STEIN ROE BOND FUNDS
Annual Report
June 30, 1998
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
Sensible Risks. Intelligent Investments.(sm)
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Contents
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From the President................................................ 1
Tom Butch's thoughts on the markets and investing
Fund Performance.................................................. 3
How the Stein Roe bond funds have done over time
Q&A
Interviews with the portfolio managers and a summary
of investment activity over the past year
Intermediate Bond Fund......................................... 7
Income Fund.................................................... 10
High Yield Fund................................................ 13
Portfolio of Investments.......................................... 18
A complete list of investments with market values
Financial Statements.............................................. 32
Statements of assets and liabilities, statements of operations
and changes in net assets
Notes to Financial Statements..................................... 44
Financial Highlights.............................................. 49
Selected per-share data
Report of Independent Auditors.................................... 55
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From the President
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TO OUR SHAREHOLDERS
We are pleased to present this annual report for Stein Roe's taxable bond funds
- -- Stein Roe Intermediate Bond Fund, Stein Roe Income Fund and Stein Roe High
Yield Fund. In the following pages, we'll provide you with an overview of
economic events that occurred over the past year and explain how we positioned
the funds to respond to those events. ECONOMY REMAINS FAVORABLE TO BONDS Many
bond market observers have described the past year's economy as a "Goldilocks"
economy. And it's no wonder. Declining interest rates, low inflation and a
shrinking budget deficit have produced a favorable investment environment for
bonds.
This bond-friendly landscape has played a key role in the success of nearly
all types of bonds. The yield of the benchmark 30-year Treasury bond on June 30,
1998, fell to 5.62 percent--a 30-year low--compared with 6.78 percent one year
ago. In the past, bond funds have experienced their heaviest net inflows during
periods of falling interest rates, and 1997 proved no exception with net inflows
of $44.5 billion*, the highest rate since 1993. Through June of this year, net
inflows are $40 billion.* ASIA: A MIXED BLESSING The well-chronicled problems of
many Asian economies were a major factor in shaping investor psychology over the
past year. For the bond market, concerns about these struggling economies had
two distinct, and divergent, effects.
First, Asia's woes caused investors both here and abroad to invest heavily in
U.S. Treasury bonds. This "flight to quality," or search for a relatively safer
investment, boosted prices as yields fell to 30-year lows. (Yields move in the
opposite direction of prices). In addition, Asian uncertainty kept inflation at
bay, which has helped sustain a generally positive domestic economic
environment.
Second, while Treasury securities rallied, corporate and high yield bonds
suffered somewhat over perceptions of Asia's possible impact on the earnings
potential of some companies that trade with that region. Concurrently,
oversupply in both of these markets has caused yield spreads to widen. As a
result, it was difficult for corporate and high yield bonds
Thomas W. Butch
Photo of:Thomas W. Butch
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From the President CONTINUED
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to keep pace with Treasury securities. So it was no surprise that bond funds
that emphasized Treasury securities over this period delivered better relative
performance than funds with a higher concentration of corporate bonds or high
yield bonds.
Nonetheless, going forward, we think corporate bonds remain attractive. These
bonds historically have paid a higher yield than Treasury securities because the
risk of corporate default is greater than the risk of potential default by the
U.S. government. Given the current yield spread between corporate and Treasury
bonds, the economy's strength and the limited risk of default for corporate
investment grade bonds, many market observers believe they may pick up and
provide a good investment opportunity over the next several quarters.
THE ROAD AHEAD
For the foreseeable future, Asian turmoil could help keep inflation in
check and interest rates stable. Although the U.S. economy has been remarkably
strong, so far Federal Reserve Chairman Alan Greenspan has been reluctant to
raise rates. This is in part due to the drag the Asian crisis has had on the
U.S. economy. However, worries that a tighter labor market may ignite inflation
seem to be a significant concern and likely will remain a focal point for
evaluating the future direction of interest rates.
While there appears to be near-term uncertainty created largely by Asia, the
general U.S. economy appears to be in very good condition. Inflation is tame,
the economy continues to expand, and consumer confidence remains strong. All of
these factors could provide ongoing bond market support in the coming quarters.
THE BASICS
No one can predict what might happen to the markets in the future. But no
matter what direction you think the economy is heading, it's important to
remember the basics. 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. 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.
Sincerely,
/s/Thomas W. Butch
Thomas W. Butch
President
July 31, 1998
*Bond fund net inflows are from the Investment
Company Institute monthly and annual statistical releases.
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Fund Performance
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There are several ways to evaluate a fund's historical performance. You can
look at the cumulative return percentage, the average annual return percentage
or the growth of a hypothetical $10,000 investment. Each performance figure
includes changes in a fund's share price, plus reinvestment of any dividends
(net investment income) and capital gains (the profits the fund earns when fixed
income securities grow in value).
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AVERAGE ANNUAL TOTAL RETURNS
Periods ended June 30, 1998
PAST 1 PAST 3 PAST 5 PAST 10
YEAR YEARS YEARS YEARS
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INTERMEDIATE BOND FUND 9.51% 8.19% 6.77% 8.51%
Lehman Intermediate Government/
Corporate Bond Index 8.54 6.91 6.11 8.25
INCOME FUND 8.72 8.23 7.27 8.85
Lehman Intermediate
Corporate Bond Index 9.05 7.49 6.87 9.01
HIGH YIELD FUND 14.38 -- -- --
Merrill Lynch High Yield Master II Index 11.40 -- -- --
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PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions.
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Investment Comparison
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COMPARISON of change in value of a $10,000 investment for the years ended June
30.
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Intermediate Bond Fund
Chart:
Lehman Intermediate
Intermediate Bond Government /Corporate
Fund Bond Index
6/30/88 10000 10000
6/30/89 11125 11022
6/30/90 11722 11884
6/30/91 12970 13134
6/30/92 14782 14864
6/30/93 16345 16423
6/30/94 16268 16382
6/30/95 17912 18081
6/30/96 18950 18987
6/30/97 20712 20357
6/30/98 22682 22096
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Income Fund
Chart:
Lehman Intermediate
Income Fund Corporate Bond Index
6/30/88 10000 10000
6/30/89 11097 11069
6/30/90 11375 11976
6/30/91 12437 13228
6/30/92 14332 15134
6/30/93 16431 16989
6/30/94 16318 16893
6/30/95 18405 19070
6/30/96 19461 20088
6/30/97 21464 21721
6/30/98 23336 23687
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. TOTAL RETURN PERFORMANCE INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF INCOME AND CAPITAL GAINS DISTRIBUTIONS. These graphs compare the
performance of the Stein Roe funds to the Lehman Intermediate
Government/Corporate Bond Index and the Lehman Intermediate Corporate Bond
Index, each an unmanaged group of fixed income securities that differs from the
composition of each Stein Roe fund; they are not available for direct
investment.
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Investment Comparison
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COMPARISON of change in value of a $10,000 investment since inception.
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High Yield Fund
Chart:
Merrill Lynch
High Yield High Yield
Fund Master II Index
11/1/96 10000 10000
12/31/96 10271 10280
3/31/97 10423 10388
6/30/97 11088 10881
9/30/97 11655 11307
12/31/97 11899 11599
3/31/98 12648 11922
6/30/98 12682 12122
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. TOTAL RETURN PERFORMANCE INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF INCOME AND CAPITAL GAINS DISTRIBUTIONS. 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.
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Investment Comparison CONTINUED
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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.
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. But if you can ride out the market's ups and downs, your fund
might achieve a gain.
When your fund experiences a temporary downturn, it's important to
remember why you chose that fund in the first place. If your fund has
an investment strategy in which you believe and which is properly
matched to your financial goals, there is probably no reason to change
course. It can be shortsighted to sell an investment at its lowest
point. In fact, that may be the time when you should be investing more,
to take advantage of a potential upturn.
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.
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Q&A
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AN INTERVIEW WITH MIKE KENNEDY, PORTFOLIO MANAGER OF
SR&F INTERMEDIATE BOND PORTFOLIO
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:
Dec. 5, 1978
TOTAL NET ASSETS:
$437.5 million
Q: HOW DID THE FUND PERFORM?
A: For the fiscal year ended June 30, 1998, Intermediate Bond Fund returned 9.51
percent, amply outperforming the 8.54 percent return of the Lehman Intermediate
Government/Corporate Bond Index, yet slightly underperforming the 9.53 percent
return of the Lipper intermediate investment grade debt fund peer group.
Q: HOW DID EVENTS IN THE CORPORATE BOND MARKET AFFECT THE PORTFOLIO'S HOLDINGS?
A: The fiscal year started out strong for corporate bonds. Then in October, the
currency crisis in Asia spread to worldwide markets. As a result, bond investors
focused on safer Treasury bonds, which led to a subsequent rally. Corporate
bonds historically falter more than other fixed income securities in periods of
stock market volatility because, by their nature, they reflect the activity of
stocks. When the equity markets stabilized in the first quarter of 1998,
corporate bonds rebounded. Then in the most recent quarter, corporate bonds
decreased in value slightly as low interest rates generated excess supply from
corporations wishing to borrow at low rates. In addition, turmoil in Asia
resurfaced. We believe that together, these factors caused interest in U.S.
corporate bonds to once again waver.
Q: HOW DID YOU POSITION THE PORTFOLIO THROUGHOUT THE YEAR?
A: Because corporate bonds led the market this year, they also drove most of
our decisions regarding the portfolio's trading activity. Although we were
overweighted in corporate bonds for the entire year -- compared to other invest
ments -- we shifted assets
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Q&A CONTINUED
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between the corporate and Treasury sectors in response to changing market
conditions. We made shifts based on supply and demand and sector performance.
For example, during the fourth quarter of 1997, the Asian currency crisis
created fears that corporate earnings would be negatively impacted and affect
bond prices. In response, we shifted our position in Treasuries from four
percent to more than 20 percent of the portfolio's total net assets. This move
allowed us to take advantage of the Treasury market rally and helped to offset
the Asian crisis' negative impact on our performance. Then, around mid-January,
when we saw a turnaround in the corporate market, we sold all of our Treasury
holdings to acquire a full position in corporate bonds. We recently shifted some
assets back to Treasuries to take advantage of the rally triggered by continuing
turmoil in Asia.
Q: WHAT'S YOUR CURRENT OUTLOOK FOR CORPORATE BONDS?
A: We think corporate bonds are at their most attractive levels in three years.
Their credit quality is good and yields are attractive. We plan to focus our
investing in this sector in coming months. However, it seems that many investors
are waiting for sustained interest-rate stability and an easing of supply before
they invest in corporate bonds. We think the key to a shift in confidence will
be stability in the Asian markets and specifically, evidence that Japan is
effectively addressing its financial problems. We also believe that if the
economy continues to grow at a moderate pace in coming months, that interest
rates will remain stable.
Q: WHAT IS YOUR CURRENT OUTLOOK FOR THE MORTGAGE SECURITIES SECTOR?
A: Although the attractiveness of the mortgage securities sector is improving,
in our opinion it is still not as attractive as the corporate bond sector.
Therefore, we will wait for mortgage yields to become more attractive relative
to corporate bonds before we shift significant assets to that sector.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. Portfolio holdings are as of June 30, 1998; portfolio data is subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Lehman Intermediate
Government/Corporate Bond Index represents an unmanaged group of bonds that
differs from the composition of the portfolio; it is not available for direct
investment. According to Lipper Analytical Services, Inc., an independent
monitor of mutual fund performance, the median returns for the Fund's
intermediate investment grade debt fund peer group for the one-, five- and
10-year periods ended June 30, 1998, were 9.53 percent, 6.05 percent and 8.21
percent, respectively.
