our large weighting in corporate bonds,
we believe this trend should benefit the Fund. We plan to continue
underweighting mortgage-backed securities because of their increased prepayment
risk and our belief that they will underperform other sectors.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL
SHARES. Portfolio holdings as of June 30, 1997; portfolio data subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. Prior to November 1,
1996, the Adviser limited expenses to 0.70 percent of average net assets. Absent
past limits, total return would have been less. The Lehman Intermediate
Government/Corporate Bond Index represents an unmanaged group of
intermediate-term bonds that differs from the composition of the Fund; it is not
available for direct investment. According to Lipper Analytical Services, Inc.,
an independent monitor of mutual fund performance, the median returns for the
Fund's intermediate investment-grade debt fund peer group for the one-, five-
and 10-year periods ended June 30, 1997, were 7.33 percent, 6.31 percent and
8.01 percent, respectively.
Foreign investments involve currency, market and political risks not
generally associated with U.S. investments.
<PAGE>
Fund Highlights
Intermediate Bond Fund
Securities Type Breakdown
PORTFOLIO PORTFOLIO
JUNE 30, 1996 JUNE 30, 1997
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Corporate Bonds 33.2% 39.3%
Foreign Issues 24.0 27.2
Mortgage-Backed Securities 30.5 19.1
Asset-Backed Securities 5.9 7.0
U.S. Treasury Securities 0.9 --
Cash and Equivalents 5.5 7.4
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Total 100.0% 100.0%
PIE CHART:
Average Life
As of June 30, 1996 As of June 30, 1997
Greater than 20 years -- 8.9%
10-20 Years 6.6% 7.6%
5-10 Years 55.7% 45.4%
1-5 Years 28.6% 31.1%
Less than 1 Year 9.1% 7.0%
PIECHART:
Portfolio Quality
As of June 30, 1996 As of June 30, 1997
Treasury/AAA/Agency (26.7%) Treasury/AAA/Agency (27.5%)
AA (11.1%) AA (8.9%)
A (24.8%) A (24.1%)
BBB (23.4%) BBB (29.3%)
BB (14.0%) BB and Below (10.2%)
<PAGE>
Q&A
An Interview with Steve Lockman, Portfolio Manager
of Stein Roe Income Fund and SR&F High Yield Portfolio
Photo of: Steve Lockman
Fund Data
Investment Objective:
Seeks high current income by investing principally in medium-quality debt
securities. The Fund also may invest in higher-quality securities and, to a
lesser extent, lower-quality securities which may involve greater credit and
other risks.
Fund Inception:
March 5, 1986
Total Net Assets:
$375.3 million
Income Fund Q&A
Stephen F. Lockman was promoted to portfolio manager of Income Fund as well as
High Yield Fund and its Portfolio on March 3, 1997. He previously served as
associate portfolio manager of both Funds.
Q: How did the Fund perform?
A: For the fiscal year ended June 30, 1997, Income Fund posted a total return of
10.34 percent, surpassing both the 8.13 percent return of the Lehman
Intermediate Corporate Bond Index and the 8.16 percent median return of its
Lipper corporate debt BBB fund peer group. As of June 30, 1997, Income Fund's
30-day standardized yield was 6.93 percent.
The Fund's performance was enhanced by our emphasis on medium-quality
securities rated BBB and BB, which outperformed investment-grade debt throughout
much of the last year. The continued narrowing of corporate bond spreads,
particularly those in the high yield market, contributed positively to the
Fund's return. Throughout the year, the increasing popularity of high yield
bonds, and a desire for yield potential among both institutional and retail
investors, led to strong inflows into the high yield market from mutual funds
investing in these securities. An overall improvement in quality across the
credit spectrum, as well as the strength of the stock market, provided support
for the high yield market.
In addition, many of our international holdings performed quite well during
the year, even though the yield premium on Yankee bonds versus domestic issues
declined as investor knowledge and acceptance of foreign companies and countries
has increased. Some of our best-performing foreign securities were Mass Transit
Railway Corp. of Hong Kong, Comtel Brasileira Ltd. and Polysindo International
Finance (1.3 percent, 0.6 percent and 0.3 percent of total net assets,
respectively) and Republic of Uruguay and Perez Company, which we sold for
valuation reasons and to capture gains.
<PAGE>
Q: While fears of inflation were raised on several occasions throughout the
year, the Federal Reserve maintained a fairly neutral stance on interest rates.
As a result, economic growth appears to have slowed to a sustainable pace on its
own. What were some of your investment strategies under these conditions?
A: While there were periods of uncertainty, corporations continued to
report solid earnings over the past year. This created a good environment for
corporate bonds. Under these conditions, two things occurred. First, credit
quality in general has improved up and down the credit spectrum, with yield
spreads tightening as a result. Second, the demand for yield has exceeded supply
for both investment- and below investment-grade issues.
One strategy we employed was to focus on the bonds of companies that have
exhibited cost savings or productivity enhancements as a result of
consolidations. CSX Corp. and Norfolk Southern Corp. are two examples in the
railroad industry, and these bonds have performed very well (each 1.4 percent of
total net assets).
We also tried to take advantage of wider yield spreads on the longer-maturity
bonds of companies that we believe have favorable return or appreciation
potential. This is one of the ways in which we extended the Fund's duration near
year end. Comcast Cable Communications Corp., St. George Funding Company and
Washington Mutual Capital are examples of extension trades we made during the
fiscal year (1.7 percent, 0.7 percent and 1.2 percent of total net assets,
respectively). We found this strategy particularly beneficial in the latter part
of the year.
Q: Over the year, you increased the Fund's holding in real estate investment
trusts (REITs). Is this a theme you're developing?
A: We've believed that Income Fund could benefit from investing in corporate
bonds issued by REITs and other property companies for quite some time.
A REIT is a special-purpose corporation that owns and invests in various real
estate operations, such as shopping centers, health care facilities, industrial
properties or apartment buildings. These companies are becoming larger and
increasing their geographic diversification. We believe this growth signals a
very important turning point and is one reason why we like the sector.
Bonds issued by REITs, in general, have been performing well due to the
health of the overall economy. This, in turn, has led to an underlying
improvement in commercial mortgage properties, as well as the credit quality of
health care properties and their operators. This underlying fundamental strength
also has been leading to high occupancies and continued improvement in rents.
We've seen fewer delinquencies and defaults in the commercial real estate
sector, and consolidation in the ownership of commercial properties has led to
better operating efficiencies.
<PAGE>
We think many REITs have done a very good job in balancing their leverage
by accessing both the debt and equity markets. These companies have successfully
obtained funds for growth while keeping their balance sheets intact. Some of the
companies we like include American Health Properties, Storage USA L.P. and
Trinet Corp. Realty Trust (0.8 percent, 0.8 percent and 1.2 percent of total net
assets, respectively).
Q: What is your outlook for the Fund?
A: The current market fundamentals of stable interest rates and low volatility
support our optimistic outlook for corporate earnings potential and strong
performance potential from corporate bonds. We plan to maintain our existing
high yield position, but given the large number of new issues the market has had
to digest recently, the declining quality of new issues and the size of the
forward calendar, we are becoming more selective in our purchases. We may
upgrade credit quality when we can do so without giving up yield potential. We
plan to maintain a more neutral to positive duration position given the
favorable inflation outlook and low volatility of rates. Finally, we will pay
close attention to the quality of corporate earnings.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL
SHARES. Portfolio holdings as of June 30, 1997; portfolio data subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. Prior to November 1,
1996, the Adviser limited expenses to 0.82 percent of average net assets. Absent
past limits, total return would have been less. The Lehman Intermediate
Corporate Bond Index is an unmanaged group of intermediate-term bonds that
differs from the composition of the Fund; it is not available for direct
investment. According to Lipper Analytical Services, Inc., an independent
monitor of mutual fund performance, the median returns for the Fund's corporate
debt BBB fund peer group for the one-, five- and 10-year periods ended June 30,
1997, were 8.16 percent, 7.62 percent and 8.84 percent, respectively.
Investing in high yield bonds involves greater credit and other risks not
associated with investing in higher-quality securities.
Foreign investments involve currency, market and political risks not
generally associated with U.S. investments.
<PAGE>
Q&A
Fund Data
Investment Objective:
Invests all of its assets in SR&F High Yield Portfolio, which seeks high
current income and capital appreciation by investing principally in high
yield, high-risk, medium- and lower-quality debt securities.
Fund Inception:
November 1, 1996
Total Net Assets:
$13.5 million
High Yield Fund Q&A
Q: How has the Fund performed since its launch on November 1, 1996?
A: High Yield Fund's total return from its inception on November 1, 1996,
through June 30, 1997, was 10.88 percent, outpacing the 8.98 percent return of
the Merrill Lynch High-Yield Master II Index over the same time period. The
Fund's 30-day standardized yield was 8.12 percent.
Q: Since the inception of the Fund, the high yield market has displayed
considerable fundamental strength. What are some of the factors contributing to
this?
A: A healthy economy, lower interest rates, narrower spreads, very liquid
capital markets and extremely strong investor demand all contributed to strong
fundamentals for high yield debt. An additional support for the strength of the
high yield market has been the very low default rate in these issues that we've
seen over the last two years.
Q: There has been a tremendous issuance of high yield debt over the last six
months. How did this influence your investment strategy?
A: After our initial startup, our purchase strategy was influenced by the new
issue calendar. We saw new issues as a much more efficient means of putting cash
inflows to work. We maintained our cash position at a level that would help us
to benefit from the strength of the market, yet allow us to participate in new
issue oppor tunities. The market easily absorbed the new issue supply except for
two brief periods. The first was in late March and early April when the Federal
Reserve tightened interest rates and the stock market sold off. The second came
at the end of the fiscal year when the supply of new issues temporarily exceeded
demand.
Q: Why is there so much new issuance in the high yield bond market?
A: First, there's been tremendous growth in the demand for high yield bonds
as yields offered by Treasuries and investment-grade corporate bonds remain at
historically low levels. The search for yield has led many investors to the high
yield market. For example, both retail and institutional investors who normally
invest in the investment-grade market have crossed over and increased their
allocations of high yield bonds. We think they are doing this to try to satisfy
their yield requirements, while at the same time to providing somewhat of a
hedge to the stock market -- which has been on a tremendous run.
Another factor leading to heavy new issuance is the continuation of strong
flows into high yield mutual funds. Over the last 12 months, more than $15
billion has flowed into these funds, according to the Investment Company
Institute.1
Third, there has been enormous growth in the collateralized bond obligation
(CBO) market. These are pools of bonds that are divided into short-, medium- and
long-term sections called tranches, each paying a different yield. We think CBOs
are growing in popularity because they provide a flexible alternative to owning
the bonds directly. The growing popularity of CBOs has created demand for the
underlying high yield bonds.