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Fund Highlights
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SR&F Intermediate Bond Portfolio
SECURITIES TYPE BREAKDOWN
PORTFOLIO PORTFOLIO
JUNE 30, 1998 JUNE 30, 1997
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Corporate Bonds 69.7% 62.3%
Mortgage-Backed Securities 13.3 19.1
U.S. Treasury Securities 4.6 7.0
Foreign Sovereign 4.4 4.2
Asset-Backed Securities 3.3 --
Cash and Equivalents 4.7 7.4
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Total 100.0% 100.0%
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AVERAGE LIFE
As of June 30, 1998 As of June 30, 1997
LESS THAN 1 YEAR 6.0% 7.0%
1-5 YEARS 34.4% 31.1%
5-10 YEARS 50.2% 45.4%
10-20 YEARS 3.8% 7.6%
GREATER THAN 20 YEARS 5.6% 8.9%
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PORTFOLIO QUALITY
As of June 30, 1998
Treasury/AAA/Agency (23.7%)
AA (9.1%)
A (30.9%)
BBB (23.7%)
BB and Below/Not Rated (12.6%)
As of June 30, 1997
Treasury/AAA/Agency (27.5%)
AA (8.9%)
A (24.1%)
BBB (29.3%)
BB and Below/Not Rated (10.2%)
<PAGE>
Q&A
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AN INTERVIEW WITH STEVE LOCKMAN, PORTFOLIO MANAGER
OF SR&F INCOME PORTFOLIO 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:
$448.4 million
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INCOME FUND Q&A
Q: HOW DID THE FUND PERFORM?
A: With an 8.72 percent return for the fiscal year ended June 30, 1998, the Fund
underperformed the Lehman Intermediate Corporate Bond Index, which returned 9.05
percent, as well as the Lipper corporate debt BBB fund peer group, which had a
median return of 10.41 percent.
Q: WHAT AFFECTED THE FUND'S PERFORMANCE?
A: Two pockets of explosive performance in the Treasury market during the fiscal
year affected the relative performance of the portfolio's high yield corporate
bond holdings. In the fourth quarter of 1997 -- the Fund's second fiscal quarter
- -- markets wavered as a result of the Asian currency crisis. Although the
portfolio's exposure to government-related and high-quality Asian bonds was low,
these bonds nevertheless hurt performance. We have subsequently reduced our
exposure to Asia. The Asian effects also translated into slightly wider spreads
for the portfolio's largest sectors weightings -- BB and BBB. We had anticipated
that the popularity of the high yield market at that time would push the spreads
narrower. Unfortunately, that only occurred in the lowest-credit quality bonds,
which we rarely hold in the portfolio.
The second downdraft occurred during the renewal of Asian concerns in late
April and continued through the end of the fiscal year. During that time,
analysts began to reassess the damage to earnings from the continuing decline in
Asian economies. Because the value of a company's stock typically has an
indirect effect on the value of a company's corporate bonds, the value of
certain corporate bonds declined
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Q&A CONTINUED
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across the spectrum from double-A to single-B bonds. Because Income Fund is a
corporate bond fund, it was negatively affected.
Q: HOW DID YOU ADJUST THE PORTFOLIO'S HOLDINGS THIS YEAR?
A: We adjusted holdings within several sectors to take advantage of multibillion
dollar mergers and acquisitions and a tremendous amount of refinancing activity.
We purchased large and liquid names, as well as new names. Specifically, we
purchased Owens Illinois, Tyco, Hyatt Equities and Rank Group (0.9 percent, 1.3
percent, 1.1 percent and 1.5 percent of total net assets, respectively) due to
their attractive yields, growing businesses and more importantly, sound
financials. In an attempt to avoid any potential effects from the Asian crisis,
our purchases were skewed toward domestically-oriented companies. Consumer
services and leisure sectors also played an important role. Companies we
invested in include MGM, Choice Hotels and Tommy Hilfiger (1.1 percent, 0.4
percent and 1.5 percent of total net assets, respectively). With the decline in
unemployment and the increase in consumer spending, we believe these sectors
will continue to perform well.
Q: WHAT SECTORS DID YOU SELL?
A: We sold some of our financial holdings to accommodate what we think are more
attractive issues. Spreads tightened enough in the financial services sector
that we believed there was less potential for return.
Q: WHAT EFFECT HAS AT&T'S RECENT PURCHASE OF TCI HAD ON THE MEDIA AND
TELECOMMUNICATIONS INDUSTRY?
A: This sector has become more and more profitable as the prospect of a
telephone, long-distance and cable merger has come closer to reality. In
addition, operating efficiencies of television, telephone, cable and Internet
service companies are improving. These companies are paying down debt to improve
their financial positions which has resulted in improved credit ratings. Two of
our holdings that were upgraded were Time Warner and Viacom (0.8 percent and 0.2
percent of total net assets, respectively). We think the merger of these two
companies is proof that they can provide content over streamlined mediums and we
look forward to the continued attractiveness of this sector going forward.
Q: WHAT IS YOUR OUTLOOK FOR THE FUND?
A: Throughout most of the year, we had a slightly longer duration than normal
due to our optimism
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Q&A CONTINUED
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for lower interest rates. We expect interest rates to remain low, at least for
the near term, and we therefore plan to maintain our current duration. We'll be
much more cautious about the companies we buy in the coming year due to the
volatility in the global equity markets. We increased our high yield exposure at
the end of the year after that sector experienced a dramatic sell-off and an
increase in spreads. Should the Asian economy continue to decline, we may
reverse course and start upgrading the credit quality of the entire fund. We
plan to maintain a neutral to positive duration position given the favorable
inflation outlook and ongoing fears about the Asian crisis.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. Portfolio holdings are as of June 30, 1998; portfolio data is subject to
change. Holdings are disclosed as a percentage of SR&F Income Portfolio's total
net assets. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Lehman Intermediate
Corporate Bond Index is an unmanaged group of intermediate-term bonds that
differs from the composition of the portfolio; it is not available for direct
investment. According to Lipper Analytical Services, Inc., an independent
monitor of mutual fund performance, the median returns for the Fund's corporate
debt BBB fund peer group for the one-, five- and 10-year periods ended June 30,
1998, were 10.41 percent, 7.38 percent and 9.38 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
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HIGH YIELD FUND Q&A
FUND DATA
INVESTMENT OBJECTIVE:
Seeks high current income and capital appreciation by investing principally
in high yield, high-risk, medium- and lower-quality debt securities.
FUND INCEPTION:
Nov. 1, 1996
TOTAL NET ASSETS:
$41.5 million
Q: HOW DID THE FUND PERFORM?
A: With a 14.38 percent total return for the fiscal year ended
June 30, 1998, High Yield Fund significantly outperformed the Lipper high yield
bond fund peer group return of 11.14 percent and the 11.80 percent return of the
Merrill Lynch High Yield Master II Index for the same time period.
Q: WHAT SIGNIFICANT EVENTS OCCURRED IN THE HIGH YIELD MARKET THROUGHOUT THE
FISCAL YEAR, AND HOW DID THESE OCCURRENCES AFFECT THE FUND?
A: Low interest rates, lofty stock prices and declining yields on both Treasury
and corporate bonds, all combined to drive investors further down on the quality
curve to capture higher yield. Demand came from many different investment
groups, such as insurance companies and other mutual funds, including equity
mutual funds. As some investors move out of equities and into bonds, we believe
the high yield category is a natural choice as these fixed income investments
have equity-like qualities.
Demand was met by dynamic growth as the market experienced record new
issuance over the previous year. This market is well over $500 billion and
growing.* New issues and players created a liquid market for high yield bonds.
The Fund's performance benefited greatly because we had previously increased our
allocation to bonds that had the best yield-narrowing potential. Additionally,
the Fund's assets nearly doubled, allowing us to take advantage of new issues
that could provide strong short- and long-term total return potential.
Q: WHAT SECTORS STOOD OUT?
A: Two sectors increased their importance in the high yield market throughout
the year: foreign issuance and telecommunications. An increasing amount of
foreign issuance saturated the high yield market providing some investors with
the unusual opportunity to buy high-quality companies in countries around the
world. The Fund did purchase some of these issues.
<PAGE>
Q&A CONTINUED
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The second and more profound sector change was in the
telecommunications/media sector. For more than three years, this sector has been
the largest issuer in the high yield market, and it currently represents over 30
percent+ of the market. Telecommunications and media companies continue to bring
new products to the market, shaping the way businesses operate and compete on a
global scale. We believe these companies will benefit from global demand; our
large position in this sector has aided performance. It's important to note,
however, that many companies in this sector are start-ups, with little cash flow
and low credit ratings or none at all, which forces us to be extremely selective
in our purchases. We pay close attention not only to the size of the issues we
buy, but also to the number of brokers who back the issue and can provide
support in down markets. Although this may seem like a volatile area to invest,
we believe the rewards will be there. Some of these companies remind us of the
early days of the high yield market when investors were funding start-up
companies such as MCI. Now we're investing in NextLink (1.6 percent of total net
assets) and other Internet and long distance companies. We believe they will
shape the way companies operate in the future, as MCI did a decade or so ago.
Q: WHERE DO YOU PLAN TO FOCUS YOUR INVESTMENTS GOING FORWARD?
A: We've increased our trading in the secondary market, where bonds are bought
and sold subsequent to original issuance. We find that when it is hard to find
suitable investments in the primary market, the secondary market is a good place
to look for undiscovered opportunities. We're looking for companies that are
improving their cash flows and revenues. We still favor consolidating sectors,
including telecommunications, defense and outsourcing of auto parts, and we
have a strong position in each of those industries. We believe the lowest
quality issues will be the best performers so we've concentrated our investments
there. We have also increased our zero coupon holdings. The recent Treasury
outperformance positions the zero coupon portion of the high yield market to
potentially be one of the best performing segments. If the stock market
declines, we plan to decrease our zero coupon holdings, perhaps by trading into
coupon holdings of the same issuer.
Q: WHAT'S YOUR OUTLOOK?
A: If the stock market continues to hit new highs, the high yield market should
benefit. We believe the strong economy should carry us through at
<PAGE>
Q&A CONTINUED
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least another quarter before we see any material effects from the Asian crisis.
However, we are concerned that continuing fallout from Asia will have some
longer-term effect on the markets in coming quarters. When and if this happens,
we believe it will translate into lower valuations for most high yield bonds and
we will invest with caution.
* Source: Chase Bank.
+ Source: Merrill Lynch
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. Portfolio holdings are as of June 30, 1998; portfolio data subject to
change. Holdings are disclosed as a percentage of SR&F High Yield Portfolio's
total net assets. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Merrill Lynch High
Yield Master II Index is an unmanaged group of bonds that differs from the
composition of any Stein Roe fund; it is not available for direct investment.
The Adviser currently limits expenses to 1.00 percent of average net assets,
subject to termination upon 30 days' notice to the Fund. Absent this limit, the
Fund's total return would have been less. According to Lipper Analytical
Services, Inc., an independent monitor of mutual fund performance, the median
returns for the Fund's high yield bond fund peer group for the one-year period
ended June 30, 1998 was 11.14 percent.
Investing in high yield bonds involves greater credit and other risks not
associated with investing in higher-quality securities.
Foreign investments involve market, political and currency risks not
associated with other investments.
<PAGE>
Fund Highlights
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SR&F Income Portfolio
SECURITIES TYPE BREAKDOWN
PORTFOLIO PORTFOLIO
JUNE 30, 1998 JUNE 30, 1997
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Financial 28.1% 29.8%
Industrial 11.5 10.1
Consumer Cyclical 10.7 7.3
Consumer Non-cyclical 9.3 14.6
Media/Communciations 9.2 10.8
Foreign Sovereign 9.1 11.3
Utilities 8.6 7.0
Energy 5.9 5.2
U.S. Treasuries 4.4 1.6
Technology 3.2 2.3
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Total 100.0% 100.0%
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MATURITY
As of June 30, 1998 As of June 30, 1997
LESS THAN 1 YEAR 2.6% 3.7%
1-5 YEARS 25.7% 21.1%
5-10 YEARS 57.1% 59.3%
10-20 YEARS 6.7% 10.8%
GREATER THAN 20 YEARS 7.9% 5.1%
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PORTFOLIO QUALITY
As of June 30, 1998
Treasury/AAA/Agency (4.5%)
AA (4.6%)
A (23.1%)
BBB (33.9%)
BB (20.4%)
B (10.2%)
CCC and Below/Not Rated (3.3%)
As of June 30, 1997
Treasury/AAA/Agency (5.4%)
AA (6.3%)
A (22.8%)
BBB (35.5%)
BB (19.8%)
B (9.6%)
CCC and Below/Not Rated (0.6%)
<PAGE>
Fund Highlights
- --------------------------------------------------------------------------------
SR&F High Yield Portfolio
SECURITIES TYPE BREAKDOWN
PORTFOLIO PORTFOLIO
JUNE 30, 1998 JUNE 30, 1997
- --------------------------------------------------------------------------------
Consumer Non-cyclical 21.6% 23.3%
Media/Communications 20.3 9.8
Industrial 18.0 26.0
Consumer Cyclical 14.6 11.2
Technology 11.7 7.3
Utilities 8.9 3.6
Financial 3.4 6.5
Energy 1.5 9.6
Foreign Sovereign -- 2.7
- --------------------------------------------------------------------------------
Total 100.0% 100.0%
- --------------------------------------------------------------------------------
MATURITY
As of June 30, 1998 As of June 30, 1997
LESS THAN 1 YEAR 2.7% 4.5%
1-5 YEARS 1.1% 11.2%
5-10 YEARS 88.4% 75.5%
10-15 YEARS 7.8% 8.8%
- --------------------------------------------------------------------------------
PORTFOLIO QUALITY
As of June 30, 1998
BB (10.5%)
B (70.4%)
CCC and Below/Not Rated (19.1%)
As of June 30, 1997
AAA/AGENCY (3.2%)
BBB (1.3%)
BB (25.0%)
B (64.1%)
CCC AND BELOW/NOT RATED (6.4%)
<PAGE>
SR&F Intermediate Bond Portfolio
- --------------------------------------------------------------------------------
Portfolio of Investments at June 30, 1998
(Dollar amounts in thousands)
Principal Market
LONG-TERM OBLIGATIONS (94.4%) Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (4.6%)
U.S. Treasury Notes
7.250% 5/15/04.................................... $ 2,500 $ 2,712
5.625% 5/15/08.................................... 3,750 3,801
U.S. Treasury Bonds
7.500% 11/15/16................................... 1,850 2,220
6.125% 11/15/27................................... 10,650 11,415
--------
20,148
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (6.0%)
FHLMC Gold
12.000% 7/1/20.................................... 2,589 2,971
FHLMC Remic Trust
9.500% 4/15/19 Series 11 Class C.................. 134 137
FNMA
8.500% 4/1/01..................................... 1 1
8.500% 5/1/03..................................... 8 8
8.500% 9/1/03..................................... 63 65
8.500% 11/1/03.................................... 106 109
6.000% 4/1/09..................................... 10,282 10,177
11.250% 11/1/13 (FHA/VA guaranteed)............... 112 127
6.000% 1/1/24..................................... 800 781
6.000% 3/1/24..................................... 2,327 2,273
FNMA Remic Trusts
7/25/98 Series 1991-91 Class SA-IO................ 1,331 17
9.250% 3/25/18 Series 1988-4 Class Z.............. 2,747 2,920
GNMA
8.000% 1/15/08.................................... 379 394
8.000% 2/15/08.................................... 262 272
8.000% 4/15/08.................................... 323 335
8.000% 5/15/08.................................... 335 348
8.000% 6/15/08.................................... 2,011 2,088
8.000% 7/15/08.................................... 394 409
9.000% 6/15/16.................................... 107 116
9.000% 8/15/16.................................... 66 72
9.000% 10/15/16................................... 146 158
7.125% 7/20/25 ARM (Floating Rate)................ 2,782 2,836
--------
26,614
AIRLINES (0.8%)
United Airlines Series 1991-A1 9.200% 3/22/08........ 3,060 3,501
ASSET-BACKED OBLIGATIONS (3.3%)
ALPS Pass-Through Trust
Series 1994-1 Class C 9.350% 9/15/04.............. 3,482 3,717
Contimortgage Home Equity Loan Trust
7.420% 3/15/28 Series 1997-1 Class M1............. 750 763
7.670% 3/15/28 Series 1997-1 Class M2............. 2,875 2,927
First Boston Mortgage Securities Series 1993-H1 Class A-IO
(Effective Yield 12.820%) 9/28/13................. 14,275 558
Greentree Home Improvement Loan Pass-ThroughTrust
Series 1994-A Class A 7.050% 3/15/14.............. 1,460 1,486
IMC Home Equity Loan Trust Series 1997-3 Class M2
7.550% 8/20/28.................................... 5,000 5,116
--------
14,567
<PAGE>
SR&F Intermediate Bond Portfolio
- --------------------------------------------------------------------------------
CONTINUED Principal Market
Amount Value
- --------------------------------------------------------------------------------
AUTOMOTIVE (1.6%)
Chrysler 7.450% 3/1/27............................... $ 1,750 $ 1,952
Federal-Mogul 7.500% 7/1/04.......................... 5,000 5,007
--------
6,959
BANKING (8.1%)
Bank One Texas 6.250% 2/15/08........................ 5,000 4,988
BankBoston 6.375 4/15/08............................. 13,000 13,029
Deutsche Ausgleichsbank Series E Medium-Term Note
7.000% 9/24/01.................................... 4,000 4,146
First Federal of Michigan
Zero Coupon (Yield to Maturity 7.343%) 2/26/05.... 6,500 4,426
Merita Bank 7.150% 12/29/49.......................... 4,500 4,580
Riggs Capital Trust 8.625% 12/31/26 (a).............. 4,000 4,315
--------
35,484
BUILDING & CONSTRUCTION (2.6%)
Hanson Overseas (Yankee Issue) 7.375% 1/15/03........ 6,000 6,297
Kaufman & Broad Home 7.750% 10/15/04................. 2,000 1,985
PYCSA Panama 10.280% 12/15/12 (a).................... 3,250 3,118
--------
11,400
CABLE & MEDIA (4.9%)
Groupe Videotron (Yankee Issue) 10.625% 2/15/05...... 3,000 3,315
News America Holdings 8.625% 2/1/03.................. 7,500 8,170
Paramount Communications 7.500% 1/15/02.............. 3,000 3,113
Rogers Cablesystems (Yankee Issue) 9.625% 8/1/02..... 3,000 3,195
Viacom International 10.250% 9/15/01................. 3,500 3,876
--------
21,669
CHEMICALS (1.4%)
BOC Group 5.875% 1/29/01............................. 6,100 6,084
ELECTRONICS (2.0%)
Pan Pacific Industrial Investment (Yankee Issue)
Zero Coupon (Yield to Maturity 8.834%) 4/28/07 (a) 10,000 3,536
Sony 6.125% 3/4/03................................... 5,000 5,026
--------
8,562
FOOD & BEVERAGE (0.1%)
NBTY Series B 8.625% 9/15/07......................... 625 634
FINANCIAL (10.1%)
Amvescap 6.600% 5/15/05 (a).......................... 7,500 7,576
Banctec 7.500% 6/1/08 (a)............................ 4,000 4,066
Bistro Trust 9.500% 12/31/02 (a)..................... 3,000 3,026
Cigna CBO Series 1996-1 Class A-2 6.460%11/15/08 (a). 5,000 5,456
GMAC Series E Medium-Term Note 6.750% 7/10/02........ 9,000 9,157
Halifax Series E Medium-Term Note 6.000% 2/26/08..... 2,000 1,985
Health Care Properties 6.875% 6/8/05................. 5,000 5,003
Merrill Lynch 6.550% 8/1/04.......................... 6,000 6,143
Salomon (Traveler's Group ) 6.750% 1/15/06........... 2,000 2,048
--------
44,460
FOREIGN SOVEREIGN REGIONAL BONDS (3.7%)
Corporacion Andina de Fomento (Yankee Issue)
7.375% 7/21/00.................................... 6,000 6,078
Financiera Energetica 9.000% 11/8/99 (a)............. 4,250 4,292
Republic of Slovenia 7.000% 8/6/01 (a)............... 6,000 6,143
--------
16,513
<PAGE>
SR&F Intermediate Bond Portfolio
- --------------------------------------------------------------------------------
CONTINUED Principal Market
Amount Value
- --------------------------------------------------------------------------------
HEALTH SERVICE & EQUIPMENT (1.0%)
Tenet Healthcare 7.875% 1/15/03...................... $ 4,000 $ 4,077
HOTELS & ENTERTAINMENT (3.5%)
MGM Grand 6.950% 2/1/05.............................. 5,000 4,970
Prime Hospitality 9.250% 1/15/06..................... 2,500 2,650
Rank Group Finance (Yankee Issue) 6.750% 11/30/04.... 7,900 8,021
--------
15,641
INSURANCE (3.3%)
Prudential Insurance 7.650% 7/1/07 (a)............... 7,250 7,841
Zurich Capital Trust 8.376% 6/1/37 (a)............... 6,000 6,650
--------
14,491
MANUFACTURING (3.5%)
Owens-Illinois 7.850% 5/15/04........................ 4,000 4,173
Tyco International Group (Yankee Issue) 6.375% 6/15/05 6,000 6,018
USX 6.850% 3/1/08.................................... 5,000 5,044
--------
15,235
MINING (1.1%)
Freeport-McMoran Copper & Gold 7.500% 11/15/06....... 2,700 2,018
PT Alatief Freeport Financial (Yankee Issue) 9.750% 4/15/01 3,500 3,080
--------
5,098
MORTGAGE-BACKED SECURITIES (7.3%)
American Mortgage Trust Series 1993-3 Class 3B
8.190% 9/27/22.................................... 2,789 2,766
First Union-Lehman Brothers Commercial Mortgage Series 1997-C2
Series A3 6.650% 12/18/07......................... 7,000 7,197
Kidder Peabody Acceptance Series 1994-C3 Class A2
8.500% 4/1/07..................................... 3,500 3,934
Merrill Lynch Mortgage Investors Series 1995-C3
Class A3 7.088% 12/26/25.......................... 4,000 4,250
Merrill Lynch Trust Series 20 Class D 8.000% 12/20/18 2,441 2,490
Nomura Asset Securities Series 1996-MD5 Class A-1B
7.120% 4/13/36.................................... 3,000 3,229
Resolution Trust Series 1992-C5 Class C
8.850% 5/25/22.................................... 2,334 2,394
Structured Assets Securities
6.525% 2/25/28 Series 1996-CFL Class C............ 3,684 3,684
Zero Coupon (Yield to Maturity 9.806%) 2/25/28
Series 1996-CFL Class X1-IO..................... 44,174 2,340
--------
32,284
NATURAL GAS & OIL (5.5%)
Gulf Canada Resources (Yankee Issue) 8.250% 3/15/17.. 3,000 3,363
Newfield Exploration 7.450% 10/15/07 (a)............. 1,500 1,526
Northwest Pipeline 6.625% 12/1/07.................... 6,000 6,196
PDVSA Finance Series 1998-1D 7.400% 8/15/16 (a)...... 2,500 2,497
Vastar Resources 6.000% 4/20/00...................... 4,000 4,002
YPF Sociedad Anonima (Yankee Issues)
7.500% 10/26/02................................... 3,756 3,840
7.250% 3/15/03.................................... 3,000 2,916
--------
24,340
<PAGE>
SR&F Intermediate Bond Portfolio
- --------------------------------------------------------------------------------
CONTINUED Principal Market
Amount Value
- --------------------------------------------------------------------------------
REAL ESTATE INVESTMENT TRUSTS (4.6%)
Dynex Capital 7.875% 7/15/02......................... $ 3,250 $ 3,222
Federal Realty Investment Trust
6.625% 12/1/05.................................... 2,750 2,730
7.480% 8/15/26.................................... 3,500 3,661
Felcor Suites 7.375% 10/1/04 (a)..................... 3,000 2,923
Meditrust 7.820% 9/10/26............................. 4,200 4,297
Susa Partnership 7.125% 11/1/03...................... 3,250 3,336
---------
20,169
RETAIL (4.1%)
Dayton Hudson 6.750% 1/1/28.......................... 3,000 3,031
Tommy Hilfiger USA 6.850% 6/1/08..................... 6,750 6,738
Price/Costco 7.125% 6/15/05.......................... 1,650 1,725
Rite Aid 7.625% 4/15/05.............................. 6,000 6,405
---------
17,899
TELECOMMUNICATIONS (5.3%)
Cable & Wireless Communications (Yankee Issue)
6.625% 3/6/05..................................... 3,250 3,280
GTE Hawaiian Telephone Series A 7.000% 2/1/06........ 5,500 5,738
PanAmSat 6.125% 1/15/05 (a).......................... 9,000 8,887
WorldCom 9.375% 1/15/04.............................. 5,000 5,251
---------
23,156
TRANSPORTATION (0.7%)
Federal Express Pass-Through Certificates
Series A1 7.530% 9/23/06.......................... 3,150 3,315
UTILITIES (5.3%)
National Power 7.125% 7/11/01........................ 5,000 5,147
National Rural Utilities
6.000% 1/15/04.................................... 11,500 11,456
6.375% 10/15/04................................... 2,500 2,535
Oglethorpe Power 6.974% 6/30/11...................... 4,000 4,112
---------
23,250
---------
TOTAL LONG-TERM OBLIGATIONS
(Cost $408,225)................................... 415,550
- --------------------------------------------------------------------------------
Number of
EQUITY-RELATED SECURITIES (0.9%) Shares
- --------------------------------------------------------------------------------
PREFERRED STOCK (0.9%)
FINANCIAL (0.9%)
Pinto Totta International Finance $7.770 (gtd. by Banco
Tinto Mayor) (a) (Cost $4,014).................... 4,000 4,161
- --------------------------------------------------------------------------------
<PAGE>
SR&F Intermediate Bond Portfolio
- --------------------------------------------------------------------------------
CONTINUED Principal Market
Amount Value
- --------------------------------------------------------------------------------
SHORT-TERM OBLIGATION (4.2%)
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (4.2%)
Associates Corp. of North America 6.250% 7/1/98
(Amortized cost $18,445).......................... $18,445 $ 18,445
---------
TOTAL INVESTMENTS (99.5%)
(Cost $430,684) (b)............................... 438,156
OTHER ASSETS, LESS LIABILITIES (0.5%)................ 2,009
---------
TOTAL NET ASSETS (100.0%)............................ $440,165
=========
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a)Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933.