<PAGE>
Q: And all this demand leads issuers to bring more high-yield debt to market?
A: Exactly -- especially in 1997. According to First Boston, close to $60
billion of new issues has come to market in the first six months of 1997. That's
about 75 percent of the total issuance in 1996. The size of the high yield
market is approaching $400 billion.
It was $352 billion in 1996, $300 billion in 1995 and $275 billion in 1994.
In addition, a number of new issues are being used to call or tender for
existing bonds. As interest rates have moved lower, issuers have taken advantage
of the lower cost of funding and called or bought back older, higher-cost bonds
as well as those having more restrictive covenants such as bank debt.
Q: How do you address the credit risk associated with high yield bonds?
A: We take an equity-like approach to managing credit risk. To help ensure that
our investments are sound, our investment process incorporates intensive credit
research and estimates of a company's future earnings potential. We constantly
monitor stock and bond prices, as well as earnings reports and news items about
our holdings. We believe this approach helps us identify not only those issues
with good upside potential, but also those that may be greater credit risks. In
fact, several of the issues we passed on ran into trouble in the first quarter
of 1997. Because of the quality of our research we did not invest in them.
<PAGE>
Q: What is your outlook?
A: We're somewhat cautious because of the large number of new issues scheduled
to be offered in the near term -- we believe the market may experience some
indigestion because of the amount of supply. We hope to take advantage of any
spread widening.
In addition to the heavy supply, we saw the size and credit quality of many
of the individual issues decline in the last few weeks of the year. As a result,
we are taking a much more selective approach to the new issue market. Many of
the companies bringing the smaller issues -- in the $100 million range -- are
not public, so information about them is not as readily or quickly available. We
believe these are important factors to take into consideration before investing
because they could lead to liquidity problems in the future.
1 Source: Investment Company Institute, 1997.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL SHARES.
Portfolio holdings as of June 30, 1997; portfolio data subject to change. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions. The Adviser currently limits expenses to 1
percent of average net assets, subject to 30 days' notice to the Fund. Absent
this limit, the Fund's 30-day standardized yield at June 30, 1997, would have
been 7.93 percent and total return would have been less. The Merrill Lynch
High-Yield Master II Index is an unmanaged group of high-yield bonds that
differs from the composition of the Fund; it is not available for direct
investment.
Investing in high yield bonds involves greater credit and other risks not
associated with investing in higher-quality securities.
<PAGE>
Fund Highlights
Income Fund
Securities Type Breakdown
PORTFOLIO PORTFOLIO
JUNE 30, 1996 JUNE 30, 1997
- ------------------------------------------------------------------------------
Industrial 17.8% 28.8%
Financial 20.5 17.7
Miscellaneous 36.9 10.5
Foreign Issues 7.7 30.1
Utilities 8.5 2.8
U.S. Government Securities 4.5 1.5
Transportation -- 2.7
Cash and Equivalents 4.1 5.9
- ------------------------------------------------------------------------------
Total 100.0% 100.0%
- ------------------------------------------------------------------------------
PIE CHART:
Maturity
As of June 30, 1996 As of June 30, 1997
Greater than 20 years 0.7% 3.7%
10-20 Years 15.1% 21.1%
5-10 Years 69.5% 59.3%
1-5 Years 10.9% 10.8%
Less than 1 Year 3.8% 5.1%
PIE CHART:
Portfolio Quality
As of June 30, 1996 As of June 30, 1997
Treasury/AAA/Agency (4.8%) Treasury/AAA/Agency (5.4%)
AA (11.3%) AA (6.3%)
A (20.5%) A (22.8%)
BBB (30.2%) BBB (35.5%)
BB (25.5%) BB (19.8%)
B/Not Rated (7.7%) B/Not Rated (10.2%)
<PAGE>
Portfolio Highlights
High Yield Portfolio
Securities Type Breakdown
PORTFOLIO
JUNE 30, 1997
- ------------------------------------------------------------------------------
Industrial 75.4%
Foreign Issues 9.4
Financial 2.6
Miscellaneous 1.3
Utilities 3.1
Transportation 2.6
Cash and Equivalents 5.6
- ------------------------------------------------------------------------------
Total 100.0%
- ------------------------------------------------------------------------------
PIE CHART:
Maturity
As of June 30, 1997
10-15 Years 8.8%
5-10 Years 75.5%
1-5 Years 11.2%
Less than 1 Year 4.5%
PIE CHART:
Portfolio Quality
As of June 30, 1997
Not Rated (6.4%)
AAA/Agency (3.2%)
BBB (1.3%)
BB (25.0%)
B (64.1%)
<PAGE>
<TABLE>
Intermediate Bond Fund
Investments as of June 30, 1997
(Dollar Amounts In Thousands)
<CAPTION>
Principal Market
<S> <C> <C>
LONG-TERM OBLIGATIONS (92.6%) Amount Value
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (10.2%)
Federal Home Loan Mortgage Corporation Gold
12.000% 7/01/20................................... $ 3,429 $ 3,910
Federal Home Loan Mortgage Corporation
Remic Trust Series 11-C 9.500% 4/15/19............ 228 236
Federal National Mortgage Association
8.500% 4/01/01.................................... 1 1
8.500% 5/01/03.................................... 21 21
8.500% 9/01/03.................................... 78 80
8.500% 11/01/03................................... 177 182
6.000% 4/01/09.................................... 11,794 11,394
11.250% 11/01/13 (FHA/VA guaranteed).............. 216 242
6.000% 1/01/24.................................... 902 846
6.000% 3/01/24.................................... 2,542 2,383
Federal National Mortgage Association Remic Trusts
14.400% (Effective Yield) 7/25/98 Series 1991-91-SA 36 142
9.250% 3/25/18 Series 88-4-Z...................... 3,617 3,745
Government National Mortgage Association
8.000% 1/15/08.................................... 547 566
8.000% 2/15/08.................................... 370 383
8.000% 4/15/08.................................... 414 428
8.000% 5/15/08.................................... 584 604
8.000% 6/15/08.................................... 2,463 2,549
8.000% 7/15/08.................................... 447 462
9.000% 6/15/16.................................... 145 155
9.000% 8/15/16.................................... 89 96
9.000% 10/15/16................................... 194 208
7.125% 7/20/25 ARM (Floating Rate)................ 4,614 4,734
--------
33,367
AIR TRANSPORTATION (2.2%)
Federal Express Corporation 1994 Pass-Through Certificates
Series A310-A1 7.530% 9/23/06..................... 3,813 3,841
United Airline Corporation Series 1991-A1
9.200% 3/22/08.................................... 3,171 3,484
--------
7,325
ASSET-BACKED OBLIGATIONS (7.0%)
Airplane Pass-Through Trust Series 1 Class A 6.790%
(Floating Rate) 3/15/19........................... 2,851 2,862
ALPS Pass-Through Trust Series 1994-1
Class C2 9.350% 9/15/04........................... 3,482 3,543
ContiMortgage Home Equity Loan Trust Series 1997-1
7.670% 3/15/28.................................... 2,875 2,888
First Boston Home Equity Loan Pass-Through Certificates
Series 1993-H1 Class A-IO 12.820% (Effective Yield)
9/28/13.......................................... 20,344 789
Green Tree Financial Corporation Series 1996-9 Class B1
7.650% 1/15/28.................................... 5,750 5,847
Greentree Home Improvement Loan Trust Series 1994-A
Class A 7.050% 3/15/14............................ 2,166 2,165
IMC Home Equity Loan Trust Series 1997-3 Class M2
7.55% 8/20/28..................................... 5,000 4,996
--------
23,090
<PAGE>
<CAPTION>
Intermediate Bond Fund CONTINUED
Principal Market
Amount Value
<S> <C> <C>
BROADCASTING & PUBLISHING (0.9%)
Paramount Communications 7.500% 1/15/02.............. $ 3,000 $ 3,017
COMMERCIAL BANKS (8.0%)
Deutsche Ausgleichsbank Series 7.000% 9/24/01........ 4,000 4,066
First Federal of Michigan Zero Coupon
(Effective Yield 7.409%) 2/26/05.................. 11,000 6,537
*Riggs Capital Trust 8.625% 12/31/26................. 4,000 3,957
Santander Financial Issuances 7.875% 4/15/05......... 5,000 5,201
Washington Mutual Capital 8.375% 6/01/27............. 6,500 6,622
--------
26,383
COMMUNICATIONS (4.7%)
*Comcast Cable Communications 8.375% 5/01/07......... 5,000 5,302
LeGroupe Videotron Ltee (Yankee Issue) 10.625% 2/15/05 3,000 3,345
Rogers Cablesystem (Yankee Issue) 9.625% 8/01/02..... 3,000 3,150
Viacom International 10.250% 9/15/01................. 3,500 3,815
--------
15,612
CONGLOMERATES (2.5%)
*Pan Pacific Industrial Investment Co. (Yankee Issue)
Zero Coupon (Effective Yield 8.833%) 4/28/07...... 15,000 6,699
*Reliance Industries (Yankee Issue) 10.250% 1/15/2097 1,500 1,628
--------
8,327
CONSTRUCTION (1.9%)
Hanson Overaseas B.V. 7.375% 1/15/03................. 6,000 6,114
DRUGS (1.4%)
Glaxo Wellcome Plc 6.125% 1/25/06.................... 4,750 4,501
ENERGY & ENERGY SERVICES (7.7%)
BOC Group Plc 5.875% 1/29/01......................... 6,100 5,941
National Power Co. Plc 7.125% 7/11/01................ 9,500 9,563