These securities generally are issued to qualified institutional buyers, such
as the Portfolio, and any resale by the Portfolio must be in an exempt
transaction, normally to other qualified institutional investors. At June 30,
1998, the aggregate value of the Portfolio's private placement securities was
$76,013 (aggregate cost $75,438) which represented 17.3 percent of net
assets.
(b)At June 30, 1998, the cost of investments for federal income tax purposes was
$430,758. Net unrealized appreciation was $7,398 consisting of gross
unrealized appreciation of $9,914 and gross unrealized depreciation of
$2,516.
(c)The following futures contracts were open at June 30, 1998:
NUMBER OF CONTRACT UNREALIZED
TYPE POSITION CONTRACTS VALUE EXPIRATION LOSS
----------- ---------- ---------- ---------- ---------- ----------
10 YR T-Note Long 473 $53,848 9/98 $435
See accompanying Notes to Financial Statements.
<PAGE>
SR&F Income Portfolio
- --------------------------------------------------------------------------------
Portfolio of Investments at June 30, 1998
(Dollar amounts in thousands)
Principal Market
LONG-TERM OBLIGATIONS (94.3%) Amount Value
- --------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (4.3%)
U.S. Treasury Bonds
7.500% 11/15/16................................... $ 1,750 $ 2,100
6.625% 2/15/27.................................... 2,500 2,825
6.125% 11/15/27................................... 7,750 8,307
U.S. Treasury Notes
7.250% 5/15/04.................................... 2,500 2,712
6.625% 6/30/01.................................... 3,250 3,345
--------
19,289
AEROSPACE & MILITARY TECHNOLOGY (0.8%)
Derlan Manufacturing (Yankee Issue) 10.000% 1/15/07.. 1,750 1,829
L-3 Communications Series B 10.375% 5/1/07........... 1,500 1,655
--------
3,484
AIRLINES (0.9%)
American Airlines Pass-Through Certificates
Series 1991-A 9.710% 1/2/07....................... 2,798 3,244
Continental Airlines Pass-Through Certificates
Series 1997-CI 7.420% 4/1/07...................... 982 1,020
--------
4,264
ASSET-BACKED OBLIGATION (0.2%)
ALPS Pass-Through Trust
Series 1994-1 Class C2 9.350% 9/15/04............. 995 1,062
AUTOMOBILES (0.4%)
General Motors 6.750% 5/1/28......................... 2,000 2,030
AUTOMOTIVE (1.7 %)
Federal-Mogul 7.500% 7/1/04.......................... 5,000 5,007
Safelite AutoGlass 9.875% 12/15/06 (a)............... 850 880
Titan International 8.750% 4/1/07.................... 1,500 1,549
--------
7,436
BANKING (7.6%)
Banco do Brasil (Cayman Islands) 8.375% 6/15/02 (a).. 2,000 1,840
Banesto Delaware 8.250% 7/28/02
(gtd. by Banco Espanol de Credito )............... 2,000 2,138
BBV International Finance (Cayman Islands)
(Yankee Issue) 6.875% 10/27/05.................... 6,000 6,213
BCH Cayman Islands 7.700% 7/15/06
(gtd. by Banco Central Hispanoamericano )......... 5,000 5,380
Dresdner Bank (Yankee Issue) 7.250% 9/15/15.......... 3,000 3,204
Merita Bank 7.150% 12/29/49.......................... 3,000 3,053
Merrill Lynch Bank & Trust (Cayman Islands)
8.390% 8/1/01 (a)................................. 3,000 3,156
St. George Funding 8.485% 12/31/49 (a)............... 2,500 2,660
Swiss Bank 7.375% 7/15/15............................ 6,000 6,535
--------
34,179
BUILDING & CONSTRUCTION (2.4%)
Beazer Homes USA 8.875% 4/1/08 (a)................... 3,000 2,895
International Comfort Products 8.625% 5/15/08 (a).... 3,000 2,974
Kaufman & Broad Home 7.750% 10/15/04................. 2,000 1,985
PYCSA Panama 10.280% 12/15/12 (a).................... 3,250 3,118
--------
10,972
<PAGE>
SR&F Income Portfolio CONTINUED
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
BUSINESS SERVICES (2.7%)
Iron Mountain 10.125% 10/1/06........................ $ 2,000 $ 2,165
Lamar Advertising 9.625% 12/1/06..................... 1,850 1,982
Rental Services 9.000% 5/15/08 (a)................... 2,000 1,990
Tyco International Group (Yankee Issue) 6.375% 6/15/05 6,000 6,018
--------
12,155
CABLE & MEDIA (8.2%)
Azteca Holdings (Yankee Issue) 11.000% 6/15/02....... 1,000 1,002
British Sky Broadcasting (Yankee Issue) 7.300% 10/15/06 2,000 2,091
Century Communications 9.750% 2/15/02................ 1,850 1,979
Continental Cablevision 8.875% 9/15/05............... 3,500 4,012
Groupe Videotron (Yankee Issue) 10.625% 2/15/05...... 3,000 3,315
JCAC 10.125% 6/15/06................................. 1,500 1,631
News America Holdings 8.625% 2/1/03.................. 6,000 6,536
Rogers Cablesystems (Yankee Issue) 9.625% 8/1/02..... 3,000 3,195
Rogers Cantel 9.375% 6/1/08.......................... 3,000 3,098
Time Warner Entertainment
9.625% 5/1/02..................................... 3,000 3,341
8.875% 10/1/12.................................... 3,000 3,620
Viacom 7.750% 6/1/05................................. 1,000 1,063
Young Broadcasting 11.750% 11/15/04.................. 1,940 2,134
--------
37,017
COMMUNICATIONS (2.1%)
GCI 9.750% 8/1/07.................................... 1,000 1,037
Level 3 Communications 9.125% 5/1/08 (a)............. 2,000 1,950
WorldCom 9.375% 1/15/04.............................. 6,000 6,302
--------
9,289
CONTAINERS (3.1%)
BWAY Series B 10.20% 4/15/07......................... 1,900 2,043
Coca-Cola Bottling Medium-Term Note
Series A 8.560% 2/26/02........................... 2,000 2,166
Comtel Brasileria (Yankee Issue) 10.750% 9/26/04 (a). 2,000 1,840
Consumers International 10.250% 4/1/05 (a)........... 2,500 2,700
Owens-Illinois 8.100% 5/15/07........................ 4,000 4,255
Plastic Containers Series B 10.000% 12/15/06......... 850 914
--------
13,918
ENERGY (0.6 %)
PDVSA Finance Series 1998-1-D 7.400% 8/15/16......... 2,500 2,497
FINANCIAL (12.7%)
Amvescap 6.600% 5/15/05 (a).......................... 7,500 7,576
Banc Tec 7.500% 6/1/08 (a)........................... 4,000 4,066
Bistro Trust 1997-1000 9.500% 12/31/02 (a)........... 3,000 3,026
Credit Suisse (London) 7.900% 5/1/07 (a)............. 6,000 6,372
Dynex Capital 7.875% 7/15/02......................... 2,750 2,726
Goldman Sachs Group 7.125% 3/1/03 (a)................ 6,000 6,227
Lehman Brothers 6.625% 2/15/08....................... 6,000 6,056
Omega Healthcare Investors 6.950% 6/15/02............ 4,000 4,009
Penncorp Financial Group 9.250% 12/15/03............. 1,500 1,534
Prudential Insurance
7.125% 7/1/07 (a)................................. 4,000 4,184
7.650% 7/1/07 (a)................................. 3,000 3,244
Rank Group Finance (Yankee Issue) 6.750% 11/30/04.... 6,500 6,600
United Companies Financial 8.375% 7/1/05............. 1,500 1,489
--------
57,109
<PAGE>
SR&F Income Portfolio CONTINUED
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
FOOD & BEVERAGE (2.5%)
NBTY Series B 8.625% 9/15/07......................... $ 625 $ 634
Panamerican Beverages 7.250% 7/1/09 (a).............. 5,000 4,997
Pepsi-Gemex (Yankee Issue) Series B 9.750% 3/30/04... 1,500 1,489
Stater Brothers Holdings 11.000% 3/1/01.............. 4,000 4,320
--------
11,440
FOREIGN SOVEREIGN REGIONAL BONDS (8.8%)
Corporacion Andina de Fomento (Yankee Issue)
7.375% 7/21/00.................................... 3,000 3,039
7.100% 2/1/03..................................... 2,500 2,532
Export-Import Bank of Korea 6.375% 2/15/06........... 5,000 3,723
Financiera Energetica Nacional 9.375% 6/15/06........ 6,000 5,894
Panama Euro 7.875% 2/13/02........................... 4,000 3,934
Republic of Colombia (Yankee Issue) 8.750% 10/6/99... 2,500 2,539
Republic of Panama 8.250% 4/22/08.................... 5,000 4,886
Republic of Slovenia 7.000% 8/6/01 (a)............... 3,000 3,071
Sultan of Oman 7.125% 3/20/02 (a).................... 5,000 5,112
United Mexican States
9.750% 2/6/01..................................... 2,000 2,078
8.625% 3/12/08.................................... 3,000 2,899
--------
39,707
FORESTRY & RELATED PRODUCTS (1.3%)
Celulosa Arauco y Constitucion (Yankee Issue)
6.950% 9/15/05.................................... 6,000 5,662
FUNERAL HOMES (1.4%)
Loewen Group International 8.250% 4/15/03 (a)........ 5,000 5,293
Prime Succession Acquisition 10.750% 8/15/04......... 1,000 1,092
--------
6,385
HOSPITALS & NURSING HOMES (1.7%)
Integrated Health Services Series A 9.500% 9/15/07... 1,400 1,466
Tenet Healthcare 8.625% 12/1/03...................... 2,000 2,105
Universal Health Services 8.750% 8/15/05............. 2,800 2,933
Universal Hospital Services 10.250% 3/1/08 (a)....... 1,000 1,000
--------
7,504
HOTELS & ENTERTAINMENT (3.7%)
Choice Hotels 7.125% 5/1/08 (a)...................... 1,800 1,797
Hyatt Equities Medium-Term Note 7.000% 5/15/02 (a)... 5,000 5,160
MGM Grand 6.950% 2/1/05.............................. 5,000 4,970
Premier Parks 9.750% 1/15/07......................... 750 815
Prime Hospitality
9.250% 1/15/06.................................... 1,100 1,166
9.750% 4/1/07 Series B............................ 2,500 2,659
--------
16,567
INTERNET SERVICES (1.2%)
American Business Information 9.500% 6/15/08 (a)..... 1,250 1,256
Computer Associates International 6.375% 4/15/05 (a). 4,000 3,970
--------
5,226
MACHINERY, METALS & FABRICATED METAL PRODUCTS (2.5%)
AGCO 8.500% 3/15/06.................................. 3,000 3,121
Cincinnati Milacron 8.375% 3/15/04................... 2,000 2,119
Clark Materials Handling 10.750% 11/15/06............ 850 901
USX 6.850% 3/1/08.................................... 5,000 5,044
--------
11,185
<PAGE>
SR&F Income Portfolio CONTINUED
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
MINING & AGRICULTURE (0.6%)
PT Alatief Freeport Financial (Yankee Issue)
9.750% 4/15/01.................................... $ 3,000 $ 2,640
MORTGAGE-BACKED SECURITY (0.1%)
Resolution Trust Series 1992-C1 Class A1 8.800% 8/25/23 235 241
NATURAL GAS & OIL (4.0%)
Colorado Interstate Gas 10.000% 6/15/05.............. 1,500 1,803
Newfield Exploration 7.450% 10/15/07 (a)............. 1,500 1,526