Oryx Energy Co 10.000% 4/01/01....................... 5,000 5,432
YPF Sociedad Anonima (Yankee Issue) 7.500% 10/26/02.. 4,463 4,542
--------
25,478
FABRICATED METAL PRODUCTS (0.7%)
*Federal-Mogul 8.800% 4/15/07........................ 2,150 2,249
FINANCIAL & INVESTING INSTITUTIONS (10.2%)
*Cigna CBO Ltd. 6.460% 11/15/08 Series 1996-1........ 5,000 5,363
Federal Realty Investment Trust
6.625% 12/01/05................................... 2,750 2,646
7.480% 8/15/26.................................... 3,500 3,533
Meditrust 7.820% 9/10/26............................. 4,500 4,664
PaineWebber Group Inc. 6.500% 11/01/05............... 6,000 5,664
*Prudential Property 7.125% 7/01/07.................. 6,000 5,983
Storage U.S.A. L.P. 7.125% 11/01/03.................. 3,250 3,224
United Companies Financial 8.375% 7/01/05............ 2,500 2,490
--------
33,567
FOOD & BEVERAGE (0.6%)
*DGS International Finance (Yankee Issue)
10.000% 6/01/07.................................. 1,750 1,803
<PAGE>
<CAPTION>
Intermediate Bond Fund CONTINUED
Principal Market
Amount Value
<S> <C> <C>
FOREIGN SOVEREIGN (4.2%)
*Guandong Enterprises (Yankee Issue) 8.875% 5/22/07.. $ 3,750 $ 3,854
Republic of Slovenia 7.000% 8/06/01.................. 6,000 6,035
*United Mexican States 7.875% (Floating Rate) 8/06/01 4,000 4,036
--------
13,925
HEALTH SERVICES & EQUIPMENT (4.5%)
Loewen Group International (Yankee Issue)
8.250% 4/15/03.................................... 4,500 4,639
Smithkline Beecham 6.750% 10/30/01................... 6,000 6,010
Tenet Healthcare Corp. 7.875% 1/15/03................ 4,000 4,015
--------
14,664
HOTELS & ENTERTAINMENT (0.8%)
Prime Hospitality 9.250% 1/15/06..................... 2,500 2,594
INSURANCE (6.0%)
*Florida Property & Casualty Series A 7.625% 7/01/07. 6,000 6,079
*Prudential Insurance 7.650% 7/01/07................. 7,250 7,359
*Zurich Capital Trust 8.376% 6/01/37................. 6,000 6,198
--------
19,636
MINING (3.5%)
Freeport-McMoran Copper & Gold 7.200% 11/15/26....... 2,500 2,468
PT Alatief Freeport Financial Co. B.V. (Yankee Issue)
9.750% 4/15/01.................................... 3,500 3,766
Santa Fe Pacific Gold 8.375% 7/01/05................. 5,000 5,340
--------
11,574
MORTGAGE-BACKED SECURITIES (9.0%)
American Mortgage Trust Series 1993-3 Class 3B
8.190% 9/27/22.................................... 2,840 2,664
Kidder Peabody Series 1994-C3-A2 8.500% 4/01/07...... 3,500 3,742
Merrill Lynch Mortgage Investments Inc. Series 1995-C3
Class A3 7.088% 12/26/25 ......................... 4,000 3,999
Merrill Lynch Trust Series 20 Class D 8.000% 12/20/18 3,406 3,432
Nomura Asset Securities Corp. 1996-MD5 Class A-1B
7.120% 4/13/36.................................... 3,000 3,019
PS CMO Trust Series 1994-C1-A2 7.920% 8/15/02........ 4,094 4,178
Resolution Trust Corporation Series 1992 Class C
8.850 5/25/22..................................... 2,450 2,490
Structured Assets Securities Corporation
6.525% 2/25/28 Series 1996-CFL Class C............ 3,684 3,616
12.960% (Effective Yield) 2/25/28 Series 1996-CFL
Class X1.......................................... 46,803 2,419
--------
29,559
PAPER (2.1%)
Boise Cascade 7.480% 6/15/05 ........................ 7,000 7,042
RETAIL (3.1%)
Price/Costco 7.125% 6/15/05.......................... 1,650 1,634
Rite Aid Corp.
7.625% 4/15/05.................................... 5,000 5,138
7.125% 1/15/07.................................... 3,300 3,298
--------
10,070
UTILITIES (1.4%)
*Financiera Energetica Nacional 9.000% 11/08/99...... 4,250 4,436
<PAGE>
<CAPTION>
Intermediate Bond Fund CONTINUED
Principal Market
Amount Value
<S> <C> <C>
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $300,113)............................................. $304,333
- -------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS (6.2%)
Associates Corp. of North America 6.200% 7/01/97..... $ 16,300 16,300
Sundstrand 6.550% 7/01/97............................ 4,215 4,215
---------
TOTAL SHORT-TERM OBLIGATIONS
(Amortized cost $20,515).......................................... 20,515
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.8%)
(Cost basis $320,628)............................................. 324,848
OTHER ASSETS, LESS LIABILITIES (1.2%)............................. 3,936
---------
TOTAL NET ASSETS (100.0%)......................................... $328,784
=========
- -------------------------------------------------------------------------------
<FN>
*Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933. These
securities generally are issued to qualified institutional buyers, such as the
Fund, and any resale by the Fund must be an exempt transaction normally to other
qualified institutional investors. At June 30, 1997, the aggregate value of the
Fund's private placement securities was $64,946 (aggregate cost of $63,272)
which represented 19.8 percent of net assets.
At June 30, 1997, bonds issued by foreign entities represented 27.2 percent of
net assets.
See accompanying notes to financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
Income Fund
Investments as of June 30, 1997
(Dollar Amounts In Thousands)
<CAPTION>
Principal Market
LONG-TERM OBLIGATIONS (94.1%) Amount Value
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (1.5%)
U.S. Treasury Bonds
6.500% 8/15/05.................................... $ 500 $ 499
6.625% 2/15/27.................................... 2,500 2,446
U.S. Treasury Notes
6.500% 10/15/06................................... 750 747
6.625% 5/15/07.................................... 2,000 2,017
--------
5,709
AEROSPACE & TRANSPORT EQUIPMENT (0.9%)
*Derlan Manufacturing 10.000% 1/15/07................ 1,750 1,768
*L-3 Communications Corp. 10.375% 5/01/07............ 1,500 1,590
--------
3,358
AIRLINES (1.1%)
American Airlines Equipment Trust 9.710% 1/02/07..... 2,944 3,285
*Continental Airlines Series 1997-1CI 7.420% 4/01/07. 1,000 1,010
--------
4,295
ASSET-BACKED OBLIGATIONS (0.3%)
ALPS Pass-Through Trust
Series 1994-1 Class C2 9.350% 9/15/04............. 995 1,012
BUSINESS SERVICES (1.3%)
Iron Mountain, Inc. 10.125% 10/01/06................. 2,000 2,120
Lamar Advertising Co. 9.625% 12/01/06................ 1,850 1,901
*Safelite Glass Corp. 9.875% 12/15/06................ 850 899
--------
4,920
CABLE/MEDIA (11.5%)
*Azteca Holdings 11.000% 6/15/02..................... 1,000 1,009
British Sky Broadcasting 7.300% 10/15/06............. 2,000 1,999
Century Communications 9.75% 2/15/02................. 1,850 1,906
*Comcast Cable Communications Corp.
8.375% 5/01/07................................... 3,000 3,181
8.875% 5/01/17................................... 3,000 3,260
Continental Cablevision Inc. 8.875% 9/15/05.......... 3,500 3,853
JayCor Communications Inc. 10.125% 6/15/06........... 1,500 1,612
LeGroupe Videotron Ltee (Yankee Issue) 10.625% 2/15/05 3,000 3,345
News America Holdings Inc. 8.625% 2/01/03............ 6,000 6,395
Rogers Cable Systems Senior Secured Second Priority
Note (Yankee Issue) 9.625% 8/01/02................ 3,000 3,150
Time Warner Entertainment
9.625% 5/01/02.................................... 3,000 3,317
8.875% 10/01/12................................... 3,000 3,302
Viacom International Inc.
10.250% 9/15/01................................... 3,000 3,270
7.750% 6/01/05.................................... 1,000 998
Young Broadcasting Corp. 11.750% 11/15/04............ 2,500 2,762
--------
43,359
<PAGE>
<CAPTION>
Income Fund CONTINUED
Principal Market
Amount Value
<S> <C> <C>
COMMERCIAL BANKS (5.3%)
Banca Commercial Italian (Yankee Issue) 8.250% 7/15/07 $ 5,000 $ 5,314
Banco De Brazil (Cayman Islands) 8.375% 6/15/02...... 2,000 1,996
Banesto Delaware Inc. 8.250% 7/28/02................. 2,000 2,108
BBV International Finance (Cayman Islands)
(Yankee Issue) 6.875% 10/27/05.................... 6,000 5,858
Washington Mutual Capital 8.375% 6/1/27.............. 4,500 4,584
--------
19,860
CONSUMER PRODUCTS (0.5%)
Renaissance Cosmetics 11.750% 2/15/04................ 1,750 1,842
CONTAINERS & PLASTIC (2.4%)
Coca-Cola Bottling Company 8.560% 2/26/02............ 2,000 2,120
*Consumers International 10.250% 4/01/05............. 2,500 2,687
Owens-Illinois, Inc. 8.100% 5/15/07.................. 1,500 1,535
*Plastic Containers Inc. 10.000% 12/15/06............ 850 882
US Can Corporation 10.125% 10/15/06.................. 1,500 1,597
--------
8,821
FINANCIAL (14.8%)
*Credit Suisse Group (Yankee Issue) 7.900% 5/01/49... 6,000 6,174
Dresdner Bank 7.250% 9/15/15......................... 3,000 2,936
*Florida Property & Casualty Series A 7.625% 7/01/07. 6,000 6,080
General Motors Acceptance Corp. 6.625% 10/01/02...... 2,000 1,976
*Goldman Sachs Group L.P. 7.125% 3/01/03............. 6,000 6,033
Lehman Brothers Inc. 6.125% 2/01/01.................. 4,000 3,902
Meditrust 7.375% 7/15/00............................. 2,000 2,020
Merrill Lynch Bank & Trust (Yankee Issue) (Cayman
Islands) 8.390% 8/01/01........................... 3,000 3,140
Morgan Stanley Group 6.875% 3/01/07.................. 4,000 3,917
Penncorp Financial Group 9.250% 12/15/03............. 1,500 1,575
*Prudential Insurance 7.650% 7/01/07................. 3,000 3,045
RHG Finance Corp./Marriot International Inc.