Perez Companc 8.125% 7/15/07 (a)..................... 1,500 1,350
Triton Energy 8.750% 4/15/02......................... 3,500 3,693
YPF Sociedad Anonima (Yankee Issue)
7.500% 10/26/02................................... 4,700 4,806
7.250% 03/15/03................................... 5,000 4,860
--------
18,038
PETROLEUM (1.5%)
Lyondell Petroleum 9.750% 9/4/03 (a)................. 2,000 2,282
Petroliam Nasional Berhad (Yankee Issue)
7.125% 8/15/05 (a)................................ 5,000 4,278
---------
6,560
REAL ESTATE INVESTMENT TRUSTS (4.7%)
American Health Properties 7.050% 1/15/02............ 3,000 3,039
CarrAmerica Realty 7.200% 7/1/04 (a)................. 3,000 3,104
Health Care Property Investors 6.500% 2/15/06........ 3,500 3,440
Meditrust 7.375% 7/15/00............................. 2,000 2,024
Security Capital Pacific Trust 6.875% 2/15/08........ 2,000 2,013
Susa Partnership 7.125% 11/1/03...................... 3,000 3,079
Trinet Corporate Realty Trust 7.300% 5/15/01......... 4,500 4,576
---------
21,275
RETAIL (1.6%)
Dayton Hudson 6.750% 1/1/28.......................... 2,000 2,020
Kroger 7.650% 4/15/07................................ 3,000 3,261
MTS 9.375% 5/1/05 (a)................................ 2,000 1,970
---------
7,251
RUBBER, PLASTICS, & RELATED MATERIALS (0.2%)
Burke Industries 10.000% 8/15/07..................... 750 763
SANITARY SERVICES (0.3%)
Allied Waste Industries
(Yield to Maturity 5.597%) 6/1/07................. 1,600 1,172
SERVICES (1.1%)
ARA Services 10.625% 8/1/00.......................... 1,600 1,704
Aramark Services 8.150% 5/1/05....................... 2,000 2,150
Dyncorp 9.500% 3/1/07................................ 1,000 1,020
---------
4,874
TELECOMMUNICATIONS (3.5%)
Cable & Wireless Communications (Yankee Issue)
6.625% 3/6/07..................................... 2,750 2,775
CSC Holdings 7.875% 2/15/18.......................... 3,000 3,161
GTE 6.940% 4/15/28................................... 5,000 5,043
GTE Hawaiian Telephone Series A 7.000% 2/1/06........ 4,500 4,695
---------
15,674
TEXTILE & APPAREL (1.5%)
Tommy Hilfiger USA 6.850% 6/1/08..................... 6,750 6,738
<PAGE>
SR&F Income Portfolio CONTINUED
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
TOBACCO PRODUCTS (0.4%)
Standard Commercial Tobacco 8.875% 8/1/05 (a)........ $ 2,000 $ 1,980
TRANSPORTATION (1.2%)
Norfolk Southern 7.350% 5/15/07...................... 5,000 5,362
UTILITIES (2.8%)
AES 8.375% 8/15/07................................... 2,000 2,020
Enersis (Yankee Issue) 6.900% 12/1/06................ 5,000 4,670
Kentucky Power Medium-Term Note 8.900% 5/21/01....... 2,000 2,150
National Power 9.000% 7/5/02 (a)..................... 1,500 1,478
Texas Utilities 9.750% 5/1/21........................ 2,000 2,233
---------
12,551
---------
TOTAL LONG-TERM OBLIGATIONS
(Cost $418,001)................................... 423,496
- --------------------------------------------------------------------------------
Number of
PREFERRED STOCK (0.7%) Shares
- --------------------------------------------------------------------------------
FINANCIAL (0.7%)
Pinto Totta International Finance $7.770 (gtd. by
Banco Pinto Totto Mayor) (a) (Cost $3,010)........ 3,000 3,121
- --------------------------------------------------------------------------------
Principal
SHORT-TERM OBLIGATION (2.5%) Amount
- --------------------------------------------------------------------------------
COMMERCIAL PAPER (2.5%)
Associates Corp. of North America 6.250% 7/1/98
(Amortized cost $11,260).......................... $11,260 11,260
---------
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.5%)
(Cost $432,271) (b)............................... 437,877
OTHER ASSETS, LESS LIABILITIES (2.5%)................ 11,265
---------
TOTAL NET ASSETS (100.0%)............................ $449,142
=========
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a)Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933.
These securities generally are issued to qualified institutional buyers, such
as the Portfolio, and any resale by the Portfolio must be in an exempt
transaction, normally to other qualified institutional investors. At June 30,
1998, the aggregate value of the Portfolio's private placement securities was
$113,443 (aggregate cost $112,468) which represented 25.3 percent of net
assets.
(b)At June 30, 1998, the cost of investments for federal income tax purposes was
$432,393. Net unrealized appreciation was $5,484, consisting of gross
unrealized appreciation of $10,640 and gross unrealized depreciation of
$5,156.
See accompanying Notes to Financial Statements.
<PAGE>
SR&F High Yield Portfolio
- --------------------------------------------------------------------------------
Portfolio of Investments at June 30, 1998
(Dollar amounts in thousands)
Principal Market
LONG-TERM OBLIGATIONS (94.2%) Amount Value
- --------------------------------------------------------------------------------
AEROSPACE & MILITARY TECHNOLOGY (4.6%)
Derlan Manufacturing (Yankee Issue) 10.000% 1/15/07.. $ 1,000 $ 1,045
Dyncorp 9.500% 3/1/07................................ 500 510
L-3 Communications Series B 10.375% 5/1/07........... 500 552
United Defense Industries 8.875% 11/15/07............ 1,500 1,521
--------
3,628
AUTOMOTIVE (1.3%)
Hayes Wheels International Series B 9.125% 7/15/07... 500 522
Penda Series B 10.750% 3/1/04........................ 500 508
--------
1,030
BUILDING & CONSTRUCTION (4.6%)
Beazer Homes USA 8.875% 4/1/08 (a)................... 1,000 965
International Comfort Products 8.625% 5/15/08 (a).... 1,250 1,239
PYCSA Panama 10.280% 12/15/12 (a).................... 1,500 1,439
--------
3,643
BUSINESS SERVICES (2.3%)
Outdoor Systems 8.875% 6/15/07....................... 750 780
Rental Service 9.000% 5/15/08 (a).................... 1,000 995
--------
1,775
CABLE & MEDIA (3.7%)
Frontiervision Zero Coupon (Yield to Maturity
4.660%) 9/15/07................................... 750 593
Garden State Newspapers 8.750% 10/1/09 (a)........... 1,000 1,015
Perry-Judd 10.625% 12/15/07 (a)...................... 1,000 1,040
Young Broadcasting 10.125% 2/15/05................... 250 270
--------
2,918
CHEMICALS (0.6%)
Huntsman 9.500% 7/1/07 (a)........................... 500 500
CONTAINERS (2.2%)
BWAY Series B 10.250% 4/15/07........................ 350 376
Consumers International 10.250% 4/1/05 (a)........... 500 540
Silgan 9.000% 6/1/09................................. 750 782
--------
1,698
COSMETICS & PERSONAL CARE PRODUCTS (2.5%)
Chattem 8.875% 4/1/08 (a)............................ 1,000 985
Revlon Consumer Products 8.625% 2/1/08............... 1,000 1,000
--------
1,985
ENERGY SERVICES (1.5%)
Forcenergy Series B 8.500% 2/15/07................... 500 475
Transamerican Energy Series B 11.500% 6/15/02........ 750 701
--------
1,176
FINANCIAL (0.7%)
Penncorp Financial Group 9.250% 12/15/03............. 500 511
FOOD & BEVERAGES (3.2%)
NBTY Series B 8.625% 9/15/07......................... 1,000 1,015
Pepsi-Gemex Series B 9.750% 3/30/04................. 1,000 993
Windy Hill Pet Food 9.750% 5/15/07................... 500 523
--------
2,531
<PAGE>
SR&F High Yield Portfolio CONTINUED
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
HEALTH SERVICES & EQUIPMENT (4.2%)
Dynacare (Yankee Issue) 10.750% 1/15/06.............. $ 500 $ 529
Insight Health Services 9.625% 6/15/08 (a)........... 1,250 1,239
Leiner Health 9.625% 7/1/07.......................... 500 531
Mediq Zero Coupon (Yield to Maturity 5.810%) 6/1/09 (a) 1,850 1,008
--------
3,307
HOSPITALS & NURSING HOME CARE (2.8%)
Integrated Health Services Series A 9.500% 9/15/07... 400 419
Tenet Healthcare 8.625% 1/15/07...................... 750 774
Universal Hospital Services 10.250% 3/1/08 (a)....... 1,000 1,000
--------
2,193
HOTELS & ENTERTAINMENT (8.7%)
Empress Entertainment 8.125% 7/1/06 (a).............. 1,500 1,500
Hard Rock Hotels 9.250% 4/1/05 (a)................... 1,500 1,541
Premier Parks
9.250% 4/1/06..................................... 250 258
9.750% 1/15/07.................................... 250 271
Zero Coupon (Yield to Maturity 4.939%) 4/1/08..... 1,750 1,164
Prime Hospitality Series B 9.750% 4/1/07............. 1,000 1,064
Speedway Motorsports 8.500% 8/15/07.................. 1,000 1,035
--------
6,833
INTERNET SERVICES (6.8%)
American Business Information 9.500% 6/15/08 (a)..... 1,250 1,256
Concentric Network 12.750% 12/15/07 (a).............. 1,000 1,200
ICG Services Zero Coupon (Yield to Maturity
4.884%) 5/1/08 (a)................................ 2,250 1,311
Psinet 10.000% 2/15/05............................... 1,500 1,534
--------
5,301
LEISURE PRODUCTS (1.0%)
Boyds Collection 9.000% 5/15/08 (a).................. 750 748
METALS - STEEL (1.2%)
Geneva Steel 9.500% 1/15/04.......................... 1,000 930
PAPER (0.8%)
APP International Finance (Yankee Issue)
10.250% 10/1/00................................... 150 132
Indah Kiat Finance 10.000% 7/1/07 (a)................ 500 355
Specialty Paperboard 9.375% 10/15/06................. 150 157
--------
644
RESTAURANTS (0.3%)
AFC Enterprises 10.250% 5/15/07...................... 250 265
RETAIL (8.3%)
Amazon.com Zero Coupon (Yield to Maturity
4.929%) 5/1/08 (a)................................ 2,000 1,215
Cole National Group 9.875% 12/31/06.................. 200 216
Finlay Fine Jewelry 8.375% 5/1/08.................... 1,000 1,005
Holmes Products Series B 9.875% 11/15/07............. 1,000 1,035
Marsh Supermarkets Series B 8.875% 8/1/07............ 1,000 1,020
MTS 9.375% 5/1/05 (a)................................ 1,500 1,477
Specialty Retailers Series B 8.500% 7/15/05.......... 500 514
--------
6,482
<PAGE>
SR&F High Yield Portfolio CONTINUED
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
RUBBER, PLASTIC & RELATED MATERIALS (2.7%)
Burke Industries 10.000% 8/15/07..................... $ 250 $ 254
Key Plastics Series B 10.250% 3/15/07................ 500 519
Plastic Containers Series B 10.000% 12/15/06......... 350 376
Tekni-Plex 9.250% 3/1/08 (a)......................... 1,000 1,000
--------
2,149
SANITARY SERVICES (0.8%)
Allied Waste Industries Zero Coupon (Yield to
Maturity 5.597%) 6/1/07.............................. 900 659
TELECOMMUNICATIONS (16.0%)
American Mobile 12.250% 4/1/08 (a)................... 1,250 1,175
Focal Communications Zero Coupon
(Yield to Maturity 5.967%) 2/15/08 (a)............ 2,500 1,506
GlobalStar Telecommunications 10.750% 11/1/04........ 1,000 955
Level 3 Communications 9.125% 5/1/08 (a)............. 1,000 975
Metronet Communications
12.000% 8/15/07................................... 1,000 1,125
Zero Coupon (Yield to Maturity 5.307%) 11/1/07.... 1,000 660
MGC Communications Series B 13.000% 10/1/04.......... 1,000 960
Nextlink Communications 9.625% 10/1/07............... 1,250 1,275
Optel 11.500% 7/1/08 (a)............................. 1,200 1,203
RCN 10.000% 10/15/07................................. 1,000 1,028
Viatel
11.250% 4/15/08 (a)............................... 1,000 1,050
Zero Coupon (Yield to Maturity 5.282%) 4/15/08 (a) 1,000 610
--------
12,522
TELEPHONE (6.5%)
Allegiance Telecom Zero Coupon
(Yield to Maturity 5.870%) 2/15/08 (a)............ 1,500 739
BTI Telecom 10.500% 9/15/07.......................... 1,000 980
Comtel Brasileria (Yankee Issue) 10.750% 9/26/04 (a). 250 230
Esprit Telecom Group 11.500% 12/15/07................ 1,000 1,029
IDT 8.750% 2/15/06 (a)............................... 1,000 960
Knology Holdings Zero Coupon
(Yield to Maturity 5.840%) 10/15/07............... 2,000 1,160
--------
5,098
TEXTILE & APPAREL (1.7%)
Pillowtex Series B 9.000% 12/15/07................... 750 771
Polysindo International Finance 9.375% 7/30/07 (b)... 1,000 330
William Carter Series A 10.375% 12/1/06.............. 200 213
--------
1,314
TRANSPORTATION & TRANSPORTATION EQUIPMENT (4.5%)
Coach USA Series B 9.375% 7/1/07..................... 500 525
Greyhound Lines Series B 11.500% 4/15/07............. 500 554
Holt Group 9.750% 1/15/06 (a)........................ 1,000 980
MTL 10.000% 6/15/06 (a).............................. 1,000 990
Titan International 8.750% 4/1/07.................... 500 516
--------
3,565
UTILITIES (0.7%)
Calenergy Company 9.500% 9/15/06..................... 500 539
--------
TOTAL LONG-TERM OBLIGATIONS
(Cost $73,734).................................... 73,944
- --------------------------------------------------------------------------------
<PAGE>
SR&F High Yield Portfolio CONTINUED
- --------------------------------------------------------------------------------
Number Market
PREFERRED STOCK (0.7%) of Units Value
- --------------------------------------------------------------------------------
TELEPHONE (0.7%)
21st Century Telecom Group 13.75%
(Cost $500) ...................................... 500 $ 545
- --------------------------------------------------------------------------------
Number
WARRANTS (0.2%) of Warrants
- --------------------------------------------------------------------------------
TELECOMMUNICATIONS (0.1%)
Metronet Communications Warrants (a)................. 1,000 48
MGC Communications Warrants (a)...................... 1,000 60
--------
108
TELEPHONE (0.1%)
Knology Holdings Warrants (a)........................ 2,000 10
--------
TOTAL WARRANTS
(Cost $- )........................................ 118
- --------------------------------------------------------------------------------
Principal
SHORT-TERM OBLIGATION (2.6%) Amount
- --------------------------------------------------------------------------------
COMMERCIAL PAPER
Associates Corp. of North America 6.338% 7/1/98
(Amortized cost $2,085)........................... $ 2,085 2,085
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(Cost $76,319) (c)................................ 76,692
OTHER ASSETS, LESS LIABILITIES (2.3%)................ 1,795
--------
TOTAL NET ASSETS (100.0%)............................ $78,487
========
- --------------------------------------------------------------------------------
NOTES TO PORTFOLIO OF INVESTMENTS
- --------------------------------------------------------------------------------
(a)Represents private placement securities issued under Rule 144A, which are
exempt from the registration requirements of the Securities Act of 1933.
These securities generally are issued only to qualified institutional
investors, and any resale must be in an exempt transaction, normally to other
qualified institutional investors. At June 30, 1998, the aggregate value of
the Portfolio's private placement securities was $34,649 (aggregate cost
$34,738), which represented 44.1 percent of net assets.
(b)Issuer is in default of certain debt convenants. Income is not being accrued.
(c)At June 30, 1998, the cost of investments for financial reporting and federal
income tax purposes was identical. Net unrealized appreciation was $373,
consisting of gross unrealized appreciation of $1,995 and gross unrealized
depreciation of $1,622.
See accompanying Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Statements of Assets and Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998
(All amounts in thousands, except per-share data)
INTERMEDIATE HIGH
BOND INCOME YIELD
FUND FUND FUND
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Investment in Portfolio, at value................................. $438,041 $449,041 $41,567
Receivable for fund shares sold................................... 474 490 15
Cash.............................................................. 25 18 25
Other assets...................................................... 52 52 5
--------- --------- --------
Total assets................................................... 438,592 449,601 41,612
--------- --------- --------
LIABILITIES
Dividends payable................................................. 624 658 69
Payable for fund shares redeemed.................................. 350 392 5
Payable to investment adviser and transfer agent.................. 113 109 44
Other liabilities................................................. 49 39 23
--------- --------- --------
Total liabilities.............................................. 1,136 1,198 141
--------- --------- --------
Net assets..................................................... $437,456 $448,403 $41,471
======== ======== =======
ANALYSIS OF NET ASSETS
Paid-in capital................................................... $438,396 $443,648 $40,179
Net unrealized appreciation on investments........................ 7,028 5,605 136
Accumulated net realized gains (losses) on investments............ (7,968) (850) 1,156
--------- --------- --------
Net assets..................................................... $437,456 $448,403 $41,471
======== ======== =======
Shares outstanding (unlimited number authorized).................. 48,755 44,703 3,772
======== ======== =======
Net asset value per share......................................... $ 8.97 $ 10.03 $ 11.00
======== ======== =======
See accompanying Notes to Financial Statements.
<PAGE>
<CAPTION>
Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended June 30, 1998
(All amounts in thousands)
INTERMEDIATE HIGH
BOND INCOME YIELD
FUND FUND FUND
----------- ----------- -----------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest income.......................................................... $16,163 $18,648 $ --
Interest income allocated from Portfolio................................. 12,164 13,884 2,634
-------- -------- -------
Total investment income............................................... 28,327 32,532 2,634
-------- -------- -------
EXPENSES
Management fees.......................................................... 778 1,169 --
Expenses allocated from Portfolio........................................ 662 919 197
Administrative fees...................................................... 587 552 45
Transfer agent fees...................................................... 548 591 42
Printing and postage..................................................... 96 87 11
SEC and state registration fees.......................................... 56 57 27
Audit and legal fees..................................................... 24 24 11
Accounting fees.......................................................... 33 34 25
Trustees' fees........................................................... 20 20 11
Other.................................................................... 25 33 27
-------- -------- -------
Total expenses........................................................ 2,829 3,486 396
Reimbursement of expenses by investment adviser.......................... -- -- (96)
-------- -------- -------
Net expenses.......................................................... 2,829 3,486 300
-------- -------- -------
Net investment income ................................................ 25,498 29,046 2,334
-------- -------- -------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains on investments and futures transactions
allocated from Portfolio.............................................. 1,057 3,128 1,361
Net realized gains on investments........................................ 5,434 2,420 --
Net realized gains on futures transactions............................... 39 -- --
Net change in unrealized appreciation or depreciation on investments..... 2,808 67 (131)
-------- -------- -------
Net gains on investments.............................................. 9,338 5,615 1,230
-------- -------- -------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS..................... $34,836 $34,661 $3,564
========== ========== =========
See accompanying Notes to Financial Statements.