8.875% 10/01/05................................... 4,500 4,906
*St. George Funding Co. 8.485% 12/31/49.............. 2,500 2,500
Swiss Bank 7.000% 10/15/15........................... 6,000 5,746
United Companies Financial 8.375% 7/01/05............ 1,500 1,494
--------
55,444
FOOD & BEVERAGE (0.9%)
*DGS International Finance 10.000% 6/01/07........... 1,750 1,802
*Pepsi-Gemex S.A. 9.750% 3/30/04..................... 1,500 1,541
--------
3,343
FOREIGN SOVEREIGN REGIONAL BONDS (10.4%)
Corporacion Andina de Fomento (Yankee Issues)
7.375% 7/21/00.................................... 3,000 3,043
7.100% 2/01/03.................................... 2,500 2,490
Export/Import Bank of Korea (Yankee Issue)
6.375% 2/15/06.................................... 5,000 4,697
Financiera Energetica Nacional 9.375% 6/15/06........ 6,000 6,399
*Guangdong Enterprises (Yankee Issue) 8.875% 5/22/07. 3,750 3,854
The Republic of Columbia (Yankee Issue)
8.750% 10/06/99................................... 2,500 2,597
Republic of Panama 7.875% 2/13/02.................... 4,000 3,979
*Republic of Slovenia 7.000% 8/06/01................. 5,000 5,023
*Sultan of Oman 7.125% 3/20/02....................... 5,000 5,000
United Mexican States 9.750% 2/06/01................. 2,000 2,112
--------
39,194
<PAGE>
<CAPTION>
Income Fund CONTINUED
Principal Market
Amount Value
<S> <C> <C>
FUNERAL HOMES (1.7%)
Loewen Group International (Yankee Issue) 8.250% 4/15/03 $ 5,000 $ 5,154
Prime Succession Acquisition Co. 10.750% 8/15/04..... 1,000 1,095
--------
6,249
HEALTH SERVICES & EQUIPMENT (0.9%)
Healthcare Properties 6.500% 2/15/06................. 3,500 3,322
HOSPITALS & NURSING HOMES (2.3%)
*Integrated Health Services 9.500% 9/15/07........... 1,400 1,435
Tenet Healthcare Corp.
9.625% 9/01/02.................................... 2,000 2,170
8.625% 12/01/03................................... 2,000 2,090
Universal Health Services, Inc. 8.750% 8/15/05....... 2,800 2,940
--------
8,635
HOTELS & ENTERTAINMENT (4.2%)
Caesars World Inc. 8.875% 8/15/02.................... 1,000 1,031
Circus Circus Enterprises Inc. 6.450% 2/01/06........ 2,000 1,873
Harvey Casino 10.625% 6/01/06........................ 3,000 3,225
Hyatt Equities LLC Series 7.000% 5/15/02............. 5,000 5,009
Premier Parks 9.750% 1/15/07......................... 750 780
Prime Hospitality
9.250% 1/15/06.................................... 1,100 1,141
9.750% 4/01/07 Series B........................... 2,500 2,625
--------
15,684
MACHINERY, METALS & FABRICATED METAL PRODUCTS (4.5%)
AGCO Corp. 8.500% 3/15/06............................ 3,000 3,074
*BWAY Corp. 10.250% 4/15/07.......................... 1,900 2,042
Cincinnati Milacron 8.375% 3/15/04................... 2,000 2,046
Clark Material Handling 10.750% 11/15/06............. 850 890
*Federal-Mogul Co. 8.800% 4/15/07.................... 2,500 2,616
*IMPSA 9.500% 5/31/02................................ 1,500 1,500
Ryerson Tull Inc. 8.500% 7/15/01..................... 3,000 3,068
Titan Wheel International, Inc. 8.750% 4/01/07....... 1,500 1,538
--------
16,774
MINING AND AGRICULTURE (2.3%)
PT Alatief Freeport Financial Co. B.V.
(Yankee Issue) 9.750% 4/15/01..................... 3,000 3,228
Santa Fe Pacific Gold 8.375% 7/01/05................. 5,000 5,340
--------
8,568
MORTGAGE-BACKED SECURITY (0.2%)
Resolution Trust Corporation Series 1992-C1 Class A1
8.800% 8/25/23.................................... 579 589
NATURAL GAS & OIL (1.6%)
Colorado Interstate Gas 10.000% 6/15/05.............. 1,500 1,762
Dawson Production Services 9.375% 2/01/07............ 750 763
Triton Energy 8.750% 4/15/02......................... 3,500 3,623
--------
6,148
PAPER (1.1%)
Polysindo International Finance Co. BV.
(Yankee Issue) 11.375% 6/15/06.................... 1,000 1,100
PT Riau Andalan Pulp and Paper
(Yankee Issue) 11.500% 12/15/00................... 3,000 3,060
--------
4,160
<PAGE>
<CAPTION>
Income Fund CONTINUED
Principal Market
Amount Value
<S> <C> <C>
PETROLEUM (1.9%)
*Lyondell Petroleum 9.750% 9/04/03................... $ 2,000 $ 2,255
*Petroliam Nasional Berhad (Yankee Issue)
7.125% 10/18/06................................... 5,000 4,996
---------
7,251
REAL ESTATE OPERATIONS (5.7%)
American Health Properties 7.050% 1/15/02............ 3,000 2,992
*Carramerica Realty Corp. 7.200% 7/01/04............. 3,000 2,997
Property Trust of America 6.875% 2/15/08............. 2,000 1,950
*Prudential Property 7.125% 7/01/07.................. 4,000 3,988
Storage U.S.A. L.P. 7.125% 11/01/03.................. 3,000 2,976
Trinet Corp. Realty Trust 7.300% 5/15/01............. 4,500 4,551
Wharf Capital International Ltd. 8.875% 11/01/04..... 2,000 2,136
---------
21,590
RETAIL (2.2%)
Kroger Company 7.650% 4/15/07........................ 3,000 3,092
Rite Aid Corp. 7.125% 1/15/07........................ 5,000 4,997
---------
8,089
SANITARY SERVICES (0.3%)
*Allied Waste Industries Inc. Zero Coupon
(Effective Yield 5.597%) 6/01/07......... 1,600 1,004
SERVICES (1.9%)
ARA Services, Inc. 10.625% 8/01/00................... 1,600 1,739
Aramark Services 8.150% 5/01/05...................... 2,000 2,093
Cobblestone Golf Group Inc. 11.500% 6/01/03.......... 2,000 2,100
*Dyncorp, Inc. 9.500% 3/01/07........................ 1,000 1,015
---------
6,947
TELEPHONE (2.5%)
*Comtel Brasileira Ltd. (Yankee Issue) 10.750% 9/26/04 2,000 2,155
Rogers Cantel, Inc. 9.375% 6/01/08................... 3,000 3,173
US West Capital Funding, Inc. 7.300% 1/15/07......... 4,000 4,007
---------
9,335
TEXTILE & APPAREL (0.3%)
*Tultex Corp. 9.625% 4/15/07......................... 1,000 1,063
TRANSPORTATION (4.0%)
*CSX Corp. 7.450% 05/01/07........................... 5,000 5,092
Mass Transit Railway Corp. of Hong Kong 7.250% 10/01/05 5,000 5,005
Norfolk Southern Corp. 7.350% 5/15/07................ 5,000 5,079
---------
15,176
UTILITIES (5.6%)
CMS Energy Corp. 8.125% 5/15/02...................... 2,000 2,023
CTC Mansfield Funding Corporation 11.125% 9/30/16.... 1,500 1,594
Enersis S.A. 6.900% 12/01/06......................... 5,000 4,870
Kentucky Power First Mortgage 8.900% 5/21/01......... 2,000 2,137
Louisiana Power & Light Company Series A 10.670% 1/02/17 1,000 1,066
*National Power Corp. 9.000% 7/05/02................. 1,500 1,583
Texas Utilities Company 9.750% 5/01/21............... 2,000 2,203
YPF Sociedad Anonima (Yankee Issue) 7.500% 10/26/02.. 5,585 5,683
---------
21,159
---------
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $347,363)............................................. 352,900
- --------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Income Fund CONTINUED
Principal Market
Amount Value
<S> <C> <C>
SHORT-TERM OBLIGATION (3.6%)
Associates Corp. of North America 6.200% 7/01/97
(Amortized cost $13,585).......................... $ 13,585 $ 13,585
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(Cost basis $360,947)............................................. 366,485
OTHER ASSETS, LESS LIABILITIES (2.3%)............................. 8,787
---------
TOTAL NET ASSETS (100.0%)......................................... $ 375,272
=========
- --------------------------------------------------------------------------------
<FN>
*Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933. These
securities generally are issued to qualified institutional buyers, such as the
Fund, and any resale by the Fund must be an exempt transaction normally to other
qualified institutional investors. At June 30, 1997, the aggregate value of the
Fund's private placement securities was $91,079 (aggregate cost of $85,576)
which represented 24.3 percent of net assets.