<PAGE>
<CAPTION>
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Periods Ended June 30, 1998 and 1997
(All amounts in thousands)
INTERMEDIATE INCOME HIGH YIELD
BOND FUND FUND FUND
1998 1997 1998 1997 1998 1997(A)
--------- --------- --------- --------- -------- ---------
OPERATIONS
Net investment income..................................... $ 25,498 $ 21,703 $ 29,046 $ 24,511 $ 2,334 $ 504
Net realized gains (losses) on investments................ 6,530 (1,179) 5,548 (196) 1,361 219
Net change in unrealized appreciation or
depreciation on investments............................ 2,808 7,114 67 9,039 (131) 267
--------- --------- --------- --------- -------- --------
Net increase in net assets resulting from operations... 34,836 27,638 34,661 33,354 3,564 990
--------- --------- --------- --------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income.................. (25,498) (22,030) (29,046) (24,589) (2,334) (504)
Distributions from net capital gains...................... -- -- -- -- (424) --
--------- --------- --------- --------- -------- --------
Total distributions to shareholders.................... (25,498) (22,030) (29,046) (24,589) (2,758) (504)
--------- --------- --------- --------- -------- --------
SHARE TRANSACTIONS
Subscriptions to fund shares.............................. 177,002 119,668 151,635 131,567 39,280 14,080
Value of distributions reinvested......................... 18,599 16,336 21,636 17,736 1,347 428
Redemptions of fund shares................................ (96,267) (110,940) (105,755) (92,360) (13,444) (1,512)
--------- --------- --------- --------- -------- --------
Net increase from share transactions................... 99,334 25,064 67,516 56,943 27,183 12,996
--------- --------- --------- --------- -------- --------
Net increase in net assets............................. 108,672 30,672 73,131 65,708 27,989 13,482
TOTAL NET ASSETS
Beginning of period....................................... 328,784 298,112 375,272 309,564 13,482 --
--------- --------- --------- --------- -------- --------
End of period............................................. $437,456 $328,784 $448,403 $375,272 $41,471 $13,482
========= ========= ========= ========= ======== ========
ANALYSIS OF CHANGES IN SHARES OF BENEFICIAL INTEREST
Subscriptions to fund shares.............................. 19,854 13,802 15,110 13,490 3,593 1,392
Issued in reinvestment of distributions................... 2,083 1,884 2,154 1,817 124 34
Redemptions of fund shares................................ (10,792) (12,805) (10,526) (9,471) (1,224) (147)
--------- --------- --------- --------- -------- --------
Net increase in fund shares............................ 11,145 2,881 6,738 5,836 2,493 1,279
Shares outstanding at beginning of period................. 37,610 34,729 37,965 32,129 1,279 --
--------- --------- --------- --------- -------- --------
Shares outstanding at end of period....................... 48,755 37,610 44,703 37,965 3,772 1,279
========= ========= ========= ========= ======== ========
(a) From commencement of operations on November 1, 1996.
See accompanying Notes to Financial Statements.
<PAGE>
<CAPTION>
Statements of Assets and Liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
June 30, 1998
(All amounts in thousands)
SR&F
INTERMEDIATE SR&F SR&F
BOND INCOME HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Investments, at market value (cost of $430,684, $432,271
and $76,319, respectively)....................................... $438,156 $437,877 $76,692
Accrued interest receivable......................................... 8,063 8,539 1,405
Receivable for investments sold..................................... 2,501 6,266 5,691
Cash................................................................ -- 2 1,098
Other assets........................................................ 29 -- --
--------- --------- --------
Total assets..................................................... 448,749 452,684 84,886
--------- --------- --------
LIABILITIES
Cash overdraft...................................................... 8,345 -- --
Payable for investments purchased................................... -- 3,347 6,350
Payable to investment adviser....................................... 137 192 37
Variation margin payable on futures................................. 89 -- --
Other liabilities................................................... 13 3 12
--------- --------- --------
Total liabilities................................................ 8,584 3,542 6,399
--------- --------- --------
Net assets applicable to investors' beneficial interest.......... $440,165 $449,142 $78,487
======== ======== =======
See accompanying Notes to Financial Statements.
<PAGE>
<CAPTION>
Statements of Operations
- ------------------------------------------------------------------------------------------------------------------------------------
For the Year Ended June 30, 1998
(All amounts in thousands)
SR&F
INTERMEDIATE SR&F SR&F
BOND INCOME HIGH YIELD
PORTFOLIO (A) PORTFOLIO (A) PORTFOLIO
----------- ----------- -----------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest income............................................................ $12,185 $13,887 $5,401
-------- -------- -------
EXPENSES
Management fees............................................................ 596 862 307
Audit and legal............................................................ 16 16 18
Accounting fees............................................................ 14 14 25
Trustees' fees............................................................. 9 9 15
Other...................................................................... 28 18 36
-------- -------- -------
Total expenses.......................................................... 663 919 401
-------- -------- -------
Net investment income................................................... 11,522 12,968 5,000
-------- -------- -------
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains on investments.......................................... 976 3,126 3,084
Net realized gains on futures transactions................................. 77 -- --
Net change in unrealized appreciation or depreciation on investments....... (623) (5,089) (176)
-------- -------- -------
Net gains (losses) on investments....................................... 430 (1,963) 2,908
-------- -------- -------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... $11,952 $11,005 $7,908
========== ========== =========
(a) From commencement of operations on February 2, 1998.
See accompanying Notes to Financial Statements.
<PAGE>
Statements of Changes in Net Assets
- ------------------------------------------------------------------------------------------------------------------------------------
For the Periods Ended June 30, 1998 and 1997
(All amounts in thousands)
SR&F SR&F
INTERMEDIATE INCOME SR&F HIGH
BOND PORTFOLIO PORTFOLIO YIELD PORTFOLIO
1998 (A) 1998 (A) 1998 1997 (B)
--------- --------- --------- ---------
OPERATIONS
<S> <C> <C> <C> <C>
Net investment income.................................................. $ 11,522 $ 12,968 $ 5,000 $ 874
Net realized gains on investments...................................... 1,053 3,126 3,084 336
Net change in unrealized appreciation or depreciation on investments... (623) (5,089) (176) 549
--------- --------- -------- --------
Net increase in net assets resulting from operations................ 11,952 11,005 7,908 1,759
--------- --------- -------- --------
TRANSACTIONS IN INVESTORS' BENEFICIAL INTEREST
Contributions.......................................................... 461,444 456,478 40,432 38,807
Withdrawals............................................................ (33,231) (18,341) (9,126) (1,293)
--------- --------- -------- --------
Net increase from transactions in investors' beneficial interest.... 428,213 438,137 31,306 37,514
--------- --------- -------- --------
Net increase in net assets.......................................... 440,165 449,142 39,214 39,273
TOTAL NET ASSETS
Beginning of period.................................................... -- -- 39,273 --
--------- --------- -------- --------
End of period.......................................................... $440,165 $449,142 $78,487 $39,273
========= ========= ======== ========
(a)From commencement of operations on February 2, 1998.
(b) From commencement of operations on November 1, 1996.
See accompanying Notes to Financial Statements.
</TABLE>
<PAGE>
Notes to Financial Statements
- --------------------------------------------------------------------------------
(All amounts in thousands)
NOTE 1. ORGANIZATION
Stein Roe Intermediate Bond Fund, Stein Roe Income Fund and Stein Roe High Yield
Fund are series of Stein Roe Income Trust (the "Trust"), an open-end management
investment company organized as a Massachusetts business trust. Intermediate
Bond Fund, Income Fund and High Yield Fund invest substantially all of their
assets in SR&F Intermediate Bond Portfolio, SR&F Income Portfolio and SR&F High
Yield Portfolio (the "Portfolios"), respectively.
The Portfolios are series of the SR&F Base Trust, a Massachusetts common law
trust organized under an Agreement and Declaration of Trust dated August 23,
1993. SR&F High Yield Portfolio commenced operations on November 1, 1996, in
conjunction with High Yield Fund. SR&F Intermediate Bond Portfolio and SR&F
Income Portfolio commenced operations on February 2, 1998. At commencement,
Intermediate Bond Fund and Income Fund contributed $427,315 and $432,720 in
securities and other assets to SR&F Intermediate Bond Portfolio and SR&F Income
Portfolio, respectively, in exchange for beneficial ownership of those
Portfolios. At February 4, 1998, Stein Roe Advisor Intermediate Bond Fund and
Stein Roe Advisor Income Fund each contributed cash of $100 to their respective
Portfolios. The Portfolios allocate income, expenses, realized and unrealized
gains and losses to each investor on a daily basis, based on their respective
percentage of ownership. At June 30, 1998, Intermediate Bond Fund and Advisor
Intermediate Bond Fund owned 99.5 percent and 0.5 percent, respectively, of SR&F
Intermediate Bond Portfolio; Income Fund and Advisor Income Fund owned 99.9
percent and 0.1 percent, respectively, of SR&F Income Portfolio; and High Yield
Fund, Stein Roe Institutional High Yield Fund and Stein Roe Institutional Client
High Yield Fund owned 53.0 percent, 2.1 percent and 44.9 percent, respectively,
of SR&F High Yield Portfolio.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting policies of the Funds and
Portfolios. These policies are in conformity with generally accepted accounting
principles, which require management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
<PAGE>
Notes to Financial Statements CONTINUED
- --------------------------------------------------------------------------------
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
Investment transactions are accounted for on trade date. Interest income,
including discount accretion and premium amortization, is recorded daily on the
accrual basis. Realized gains or losses from investment transactions are
reported on an identified cost basis.
Securities purchased on a when-issued or delayed delivery basis may be
settled a month or more after the transaction date. The values of such
securities are subject to market fluctuations during this period. None of the
Funds or Portfolios had when-issued or delayed delivery purchase commitments as
of June 30, 1998.
SECURITY VALUATIONS
All securities are valued as of June 30, 1998. Long-term debt securities are
valued using market quotations if readily available at the time of valuation.
If market quotations are not readily available, they are valued at a fair value
using a procedure determined in good faith by the Board of Trustees, which has
authorized the use of market valuations provided by a pricing service.
Short-term debt securities with remaining maturities of 60 days or less are
valued at their amortized cost. Those with remaining maturities of more than 60
days for which market quotations are not readily available are valued by use of
a matrix, prepared by the Adviser, based on quotations for comparable
securities. Other assets are valued by a method that the Board of Trustees
believes represents a fair value.
FUTURES CONTRACTS
During the year ended June 30, 1998, Intermediate Bond Fund and SR&F
Intermediate Bond Portfolio entered into U.S. Treasury security futures
contracts to either hedge against expected declines in the value 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 Portfolios 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 Fund or Portfolio deposits cash or
securities with its custodian in an amount sufficient to meet the initial margin
requirement. Subsequent payments are made or received by the Fund or Portfolio
equal to the daily change in the contract value and are recorded as unrealized
gains or losses. The Fund or Portfolio recognizes a realized gain or loss when
the contract is closed or expires. See SR&F Intermediate Bond Portfolio's
portfolio of
<PAGE>
Notes to Financial Statements CONTINUED
- --------------------------------------------------------------------------------
investments for a summary of open futures contracts at June 30, 1998. No other
Funds or Portfolios entered into any futures contracts during the period.
FEDERAL INCOME TAXES
No provision is made for federal income taxes, since (a) the Funds elect to be
taxed as "regulated investment companies" and make such distributions to their
shareholders as to be relieved of all federal income tax under provisions of
current federal tax law; and (b) the Portfolios are treated as partnerships for
federal income tax purposes and all of their income is allocated to their
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, 1998, the Funds had capital loss carryforwards as follows:
YEAR OF
FUND AMOUNT EXPIRATION
Intermediate
Bond Fund $7,831 2003-2005
Income Fund 706 2002
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. Permanent differences in the recognition or classification of
income between the financial statements and tax earnings are reclassified to
paid-in capital.
NOTE 3. PORTFOLIO COMPOSITION
Intermediate Bond Portfolio invests primarily in marketable debt securities with
an expected average life between three and 10 years. Income Portfolio invests
principally in medium-quality debt securities. High Yield Portfolio invests
primarily in high yield, high-risk medium- and lower- quality debt securities.
See each Portfolio's schedule of investments for information regarding
individual securities as well as industry diversification. See each Portfolio's
Fund Highlights for unaudited information regarding portfolio quality and
average maturity.