At June 30, 1997, bonds issued by foreign entities represented 30.1 percent of
net assets.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
SR&F High Yield Portfolio
Investments as of June 30, 1997
(Dollar Amounts In Thousands)
<CAPTION>
Principal Market
LONG-TERM OBLIGATIONS (94.4%) Amount Value
<S> <C> <C>
AEROSPACE & TRANSPORTATION EQUIPMENT (3.9%)
*Derlan Manufacturing 10.000% 1/15/07................ $ 250 $ 253
*L-3 Communications Corp. 10.375% 5/01/07............ 500 530
*WR Carpenter North America 10.625% 6/15/07.......... 750 750
--------
1,533
AUTOMOTIVE (2.6%)
*Oxford Automotive 10.125% 6/15/07................... 500 503
Penda Corporation Series B 10.750% 3/01/04........... 500 501
--------
1,004
BUILDING & CONSTRUCTION (1.9%)
Standard Pacific Corp. 8.500% 6/15/07................ 500 496
*William Scotsman Inc. 9.875% 6/01/07................ 250 249
--------
745
BUSINESS SERVICES (4.3%)
Iron Mountain Inc. 10.125% 10/01/06.................. 500 530
Lamar Advertising Co. 9.625% 12/01/06................ 200 205
*Outdoor Systems, Inc. 8.875% 6/15/07................ 750 731
*Safelite Glass Corp. 9.875% 12/15/06................ 200 212
--------
1,678
CABLE/MEDIA (7.2%)
*Capstar Broadcasting 9.250% 7/01/07................. 750 728
Frontiervision 11.000% 10/15/06...................... 250 260
*Jacor Communications, Inc. 8.750% 6/15/07........... 500 492
*Radio One Inc. 7.000% 5/15/04....................... 500 449
Rogers Communications, Inc. (Yankee Issue)
9.125% 1/15/06.................................... 200 202
SFX Broadcasting Series B 10.750% 5/15/06............ 150 163
*TV Azteca 10.500% 2/15/07........................... 250 256
Young Broadcasting Corp. 10.125% 2/15/05............. 250 263
--------
2,813
COMMUNICATIONS (5.4%)
Dobson Communications Corp. 11.750% 4/15/07.......... 250 240
*GlobalStar Telecommunications Ltd 11.250% 6/15/04... 500 469
*ITC Deltacom Inc. 11.000% 6/01/07................... 500 505
Pricecellular Wire 10.750% 11/01/04.................. 150 155
*Viasystems Inc. 9.750% 6/01/07...................... 750 761
--------
2,130
CONSUMER PRODUCTS (2.9%)
*Coleman Escrow Corp. Zero Coupon 5/15/01
11.125% (Effective Yield ) First Priority Note.... 250 158
12.875% (Effective Yield ) Second Priority Note... 750 435
Renaissance Cosmetics 11.750% 2/15/04................ 500 526
--------
1,119
CONTAINERS (3.9%)
*Consumers International 10.250% 4/01/05............. 500 537
*Silgan Corp. 9.000% 6/01/09......................... 750 754
*Vicap S.A. 10.250% 5/15/02.......................... 250 257
--------
1,548
ENERGY - SERVICES (7.6%)
Dawson Production Services 9.375% 2/01/07............ 250 254
Forcenergy Inc. Series B 8.500% 2/15/07.............. 500 487
*ICO Inc. 10.375% 6/01/07............................ 500 515
<PAGE>
<CAPTION>
SR&F High Yield Portfolio CONTINUED
Principal Market
Amount Value
<S> <C> <C>
ENERGY - SERVICES (CONTINUED)
*Transamerican Energy 11.500% 6/15/02................ $ 750 $ 731
Triton Energy Ltd. 8.750% 4/15/02.................... 500 518
*United Refining Co. 10.750% 6/15/07................. 500 495
--------
3,000
FINANCIAL (2.6%)
*Navistar Financial Corp. 9.000% 6/01/02............. 500 512
Penncorp Financial Group 9.250% 12/15/03............. 500 525
--------
1,037
FOOD & BEVERAGES (5.2%)
*Archibald Candy Corp. 10.250% 7/01/04............... 500 509
*DGS International Finance Co. 10.000% 6/01/07....... 500 515
*Pepsi-Gemex S.A. 9.750% 3/30/04..................... 500 514
*Windy Hill Pet Food Co. 9.750% 5/15/07.............. 500 500
--------
2,038
FOREIGN SOVEREIGN REGIONAL BONDS (2.6%)
*City of Moscow 9.500% 5/31/00....................... 500 505
*Guangdong Enterprises (Yankee Issue) 8.875% 5/22/07. 500 514
--------
1,019
HEALTH SERVICES & EQUIPMENT (3.9%)
Dynacare Inc. (Yankee Issue) 10.750% 1/15/06......... 500 520
*Leiner Health 9.625% 7/10/07........................ 500 509
Loewen Group International Inc. Series 4
8.250% 10/15/03................................... 500 516
--------
1,545
HOSPITALS & NURSING HOME CARE (3.0%)
*Integrated Health Services 9.500% 9/15/07........... 400 410
Tenet Healthcare Corp. 8.625% 1/15/07................ 750 761
--------
1,171
HOTELS & ENTERTAINMENT (5.1%)
Boyd Gaming Corp. 9.250% 10/01/03.................... 500 498
Lady Luck Gaming 11.875% 3/01/01..................... 500 507
Premier Parks Inc. 9.750% 1/15/07.................... 250 260
Prime Hospitality Series B 9.750% 4/01/07............ 500 525
Station Casinos Inc. 10.125% 3/15/06................. 200 202
--------
1,992
MACHINERY & FABRICATED METAL PRODUCTS (8.4%)
*BWAY Corp. 10.250% 4/15/07.......................... 350 376
*Federal-Mogul Co. 8.800% 4/15/07.................... 350 366
*Hayes Wheels International, Inc. 9.125% 7/15/07..... 500 500
*IMPSA 9.500% 5/31/02................................ 500 500
Titan Wheel International Inc. 8.750% 4/01/07........ 500 512
*Wells Aluminum 10.125% 6/01/05...................... 500 516
US Can Corp. 10.125% 10/15/06........................ 500 533
--------
3,303
MISCELLANEOUS SERVICES (1.3%)
*Dyncorp Inc. 9.500% 3/01/07......................... 500 508
PAPER (2.0%)
APP International Finance Company (Yankee Issue)
10.250% 10/01/00.................................. 150 154
*Indah Kiat Finance 10.000% 7/01/07.................. 500 497
Specialty Paperboard Inc. 9.375% 10/15/06............ 150 152
--------
803
<PAGE>
<CAPTION>
SR&F High Yield Portfolio CONTINUED
Principal Market
Amount Value
<S> <C> <C>
RESTAURANTS (0.6%)
*AFC Enterprises 10.250% 5/15/07..................... $ 250 $ 250
RETAIL (4.1%)
Cole National Group 9.875% 12/31/06.................. 200 210
*Quality Food Centers 8.700% 3/15/07................. 500 504
*Ralphs Grocery Co. 11.000% 6/15/05.................. 350 380
*Specialty Retailers 8.500% 7/15/05.................. 500 502
--------
1,596
RUBBER, PLASTIC & RELATED MATERIALS (3.0%)
*Key Plastics Inc. 10.250% 3/15/07................... 500 529
Plastic Containers Inc. Series B 10.000% 12/15/06.... 350 363
*Tekni-Plex Inc. 11.250% 4/01/07..................... 250 270
--------
1,162
SANITARY SERVICES (1.4%)
*Allied Waste Industries Inc. Zero Coupon
(Effective Yield 5.597%) 6/01/07.................. 900 565
TELEPHONE (2.6%)
*Brooks Fiber Properties 10.000% 6/01/07............. 750 758
*Comtel Brasileira Ltd. (Yankee Issue) 10.750% 9/26/04 250 269
--------
1,027
TEXTILE & APPAREL (3.2%)
*Anvil Knitwear Inc. 10.875% 3/15/07................. 500 507
*Hedstrom Corp. 10.000% 6/01/07...................... 250 254
*Tultex Corp. 9.625% 4/15/07......................... 250 266
William Carter 10.375% 12/01/06...................... 200 210
--------
1,237
TRANSPORTATION & TRANSPORTATION EQUIPMENT (2.6%)
*Coach USA Inc. 9.375% 7/01/07....................... 500 495
*Greyhound Lines 11.50% 4/15/07...................... 500 533
--------
1,028
UTILITIES (3.1%)
California Energy Company Inc. 9.500% 9/15/06........ 500 535
*Energy Corp. of America 9.500% 5/15/07.............. 500 493
Midland Funding II Series B 13.250% 7/23/06.......... 150 183
--------
1,211
--------
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $36,512).............................................. 37,062
- -------------------------------------------------------------------------------
<PAGE>
<CAPTION>
SR&F High Yield Portfolio CONTINUED
Principal Market
Amount Value
<S> <C> <C>
SHORT-TERM OBLIGATION (3.1%)
COMMERCIAL PAPER
Associates Corp. of North America 6.200% 7/01/97
(Amortized cost $1,220)........................... $ 1,220 $ 1,220
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.5%)
(Cost basis $37,733).............................................. 38,282
OTHER ASSETS, LESS LIABILITIES (2.5%)............................. 991
--------
TOTAL NET ASSETS (100%)........................................... $39,273
========
- -------------------------------------------------------------------------------
<FN>
*Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933. These
securities generally are issued to qualified institutional buyers, such as the
Portfolio, and any resale must be in an exempt transaction, normally to other
qualified institutional investors. At June 30, 1997, the aggregate value of the
Portfolio's private placement securities was $25,096 (aggregate cost of
$25,114), which represented 63.9 percent of net assets.
At June 30, 1997, bonds issued by foreign entities represented 9.4 percent of
net assets.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Balance Sheets
June 30, 1997
(All Amounts in Thousands, except per-share amounts)
<CAPTION>
INTERMEDIATE HIGH
BOND INCOME YIELD
FUND FUND FUND
<S> <C> <C> <C>
ASSETS
Investments, at market value ........................... $ 324,848 $ 366,485 $ --
Investment in SR&F High Yield Portfolio, at value....... -- -- 13,482
Receivable for investments sold ........................ 5,228 14,331 --
Receivable for fund shares sold ........................ 690 754 33
Accrued interest receivable ............................ 5,389 7,253 --
Cash and other assets .................................. 130 192 26
--------- --------- ---------
Total Assets ........................................ $ 336,285 $ 389,015 $ 13,541
========= ========= =========
LIABILITIES
Payable for investments purchased ...................... $ 5,988 $ 11,975 $ --
Payable for fund shares redeemed ....................... 531 681 5
Dividends payable ...................................... 686 719 29
Payable to investment adviser and transfer agent ....... 190 269 9
Other liabilities ...................................... 106 99 16
--------- --------- ---------
Total Liabilities ................................... 7,501 13,743 59
--------- --------- ---------
CAPITAL
Paid-in capital ........................................ 339,062 376,132 12,996
Net unrealized appreciation of investments ............. 4,220 5,538 267
Accumulated net realized gains (losses) on investments.. (14,498) (6,398) 219
--------- --------- ---------
Total Capital (Net Assets) .......................... 328,784 375,272 13,482
--------- --------- ---------
Total Liabilities and Capital ....................... $ 336,285 $ 389,015 $ 13,541
========= ========= =========
Shares Outstanding (Unlimited Number Authorized) ....... 37,610 37,965 1,279
========= ========= =========
Net Asset Value (Capital) Per Share .................... $ 8.74 $ 9.88 $ 10.54
========= ========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Statements of Operations
For The Period Ended
June 30, 1997
(All Amounts In Thousands)
<CAPTION>
INTERMEDIATE HIGH
BOND INCOME YIELD
FUND FUND FUND
<S> <C> <C> <C>
INVESTMENT INCOME
Interest income .......................................... $ 23,987 $ 27,349 $ --
Interest income allocated from SR&F High Yield Portfolio . -- -- 566
-------- -------- --------
EXPENSES
Management fees .......................................... 1,091 1,630 --
Administrative fees ...................................... 466 446 9
Transfer agent fees ...................................... 436 473 9
Printing and postage ..................................... 87 68 16
Custodian fees ........................................... 49 38 1
Accounting fees .......................................... 32 32 17
SEC and state registration fees .......................... 33 44 4
Legal and audit fees ..................................... 22 22 12
Trustees' fees ........................................... 26 23 5
Amortization of organization expenses .................... -- -- 16
Expenses allocated from SR&F High Yield Portfolio ........ -- -- 48
Other .................................................... 96 103 6
-------- -------- --------
2,338 2,879 143
Reimbursement of expenses by investment adviser .......... (54) (41) (81)
-------- -------- --------
Total Net Expenses .................................... 2,284 2,838 62
-------- -------- --------
Net Investment Income ................................. 21,703 24,511 504
-------- -------- --------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains (losses) on investments ............... (1,179) (196) 219
Net change in unrealized appreciation or depreciation
of investments ........................................ 7,114 9,039 267
-------- -------- --------
Net Gains on Investments .............................. 5,935 8,843 486
-------- -------- --------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ..... $ 27,638 $ 33,354 $ 990
======== ======== ========
<FN>
(a) From the commencement of operations on November 1, 1996.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Statements of Changes in Net Assets
(ALL AMOUNTS IN THOUSANDS)
<CAPTION>
HIGH YIELD
FUND
INTERMEDIATE PERIOD
BOND FUND INCOME FUND ENDED
YEARS ENDED JUNE 30, YEARS ENDED JUNE 30, JUNE 30,
1996 1997 1996 1997 1997 (A)
<S> <C> <C> <C> <C> <C>
OPERATIONS
Net investment income .............................................. $ 20,824 $ 21,703 $ 17,318 $ 24,511 $ 504
Net realized gains (losses) on investments ......................... 3,857 (1,179) 1,846 (196) 219
Net change in unrealized appreciation or depreciation of investments (7,549) 7,114 (10,391) 9,039 267
--------- --------- --------- --------- ---------
Net Increase in Net Assets Resulting from Operations ........... 17,132 27,638 8,773 33,354 990
--------- --------- --------- --------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ............................... (20,525) (22,030) (17,246) (24,589) (504)
--------- --------- --------- --------- ---------
SHARE TRANSACTIONS
Subscriptions to fund shares ....................................... 91,892 119,668 216,512 131,567 14,080
Investment income dividends reinvested ............................. 16,753 16,336 12,786 17,736 428
Redemptions of fund shares ......................................... (108,873) (110,940) (85,588) (92,360) (1,512)
--------- --------- --------- --------- ---------
Net Increase (Decrease) from Share Transactions ................. (228) 25,064 143,710 56,943 12,996
--------- --------- --------- --------- ---------
Net Increase (Decrease) in Net Assets ........................... (3,621) 30,672 135,237 65,708 13,482
TOTAL NET ASSETS
Beginning of Period ................................................ 301,733 298,112 174,327 309,564 --
--------- --------- --------- --------- ---------
End of Period ...................................................... $ 298,112 $ 328,784 $ 309,564 $ 375,272 $ 13,482
========= ========= ========= ========= =========
Accumulated Undistributed Net Investment Income at End of Period ... $ 327 $ -- $ 78 $ -- $ --
========= ========= ========= ========= =========
ANALYSES OF CHANGES IN SHARES OF BENEFICIAL INTEREST
Subscriptions to fund shares ....................................... 10,517 13,802 21,751 13,490 1,392
Investment income dividends reinvested ............................. 1,920 1,884 1,305 1,817 34
--------- --------- --------- --------- ---------
12,437 15,686 23,056 15,307 1,426
Redemptions of fund shares ......................................... (12,495) (12,805) (8,734) (9,471) (147)
--------- --------- --------- --------- ---------
Net increase (decrease) in fund shares ............................. (58) 2,881 14,322 5,836 1,279
Shares outstanding at beginning of period .......................... 34,787 34,729 17,807 32,129 --
--------- --------- --------- --------- ---------
Shares outstanding at end of period ................................ 34,729 37,610 32,129 37,965 1,279
========= ========= ========= ========= =========
<FN>
(a) From the commencement of operations on November 1, 1996
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
SR&F High Yield Portfolio
Balance Sheet
June 30, 1997
(All Amounts In Thousands)
<CAPTION>
<S> <C>
ASSETS
Investments, at market value ...................................... $38,282
Receivable for investments sold ................................... 1,468
Accrued interest receivable ....................................... 550
Other assets ...................................................... 9
-------
Total Assets ................................................... 40,309
-------
LIABILITIES
Payable for investments purchased ................................. $ 997
Payable to investment adviser ..................................... 28
Other liabilities ................................................. 11
-------
Total Liabilities .............................................. 1,036
-------
Net Assets applicable to investors' beneficial interests .......... $39,273
=======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
SR&F High Yield Portfolio
Statement of Operations
For the Period Ended
June 30, 1997 (a)
(All Amounts In Thousands)
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest income ................................................... $ 969
------
EXPENSES
Management fees ................................................... 53
Audit and legal fees .............................................. 17
Accounting fees ................................................... 17
Trustees' fees .................................................... 4
Custodian fees .................................................... 3
Other ............................................................. 1
------
Total Expenses ................................................. 95
------
Net Investment Income ............................................. 874
------
REALIZED AND UNREALIZED GAINS ON INVESTMENTS
Net realized gains on investments ................................. 336
Net change in unrealized appreciation or depreciation
of investments ................................................. 549
------
Net Gains on Investments ....................................... 885
------
Net Increase in Net Assets Resulting from Operations .............. $1,759
======
<FN>
(a) From the commencement of operations on November 1, 1996.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
SR&F High Yield Portfolio
Statement of Changes in Net Assets
For the Period Ended
June 30, 1997 (a)
(All Amounts In Thousands)
<CAPTION>
<S> <C>
OPERATIONS
Net investment income .............................................. $ 874
Net realized gains on investments .................................. 336
Net change in unrealized appreciation or depreciation of investments 549
--------
1,759
--------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTERESTS
Contributions ...................................................... 38,807
Withdrawals ........................................................ (1,293)
--------
Net Increase from transactions in investors' beneficial interests 37,514
--------
Net Increase in Net Assets ...................................... 39,273
TOTAL NET ASSETS
Beginning of Period ................................................ --
--------
End of Period ...................................................... $ 39,273
========
<FN>
(a) From the commencement of operations November 1, 1996.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
Note 1. Organization of the SR&F High Yield Portfolio
The SR&F High Yield Portfolio (the "Portfolio") is a separate series of the SR&F
Base Trust, a Massachusetts common trust organized under an Agreement and
Declaration of Trust dated August 23, 1993. The Declaration of Trust permits the
Trustees to issue nontransferable interests in the Portfolio. The Portfolio
commenced operations on November 1, 1996.
The Portfolio allocates net asset value, income and expenses based on
respective percentage ownership of each investor on a daily basis. At June 30,
1997, Stein Roe High Yield Fund, Stein Roe Institutional Client High Yield Fund
and Stein Roe Institutional High Yield Fund owned 34.3 percent, 65.4 percent and
0.3 percent, respectively.
Note 2. Significant Accounting Policies
The following are the significant accounting policies of Stein Roe Intermediate
Bond Fund, Stein Roe Income Fund and Stein Roe High Yield Fund, (the "Funds"),
each a series of the Stein Roe Income Trust, (a Massachusetts business trust)
(the "Trust"), and the Portfolio.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of increases and decreases in net assets from operations
during the reporting period. Actual results could differ from those estimates.
Amortization of Organization Expenses
Organization costs of High Yield Fund are amortized on a straight-line
basis against income over various periods of up to sixty months from the
commence ment of public offering by the Fund, depending on the nature of the
individual costs.
Security Valuations
All securities are valued as of June 30, 1997. Long-term debt securities
are valued using market quotations if readily available at the time of
valuation. If market quota-tions are not readily available, they are valued at a
fair value using a procedure determined in good faith by the Board of Trustees,
which has authorized the use of market valuations provided by a pricing service.
Short-term debt securities with remaining maturities of 60 days or less are
valued at their amortized cost. Those with remaining maturities of more than 60
days for which market quotations are not readily available are valued by use of
a matrix, prepared by the Adviser, based on quotations for comparable
securities. Other assets are valued by a method that the Board of Trustees
believes represents a fair value.
<PAGE>
Futures Contracts
The Funds and the Portfolio may enter into U.S. Treasury bond futures
contracts to either hedge against expected declines of their securities or as a
temporary substitute for the purchase of individual bonds. Risks of entering
into futures contracts include the possibility that there may be an illiquid
market at the time the Funds or Portfolio seek to close out a contract, and
changes in the value of the futures contract may not correlate with changes in
the value of the securities being hedged.
Upon entering into a futures contract, the Funds or Portfolio deposit cash or
securities with their custodian in an amount sufficient to meet the initial
margin requirement. Subsequent payments are made or received by the Funds or
Portfolio equal to the daily change in the contract value and are recorded as
unrealized gains or losses. The Funds or Portfolio recognize a realized gain or
loss when the contract is closed or expires. Neither the Funds nor the Portfolio
entered into any futures contracts during the period ended June 30, 1997.
Federal Income Taxes
No provision is made for federal income taxes, since (a) the Funds elect to
be taxed as a "regulated investment company" and make such distribu tions to
their shareholders as to be relieved of all federal income tax under provisions
of current federal tax law and (b) the Portfolio is treated as a partnership for
federal income tax purposes and all of its income is allocated to its owners
based on respective percentages of ownership.
The Funds intend to utilize provisions of the federal income tax law that
allow them to carry a realized capital loss forward for eight years following
the year of the loss and offset such losses against any future realized gains.
At June 30, 1997, the Funds had capital loss carryforwards as follows:
YEAR OF
FUND AMOUNT EXPIRATION
Intermediate
Bond Fund $14,042 2003-2005
Income Fund 6,283 1999-2005
<PAGE>
Distributions to Shareholders
Dividends from net investment income are declared daily and paid monthly.
Capital gains distributions, if any, are distributed annually. Distributions in
excess of tax basis earnings are reported in the financial statements as a
return of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings that result in temporary
overdis tri butions are classified as distributions in excess of net investment
income or net realized gains, and all perma nent differences are reclassified to
paid-in capital.
None of the Funds had distributions in excess of net investment income or net
realized gains for the period ended June 30, 1997. Other Information Realized
gains or losses from sales of securities are determined on the specific
identified cost basis.
Securities purchased on a when-issued basis may be settled a month or more
after the transaction date. These securities are subject to market fluctuation
during this period. Neither the Funds nor the Portfolio had when-issued or
delayed delivery purchase commitments as of June 30, 1997.
All amounts, except per-share amounts, are shown in thousands.
Note 3. Portfolio Composition
Intermediate Bond Fund invests primarily in marketable debt securities. Income
Fund invests in medium-quality debt securities. High Yield Portfolio invests
primarily in a portfolio of high yield, high-risk medium- and lower-quality debt
securities.
See each Fund's and the Portfolio's schedule of investments for information
on individual securities as well as industry diversification, and see Fund
Highlights for each Fund's and Portfolio's portfolio quality.