<PAGE>
Notes to Financial Statements CONTINUED
- --------------------------------------------------------------------------------
NOTE 4. TRUSTEES' FEES AND TRANSACTIONS WITH AFFILIATES
The Funds and Portfolios pay monthly management and administrative fees,
computed and accrued daily, to Stein Roe & Farnham Incorporated (the "Adviser"),
an indirect, majority-owned subsidiary of Liberty Mutual Insurance Company, for
its services as investment adviser and manager.
The management fee for Intermediate Bond Portfolio is computed at an annual
rate of .35 of 1 percent of the average daily net assets. The management fee for
Income Portfolio 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.
The administrative fee for Intermediate Bond Fund is computed at an annual
rate of .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 Adviser also provides fund accounting services.
The Adviser has agreed to reimburse High Yield Fund for expenses in excess of
1.00 percent of average annual net assets. This commitment expires on October
31, 1998, subject to earlier termination by the Adviser on 30 days' notice.
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 annual net assets, respectively.
Transfer agent fees are paid to SteinRoe Services, Inc. (SSI), an indirect,
majority-owned subsidiary of Liberty Mutual Insurance Company. SSI has entered
into an agreement with Colonial Investors Service Center, Inc. also an indirect,
majority-owned subsidiary of Liberty Mutual Insurance Company, to act as a
subtransfer agent for the Funds.
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.
<PAGE>
Notes to Financial Statements CONTINUED
- --------------------------------------------------------------------------------
NOTE 5. SHORT-TERM DEBT
To facilitate portfolio liquidity, the Funds and Portfolios maintain borrowing
arrangements under which they can borrow against portfolio securities. There
were no borrowings during the period ended June 30, 1998.
NOTE 6. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of securities or
maturities, other than short-term obligations, for the period ended
June 30, 1998, were:
Purchases Sales
--------- ---------
Intermediate Bond Fund................................. $576,836 $486,822
Income Fund............................................ 286,917 231,945
SR&F Intermediate Bond Portfolio....................... 364,428 346,687
SR&F Income Portfolio.................................. 340,281 326,027
SR&F High Yield Portfolio.............................. 282,664 249,280
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------
Intermediate Bond Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
YEARS ENDED JUNE 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $ 8.74 $ 8.58 $ 8.67 $ 8.44 $ 9.26
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. 0.58 .60 .59 .58 .56
Net realized and unrealized gains (losses)
on investments..................... 0.23 .17 (.10) .23 (.59)
-------- -------- -------- -------- --------
Total from investment operations... 0.81 .77 .49 .81 (.03)
-------- -------- -------- -------- --------
DISTRIBUTIONS
Net investment income................. (0.58) (.61) (.58) (.58) (.56)
Net realized gains.................... -- -- -- -- (.08)
In excess of realized gains .......... -- -- -- -- (.15)
-------- -------- -------- -------- --------
Total distributions................ (0.58) (.61) (.58) (.58) (.79)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD........... $ 8.97 $ 8.74 $ 8.58 $ 8.67 $ 8.44
======== ======== ======== ======== =========
Ratio of net expenses to average net
assets (a)............................ 0.72% 0.73% 0.70% 0.70% 0.70%
Ratio of net investment income to average
net assets (b)........................ 6.51% 6.97% 6.79% 6.94% 6.20%
Portfolio turnover....................... 138%(c) 210% 202% 162% 206%
Total return (b)......................... 9.51% 9.31% 5.76% 10.11% (0.47%)
Net assets, end of period (000's)........ $437,456 $328,784 $298,112 $301,733 $302,507
(a)If the Fund had paid all of its expenses and there had been no reimbursement
by the Adviser, this ratio would have been 0.75, 0.75 and 0.71 percent for
the years ended June 30, 1997, 1996 and 1995, respectively.
(b)Computed giving effect to the Adviser's expense limitation undertaking.
(c)Prior to commencement of operations of the Portfolio.
<PAGE>
Financial Highlights CONTINUED
- --------------------------------------------------------------------------------
Income Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
YEARS ENDED JUNE 30,
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $ 9.88 $ 9.63 $ 9.79 $ 9.36 $ 10.10
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... 0.69 .70 .71 .71 .69
Net realized and unrealized gains (losses)
on investments....................... 0.15 .25 (.16) .43 (.74)
-------- -------- -------- -------- --------
Total from investment operations..... 0.84 .95 .55 1.14 (.05)
-------- -------- -------- -------- --------
DISTRIBUTIONS
Net investment income................... (0.69) (.70) (.71) (.71) (.69)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD............. $ 10.03 $ 9.88 $ 9.63 $ 9.79 $ 9.36
======== ======== ======== ======== ========
Ratio of net expenses to average net
assets (a).............................. 0.83% 0.84% 0.82% 0.82% 0.82%
Ratio of net investment income to average
net assets (b).......................... 6.89% 7.26% 7.26% 7.55% 6.94%
Portfolio turnover......................... 59%(c) 138% 135% 64% 53%
Total return (b)........................... 8.72% 10.34% 5.70% 12.79% (0.69%)
Net assets, end of period (000's).......... $448,403 $375,272 $309,564 $174,327 $158,886
(a)If the Fund had paid all of its expenses and there had been no reimbursement
by the Adviser, this ratio would have been 0.85, 0.88, 0.85 and 0.83 percent
for the years ended June 30, 1997, 1996, 1995 and 1994, respectively.
(b)Computed giving effect to the Adviser's expense limitation undertaking.
(c)Prior to commencement of operations of the Portfolio.
<PAGE>
<CAPTION>
Financial Highlights CONTINUED
- --------------------------------------------------------------------------------
High Yield Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
YEAR PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997 (C)
--------- --------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................ $ 10.54 $ 10.00
------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................ 0.85 .52
Net realized and unrealized gains on investments. 0.61 .54
------- -------
Total from investment operations............... 1.46 1.06
------- -------
DISTRIBUTIONS
Net investment income............................ (0.85) (.52)
Net realized gains............................... (0.15) --
------- -------
Total distributions............................ (1.00) (.52)
------- -------
NET ASSET VALUE, END OF PERIOD...................... $ 11.00 $ 10.54
========= =========
Ratio of net expenses to average net assets (a)..... 1.00% 1.00%(d)
Ratio of net investment income to average net
assets (b)....................................... 7.79% 8.05%(d)
Total return (b).................................... 14.38% 10.88%
Net assets, end of period (000's)................... $41,471 $13,482
(a)If the Fund had paid all of its expenses and there had been no reimbursement
by the Adviser, this ratio would have been 1.32 percent for the year ended
June 30, 1998 and 2.29 percent for the period ended June 30, 1997.
(b)Computed giving effect to the Adviser's expense limitation undertaking.
(c)From commencement of operations on November 1, 1996.
(d)Annualized
<PAGE>
<CAPTION>
Financial Highlights CONTINUED
- --------------------------------------------------------------------------------
SR&F Intermediate Bond Portfolio
PERIOD
ENDED
JUNE 30,
1998 (A)
---------
SELECTED RATIOS
<S> <C>
Ratio of net expenses to average net assets........................ 0.39%(b)
Ratio of net investment income to average net assets............... 6.77%(b)
Portfolio turnover rate............................................ 86%
(a)From commencement of operations on February 2, 1998.
(b)Annualized
<PAGE>
<CAPTION>
Financial Highlights CONTINUED
- --------------------------------------------------------------------------------
SR&F Income Portfolio
PERIOD
ENDED
JUNE 30,
1998 (A)
---------
SELECTED RATIOS
<S> <C>
Ratio of net expenses to average net assets........................ 0.51%(b)
Ratio of net investment income to average net assets............... 7.23%(b)
Portfolio turnover rate............................................ 77%
(a)From commencement of operations on February 2, 1998.
(b)Annualized
<PAGE>
<CAPTION>
Financial Highlights CONTINUED
- --------------------------------------------------------------------------------
SR&F High Yield Portfolio
YEAR PERIOD
ENDED ENDED
JUNE 30, JUNE 30,
1998 1997 (A)
---------- --------------
SELECTED RATIOS
<S> <C> <C>
Ratio of net expenses to average net assets......... 0.65% 0.89%(b)
Ratio of net investment income to average net assets 8.13% 8.24%(b)
Portfolio turnover rate............................. 426% 168%
(a)From commencement of operations on November 1, 1996.
(b)Annualized
</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&FIntermediate Bond Portfolio
SR&FIncome Portfolio
SR&FHigh Yield Portfolio
We have audited the accompanying statements of assets and liabilities of Stein
Roe Intermediate Bond Fund, Stein Roe Income Fund, and Stein Roe High Yield Fund
as of June 30, 1998, and the related statements of operations for the year then
ended, the statements of changes in net assets of Stein Roe Intermediate Bond
Fund and Stein Roe Income Fund for each of the two years in the period then
ended, the statements of changes in net assets of Stein Roe High Yield Fund for
the year ended June 30, 1998 and the period from November 1, 1996 to June 30,
1997, and the financial highlights for each of the periods indicated therein. We
have also audited the accompanying statements of assets and liabilities,
including the portfolio of invest ments, of SR&F Intermediate Bond Portfolio,
SR&F Income Portfolio and SR&F High Yield Portfolio as of June 30, 1998, and the
related statements of operations, statements of changes in net assets, and
financial highlights of SR&FIntermediate Bond Portfolio and SR&FIncome Portfolio
for the period from February 2, 1998 to June 30, 1998, and the related
statements of operations of SR&F High Yield Portfolio for the year ended June
30, 1998, and statements of changes in net assets and financial highlights of
SR&F High Yield Portfolio for the year ended June 30, 1998 and the period from
November 1, 1996 to June 30, 1997.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1998, by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights
<PAGE>
Report of Independent Auditors CONTINUED
- --------------------------------------------------------------------------------
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, SR&F Intermediate Bond Portfolio, SR&F Income Portfolio, and
SR&F High Yield Portfolio at June 30, 1998, 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 14, 1998
<PAGE>
Stein Roe Income Trust
- --------------------------------------------------------------------------------
TRUSTEES
Thomas W. Butch
President, Mutual Fund Division and Director,
Stein Roe & Farnham Incorporated
William W. Boyd
Chairman and Director, Sterling Plumbing
Group Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Douglas A. Hacker
Senior Vice President and Chief Financial Officer,
United Airlines
Janet Langford Kelly
Senior Vice President, Secretary and General
Counsel, Sara Lee Corporation
Charles R. Nelson
Van Voorhis Professor of Political Economy,
University of Washington
Thomas C. Theobald
Managing Partner, William Blair Capital Partners
OFFICERS
Thomas W. Butch, President
William D. Andrews, Executive Vice President
Loren A. Hanson, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Kevin M. Carome, Vice President,
Assistant Secretary
Michael T. Kennedy, Vice President
Stephen F. Lockman, Vice President
Lynn C. Maddox, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Heidi J. Walter, Vice President, Secretary
Janet B. Rysz, Assistant Secretary
Sharon R. Robertson, Controller
Scott E. Volk, Treasurer
Margaret O. Zwick, Assistant Treasurer
AGENTS AND ADVISERS
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
SteinRoe Services Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Public Auditors
<PAGE>
The Stein Roe Mutual Funds
Stein Roe Cash Reserves 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 Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe High Yield Fund
Stein Roe Balanced Fund
Stein Roe Growth & Income Fund
Stein Roe Growth Stock Fund
Stein Roe Young Investor Fund
Stein Roe Growth Opportunities Fund
Stein Roe Special Fund Stein Roe Large Company Focus 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
Financial Advisors call: 800-322-0593
Shareholders call: 800-338-2550
www.steinroe.com
In Chicago, visit our Fund Center at One South
Wacker Drive, 32nd Floor.
Liberty Funds Distributor, Inc.
BD12A 8/98