Note 4. Trustees' Fees and Transactions with Affiliates
The Funds and Portfolio pay monthly management fees, computed and accrued daily,
to Stein Roe & Farnham Incorporated (the "Adviser"), an indirect, majority-owned
subsidiary of Liberty Mutual Insurance Company, for its services as investment
adviser and manager.
The fee for Intermediate Bond Fund is .35 of 1 percent of the average daily
net assets. The management fee for Income Fund is .50 of 1 percent of the first
$100 million of average daily net assets and .475 of 1 percent thereafter. The
management fee for High Yield Portfolio is .50 of 1 percent of the first $500
million of average daily net assets and .475 of 1 percent thereafter.
<PAGE>
The Funds pay monthly administrative fees, computed and accrued daily, to the
Adviser. The administrative fee for Intermediate Bond Fund is .15 of 1 percent
of average daily net assets. The administrative fee for Income Fund is .15 of 1
percent of the first $100 million of average daily net assets and .125 of 1
percent thereafter. The administrative fee for the High Yield Fund is .15 of 1
percent of the first $500 million of average daily net assets and .125 of 1
percent thereafter.
The administrative agreements of the Funds provide that the Adviser will
reimburse each Fund to the extent that its annual expenses, excluding certain
expenses, exceed the applicable limits prescribed by any state in which each
Fund's shares are offered for sale. Prior to November 1, 1996, the Adviser
agreed to reimburse Intermediate Bond Fund and Income Fund to the extent that
expenses incurred exceeded .70 percent and .82 percent of average net assets,
respectively.
The Adviser has agreed to reimburse High Yield Fund to the extent that
expenses exceed 1 percent of average net assets. The expense limitation expires
October 31, 1997, subject to earlier termination by the Adviser on 30 days'
notice to the Fund.
The transfer agent fees of the Fund are paid to SteinRoe Services, Inc.
(SSI), an indirect, majority-owned subsidiary of Liberty Mutual Insurance
Company. SSI has entered into an agreement with Colonial Investors Service
Center, Inc. an indirect, majority-owned subsidiary of Liberty Mutual Insurance
Company, to act as sub-transfer agent for the Funds.
The Adviser also provides fund accounting services.
Certain officers and trustees of the Trusts are also officers of the Adviser.
Compensation is paid to trustees not affiliated with the Adviser. No
remuneration was paid to any other trustee or officer of the Trusts.
Note 5. Short-Term Debt
To facilitate portfolio liquidity, the Funds and Portfolio maintain borrowing
arrangements under which they can borrow against portfolio securities. There
were no borrowings during the period ended June 30, 1997.
<PAGE>
Note 6. Investment Transactions
The aggregate cost of purchases and proceeds from sales of securities other
than short-term obligations for the period ended June 30, 1997, were:
<TABLE>
<CAPTION>
FUND/PORTFOLIO Purchases Sales
--------- ---------
<S> <C> <C>
Intermediate Bond Fund................................. $719,901 $628,300
Income Fund ........................................... 491,776 443,807
SR&F High Yield Portfolio.............................. 65,058 28,880
</TABLE>
At June 30, 1997, unrealized appreciation and depreciation of investments on a
tax basis and the cost of investments for financial reporting purposes and for
federal income tax purposes were as follows:
<TABLE>
<CAPTION>
Cost of Investments
Federal
Net Financial Income
FUND/PORTFOLIO Appreciation Depreciation Appreciation Reporting Tax
------------ ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C>
Intermediate Bond Fund...... $5,430 $1,210 $4,220 $320,628 $320,628
Income Fund................. 7,880 2,434 5,446 360,947 361,039
SR&F High Yield Portfolio... 698 149 549 37,733 37,733
</TABLE>
<PAGE>
<TABLE>
Financial Highlights
Intermediate Bond Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
<CAPTION>
Years Ended June 30,
1988 1989 1990 1991
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................... $ 8.77 $ 8.51 $ 8.65 $ 8.38
----------- ----------- ----------- -----------
Income From Investment Operations
Net investment income ..................................... .68 .74 .73 .69
Net realized and unrealized gains (losses) on investments . (.12) .14 (.28) .16
----------- ----------- ----------- -----------
Total from investment operations .................. .56 .88 .45 .85
----------- ----------- ----------- -----------
Distributions
Net investment income ..................................... (.68) (.74) (.72) (.70)
Net realized capital gains ................................ (.14) -- -- --
In excess of realized gains ............................... -- -- -- --
----------- ----------- ----------- -----------
Total distributions ............................... (.82) (.74) (.72) (.70)
----------- ----------- ----------- -----------
Net Asset Value, End of Period ..................................... $ 8.51 $ 8.65 $ 8.38 $ 8.53
=========== =========== =========== ===========
Ratio of net expenses to average net assets (a) .................... 0.73% 0.73% 0.74% 0.73%
Ratio of net investment income to average net assets (b) ........... 7.97% 8.71% 8.60% 8.17%
Portfolio turnover rate ............................................ 273% 197% 296% 239%
Total return (b) ................................................... 6.92% 10.97% 5.33% 10.62%
Net assets, end of period (000s) ................................... $ 162,225 $ 165,056 $ 161,439 $ 184,444
<PAGE>
<CAPTION>
Years Ended June 30,
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............................... $ 8.53 $ 8.99 $ 9.26
----------- ----------- -----------
Income From Investment Operations
Net investment income ..................................... .69 .65 .56
Net realized and unrealized gains (losses) on investments . .46 .27 (.59)
----------- ----------- -----------
Total from investment operations .................. 1.15 .92 (.03)
----------- ----------- -----------
Distributions
Net investment income ..................................... (.69) (.65) (.56)
Net realized capital gains ................................ -- -- (.08)
In excess of realized gains ............................... -- -- (.15)
----------- ----------- -----------
Total distributions ............................... (.69) (.65) (.79)
----------- ----------- -----------
Net Asset Value, End of Period ..................................... $ 8.99 $ 9.26 $ 8.44
=========== =========== ===========
Ratio of net expenses to average net assets (a) .................... 0.70% 0.67% 0.70%
Ratio of net investment income to average net assets (b) ........... 7.87% 7.22% 6.20%
Portfolio turnover rate ............................................ 202% 214% 206%
Total return (b) ................................................... 14.02% 10.59% (0.47%)
Net assets, end of period (000s) ................................... $ 242,948 $ 311,728 $ 302,507
<PAGE>
<CAPTION>
Years Ended June 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period ............................... $ 8.44 $ 8.67 $ 8.58
----------- ----------- -----------
Income From Investment Operations
Net investment income ..................................... .58 .59 .60
Net realized and unrealized gains (losses) on investments . .23 (.10) .17
----------- ----------- -----------
Total from investment operations .................. .81 .49 .77
----------- ----------- -----------
Distributions
Net investment income ..................................... (.58) (.58) (.61)
Net realized capital gains ................................ -- -- --
In excess of realized gains ............................... -- -- --
----------- ----------- -----------
Total distributions ............................... (.58) (.58) (.61)
----------- ----------- -----------
Net Asset Value, End of Period ..................................... $ 8.67 $ 8.58 $ 8.74
=========== =========== ===========
Ratio of net expenses to average net assets (a) .................... 0.70% 0.70% 0.73%
Ratio of net investment income to average net assets (b) ........... 6.94% 6.79% 6.97%
Portfolio turnover rate ............................................ 162% 202% 210%
Total return (b) ................................................... 10.11% 5.76% 9.31%
Net assets, end of period (000s) ................................... $ 301,733 $ 298,112 $ 328,784
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have been 0.71, 0.75
and 0.75 percent for the years ended June 30, 1995, through June 30, 1997.
(b) Computed giving effect to Adviser's expense limitation undertaking.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Highlights CONTINUED
Income Fund
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
<CAPTION>
Years Ended June 30,
1988 1989 1990 1991
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ............................. $ 9.71 $ 9.60 $ 9.65 $ 8.95
---------- ----------- ---------- ----------
Income From Investment Operations
Net investment income ................................... .95 .95 .92 .80
Net realized and unrealized gains (losses) on investments (.11) .05 (.70) --
---------- ----------- ---------- ----------
Total from investment operations ................ .84 1.00 .22 .80
Distributions from net investment income ......................... (.95) (.95) (.92) (.80)
---------- ----------- ---------- ----------
Net Asset Value, End of Period ................................... $ 9.60 $ 9.65 $ 8.95 $ 8.95
========== =========== ========== ==========
Ratio of net expenses to average net assets (a) .................. 0.91% 0.90% 0.93% 0.95%
Ratio of net investment income to average net assets (b) ......... 10.08% 9.97% 10.02% 8.98%
Portfolio turnover rate .......................................... 158% 94% 90% 77%
Total return (b) ................................................. 9.38% 11.06% 2.48% 9.30%
Net assets, end of period (000s) ................................. $ 96,611 $ 110,376 $ 89,023 $ 93,952
<PAGE>
<CAPTION>
Years Ended June 30,
1992 1993 1994
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .............................. $ 8.95 $ 9.51 $ 10.10
----------- ----------- -----------
Income From Investment Operations
Net investment income .................................... .76 .75 .69
Net realized and unrealized gains (losses) on investments .56 .59 (.74)
----------- ----------- -----------
Total from investment operations ................. 1.32 1.34 (.05)
Distributions from net investment income .......................... (.76) (.75) (.69)
----------- ----------- -----------
Net Asset Value, End of Period .................................... $ 9.51 $ 10.10 $ 9.36
=========== =========== ===========
Ratio of net expenses to average net assets (a) ................... 0.90% 0.82% 0.82%
Ratio of net investment income to average net assets (b) .......... 8.20% 7.62% 6.94%
Portfolio turnover rate ........................................... 76% 39% 53%
Total return (b) .................................................. 15.30% 14.64% (0.69%)
Net assets, end of period (000s) .................................. $ 112,706 $ 151,594 $ 158,886
<PAGE>
<CAPTION>
Years Ended June 30,
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period .............................. $ 9.36 $ 9.79 $ 9.63
----------- ----------- -----------
Income From Investment Operations
Net investment income .................................... .71 .71 .70
Net realized and unrealized gains (losses) on investments .43 (.16) .25
----------- ----------- -----------
Total from investment operations ................. 1.14 .55 .95
Distributions from net investment income .......................... (.71) (.71) (.70)
----------- ----------- -----------
Net Asset Value, End of Period .................................... $ 9.79 $ 9.63 $ 9.88
=========== =========== ===========
Ratio of net expenses to average net assets (a) ................... 0.82% 0.82% 0.84%
Ratio of net investment income to average net assets (b) .......... 7.55% 7.26% 7.26%
Portfolio turnover rate ........................................... 64% 135% 138%
Total return (b) .................................................. 12.79% 5.70% 10.34%
Net assets, end of period (000s) .................................. $ 174,327 $ 309,564 $ 375,272
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have been 0.83, 0.85,
0.88 and .85 percent for the years ended June 30, 1994, through June 30, 1997,
respectively.
(b) Computed giving effect to Adviser's expense limitation undertaking.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Highlights CONTINUED
High-Yield Fund
Selected per-share data (for a share outstanding throughout the period), ratios
and supplemental data.
<CAPTION>
PERIOD
ENDED
JUNE 30,
1997 (A)
----------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ......................... $ 10.00
----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ..................................... .52
Net realized and unrealized gains on investments .......... .54
----------
Total from investment operations ........................ 1.06
Distribution from net investment income ...................... (.52)
----------
NET ASSET VALUE, END OF PERIOD ............................... $ 10.54
==========
Ratio of net expenses to average net assets (b) .............. 1.00%*
Ratio of net investment income to average net assets (c) ..... 8.05%*
Total return (c) ............................................. 10.88%**
Net assets, end of period (000s) ............................. $ 13,482
<FN>
* Annualized
** Not annualized
(a) The Fund commenced operations on November 1, 1996
(b) If the Fund had paid all of its expenses and there had been no reimbursement
by the investment adviser, this ratio would have been 2.29 percent for the
period ended June 30, 1997.
(c) Computed giving effect to Adviser's expense limitation undertaking.
</FN>
</TABLE>
<PAGE>
<TABLE>
Financial Highlights CONTINUED
SR&F High Yield Portfolio
<CAPTION>
PERIOD
ENDED
JUNE 30,
1997 (A)
----------
<S> <C>
RATIOS TO AVERAGE NET ASSETS
Ratio of net investment income to average net assets............. 8.24%*
Ratio of expenses to average net assets.......................... 0.89%*
Portfolio turnover rate ......................................... 168%**
<FN>
*Annualized
**Not annualized.
(a) The Portfolio commenced operations on November 1, 1996.
</FN>
</TABLE>
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Trustees of Stein Roe Income Trust and
SR&F Base Trust
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe High Yield Fund
SR&F High Yield Portfolio
We have audited the accompanying balance sheets, including the schedules of
investments, of Stein Roe Intermediate Bond Fund, Stein Roe Income Fund, Stein
Roe High Yield Fund and SR&F High Yield Portfolio as of June 30, 1997, and the
related statements of operations for the periods then ended and changes in net
assets for each of the two years in the period then ended (except for Stein Roe
High Yield Fund and SR&F High Yield Portfolio, as to which the period is from
November 1, 1996 to June 30, 1997), and the financial highlights for each of the
fiscal periods since 1988. These financial statements and financial highlights
are the responsibility of the Funds' and Portfolio's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1997, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial positions of Stein
Roe Intermediate Bond Fund, Stein Roe Income Fund, Stein Roe High Yield Fund and
SR&F High Yield Portfolio at June 30, 1997, the results of their operations, the
changes in their net assets, and their financial highlights for the periods
referred to above, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 11, 1997
<PAGE>
Funds for Every Investment Objective
The Stein Roe family of mutual funds offers a variety of funds so you can select
the right fund, or combina tion of funds, to meet your investment objectives.
Call us at 800-338-2550 for a prospectus and more complete information on any of
the funds, including management fees and expenses. Please read the prospectus
carefully before you invest or send money.
Money Market Funds
Money market funds seek to provide income while preserving principal and
maintaining liquidity. These funds offer free check writing.
o Government Reserves Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies and instrumentalities.*
o Cash Reserves Fund -- Invests in high-quality, short-term money market
securities such as certificates of deposit, banker's acceptances and
commercial paper.*
Tax-Exempt Funds
These funds help investors keep more of their earnings by investing in
instruments that earn income free from federal income tax. Income may be subject
to federal alternative minimum tax and state and local taxes; capital gains are
subject to state, local and federal taxes.
o Municipal Money Market Fund -- Seeks to provide the liquidity and
stability of a money market fund plus current tax-free income.
Free check writing available.*
o Intermediate Municipals Fund -- Seeks high current yield through
investments primarily in the three highest grades of intermediate-term
municipal securities.
o Managed Municipals Fund -- Pursues high tax-free income by investing in a
quality- conscious portfolio of long-term municipal bonds.
o High-Yield Municipals Fund -- Seeks a higher level of tax-free income from
long-term municipal securities, primarily of medium or lower quality.
Bond Funds
Bond funds seek high current income by investing primarily in fixed income
securities.
o Government Income Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies.*
o Intermediate Bond Fund-- Invests primarily in marketable debt securities
with an average life of three to 10 years.
*Money market mutual funds strive to maintain a $1 per share net asset
value, but there is no assurance that these funds will be able to maintain a
stable net asset value. The net asset value of a fund that invests in securities
issued or guaranteed by the U.S. government is not guaranteed.
<PAGE>
o Income Fund -- Pursues a higher level of current income by investing
primarily in medium- and lower-quality bonds.
o High Yield Fund -- Invests in high yield, high-risk, medium- and
lower-quality debt securities that may involve greater risk.
Growth and Income Funds
These funds seek to provide a conservative investment that is well positioned
for long-term growth and current income. Each fund's approach is designed to
limit the effects of market volatility.
o Balanced Fund -- Seeks long-term growth of capital and current income
consistent with reasonable investment risk by investing in equities, debt
securities and cash equivalents.
o Growth & Income Fund -- Pursues income and long-term capital growth by
investing primarily in large, well-established companies.
Growth Funds
Growth funds offer long-term capital appreciation potential by investing
primarily in various types of stocks.
o Growth Stock Fund -- Pursues long-term capital appreciation from stocks
with strong growth potential.
o Young Investor Fund -- Invests in securities of companies that affect the
lives of children or teenagers.
o Special Fund -- Invests in securities believed to have limited downside
risk relative to their potential for above-average growth, including
securities of undervalued, under- followed or out-of-favor companies.
o Growth Opportunities Fund -- Invests in the common stocks of small,
mid-sized and large companies believed to have the potential to generate
and sustain earnings growth at an above-average rate.
o Special Venture Fund -- Seeks capital appreciation through equity
securities of entrepreneurially managed companies.
o Capital Opportunities Fund -- Takes a long-term approach to aggressive
growth by selecting quality companies with the potential to generate high
levels of earnings growth over a three- to five-year period.
o International Fund -- Invests in a diversified portfolio of foreign
securities.
o Emerging Markets Fund -- Seeks long-term capital opportunities through
emerging market investment opportunities.
<PAGE>
To Contact Us. . .
By Phone 800-338-2550
You can discuss your investment questions with a Stein Roe account
representative by calling us toll free. We'll be happy to answer questions about
your current account, or to provide you with information about opening a Stein
Roe account, including Stein Roe IRAs. We're available seven days a week, from 7
a.m. to 8 p.m. weekdays and from 9 a.m. to 2 p.m. Saturday and Sunday (Central
time).
Stein Roe's Funds-on-Call(R)
24-Hour Service Line
Using a touch-tone phone, call our toll-free number, day or night, for your
current account balance, the latest Stein Roe Fund prices and yields and other
information. In addition, if you have a Personal Identification Number (PIN),
you may place orders for the following transactions 24 hours a day:
o Exchange shares between your Stein Roe accounts;
o Purchase fund shares by electronic transfer;
o Order additional account statements and money market fund checks;
o Redeem shares by check, wire or electronic transfer.
Retirement Plan Accounts
Call us for information about how we can assist you with your defined
contribution plan, including 401(k) plans. You can reach us toll free at
800-322-1130. For information on IRA plans, call us toll free at 800-338-2550.
By Mail or E-Mail
If you prefer to contact us by mail, please address all correspondence to:
P.O. Box 8900, Boston, MA 02205-8900. To contact us by e-mail, send
correspondence directly to: comments @steinroe.com or visit us at
www.steinroe.com on the Internet.
In Person
If you are in the Chicago area, please visit our Investor Center located in
downtown Chicago at One South Wacker Drive, 32nd Floor. Our account
representatives can answer questions about your current Fund investments or
provide you with information about any of the Stein Roe Funds and retirement
plans. Stop by weekdays between 8 a.m. and 5:15 p.m.
Must be preceded or accompanied by a prospectus.
<PAGE>
Stein Roe Income Trust
Trustees
Timothy K. Armour
President, Mutual Fund Division and Director,
Stein Roe & Farnham Incorporated
Kenneth L. Block
Chairman Emeritus, A.T. Kearney, Inc.
William W. Boyd
Chairman and Director, Sterling Plumbing
Group Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Douglas A. Hacker
Senior Vice President and Chief Financial
Officer, United Airlines
Janet Langford Kelly
Senior Vice President, Secretary and General
Counsel, Sara Lee Corporation
Francis W. Morley
Chairman, Employer Plan Administrators
and Consultants Co.
Charles R. Nelson
Van Voorhis Professor of Political Economy,
University of Washington
Thomas C. Theobald
Managing Director, William Blair Capital Partners
Officers
Timothy K. Armour, President
Jilaine H. Bauer, Executive Vice President, Secretary
Thomas W. Butch, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Philip J. Crosley, Vice President
Michael T. Kennedy, Vice President
Stephen F. Lockman, Vice President
Lynn C. Maddox, Vice President
Anne E. Marcel, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Cynthia A. Prah, Vice President
Thomas P. Sorbo, Vice President
Heidi J. Walter, Vice President
Stacy H. Winick, Vice President
Sharon R. Robertson, Controller
Margaret O. Zwick, Assistant Treasurer
Janet B. Rysz, Assistant Secretary
Agents and Advisers
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
SteinRoe Services Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
<PAGE>
THE STEIN ROE MUTUAL FUNDS
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe High Yield Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe Balanced Fund
Stein Roe Growth & Income Fund
Stein Roe Growth Stock Fund
Stein Roe Young Investor Fund
Stein Roe Special Fund
Stein Roe Growth Opportunities Fund
Stein Roe Special Venture Fund
Stein Roe Capital Opportunities Fund
Stein Roe International Fund
Stein Roe Emerging Markets Fund
Stein Roe Mutual Funds
P.O. Box 8900
Boston, Massachusetts 02205-8900
1-800-338-2550
http://www.steinroe.com
In Chicago, visit our Fund Center at One South Wacker Drive, 32nd Floor
Liberty Securities Corporation, Distributor
Member SIPC
BD11A 8/97
