STEIN ROE MUTUAL FUNDS
ANNUAL REPORT
JUNE 30, 2000
[CURRENCY PHOTO HERE]
STEIN ROE FIXED INCOME FUNDS
TAXABLE BOND FUNDS
INTERMEDIATE BOND FUND
INCOME FUND
HIGH YIELD FUND
[STEIN ROE LOGO]
STEIN ROE MUTUAL FUNDS
SENSIBLE RISKS. INTELLIGENT INVESTMENTS.
<PAGE>
Contents
--------------------------------------------------------------------------------
From the President................................................ 1
Steve Gibson's thoughts on the markets and investing
Questions &Answers
Interview with the portfolio manager and
a summary of investment activity
Stein Roe Intermediate Bond Fund............................... 5
Stein Roe Income Fund.......................................... 9
Stein Roe High Yield Fund...................................... 13
Portfolio of Investments.......................................... 17
A complete list of investments with market values
Financial Statements.............................................. 30
Statements of assets and liabilities, operations
and changes in net assets
Notes to Financial Statements..................................... 40
Financial Highlights.............................................. 45
Selected per-share data
Report of Ernst & Young LLP,
Independent Auditors ............................................. 49
Must be preceded or accompanied by a prospectus.
<PAGE>
From the President
--------------------------------------------------------------------------------
To Our Shareholders
The fiscal year ended June 30, 2000 proved to be challenging for bond markets,
with ongoing inflation worries and rising interest rates creating a generally
unfavorable environment. The U.S. economy continued to grow at an unprecedented
rate, which prompted the Federal Reserve Board to boost short-term interest
rates five times during the period (for a total increase of 1.5%) in an effort
to keep inflation at bay. This trend of rising interest rates had a negative
impact on the value of bonds.
High-yield bonds had a particularly difficult time in the second half of the
period, as investors seemed to shift their interest away from lower-quality
bonds. By contrast, emerging market countries' bonds enjoyed solid performance.
U.S. Treasury bonds also posted solid returns, as budget surpluses allowed the
government to buy back much of its outstanding debt, resulting in a decrease in
the amount of outstanding bonds. This event put pressure on all non-Treasury
bond market segments through May.
However, since that time key economic indicators have shown slower growth and
tame inflation, prompting investors to put aside fears of further interest rate
increases and renewing their confidence in higher-risk areas of the bond market.
Thus, we believe that in the months to come, investors who, wary of inflation
and market volatility, have remained on the sidelines, will begin to return to
the market. After weathering an extended storm, it appears the bond market may
have emerged in a stronger-than-anticipated position.
The following reports will provide you with more specific information about
the economic environment surrounding the Stein Roe Taxable Bond Funds during the
past 12 months. Your Funds' managers will explain how they positioned the Funds
within their markets and how they plan to take advantage of the potential in the
market going forward.
Respectfully,
/S/ Stephen E. Gibson
Stephen E. Gibson
President
August 11, 2000
--------------------------------------------------------------------------------
Stephen E. Gibson
[STEPHEN GIBSON PHOTO HERE]
Because economic and market conditions change frequently, there can be no
assurance that the trends described in this report will continue or come to
pass.
1
<PAGE>
Fund Performance
--------------------------------------------------------------------------------
Six-Month Cumulative and Average Annual Total Returns
Period Ended June 30, 2000
1 YEAR 5 YEARS 10 YEARS
-----------------------------------
Stein Roe Intermediate Bond Fund 4.62% 6.33% 7.58%
Lehman Brothers Intermediate Government/
Corporate Bond Index 4.23% 5.82% 7.28%
Lipper Intermediate Investment
Grade Debt Fund Average (Peer Group) 3.42% 5.35% 7.27%
Number of Funds in Peer Group 284 148 30
Stein Roe Income Fund 4.92% 5.98% 8.02%
Lehman Brothers Intermediate Corporate
Bond Index 3.71% 5.94% 7.83%
Lipper Corporate BBB Rated
Debt Fund Average (Peer Group) 2.28% 5.59% 7.99%
Number of Funds in Peer Group 142 59 22
1 YEAR LIFETIME(1)
-----------------------------------
Stein Roe High Yield Fund -.48% 7.56%
Merrill Lynch High Yield Master II Index -.97% 5.51%
Lipper High Current Yield Fund
Average (Peer Group) -.77% 4.57%
Number of Funds in Peer Group 351 162
--------------------------------------------------------------------------------
1 Stein Roe High Yield Fund commenced operations on 11/1/96. Index and peer
group comparisons are from 10/31/96.
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. An
expense limitation of 1.00% was in effect for Stein Roe High Yield Fund for the
periods shown. Returns would have been lower without the limitation. Total
return includes changes in share price and reinvestment of income and capital
gains distributions. Each index shown above is an unmanaged group of
fixed-income securities that differs from the composition of each Stein Roe
fund; they are not available for direct investment. Source of data: Lipper,
Inc., a monitor of mutual fund performance; Bloomberg; Liberty Funds
Distributor, Inc.
Performance results reflect any voluntary waivers or reimbursement of Fund
expenses by the Advisor or its affiliates. Absent these waivers or reimbursement
arrangements, performance results would have been lower.
2
<PAGE>
Investment Comparisons
--------------------------------------------------------------------------------
Growth of a $10,000 Investment June 30, 1990 through June 30, 2000
--------------------------------------------------------------------------------
Stein Roe Intermediate Bond Fund
[CHART DATA]
Lipper Intermediate
Intermediate Investment Grade Lehman Brothers
Bond Debt Fund Average Intermediate Government/
Fund (30 Funds) Corporate Bond Index
6/30/90 10000 10000 10000
6/30/91 11065 10953 11052
6/30/92 12610.8 12464.5 12506.4
6/30/93 13945 13957.8 13819.6
6/30/94 13879.5 13770.7 13785.1
6/30/95 15282.7 15314.4 15214.6
6/30/96 16169.1 15976 15976.8
6/30/97 17672.8 17209.4 17130.4
6/30/98 19353.5 18864.9 18593.3
6/30/99 19856.7 19285.6 19372.3
6/30/00 20772.5 19945.2 20191.8
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. Each illustration above assumes a $10,000
investment on June 30, 1990 and compares fund performance to an index, which is
an unmanaged group of fixed-income securities that differs from the composition
of each Stein Roe fund; they are not available for direct investment. Source of
data: Lipper, Inc., a monitor of mutual fund performance; Bloomberg and Liberty
Funds Distributor, Inc.
-------------------------------------------------------------------------------
Stein Roe Income Fund
[CHART DATA]
Lipper Corporate Lehman Brothers
Income BBB Rated Debt Investment Grade
Fund Fund Average (22 Funds) Bond Index
6/30/90 10000 10000 10000
6/30/91 10934 10938 11045
6/30/92 12600.3 12669.5 12636.6
6/30/93 14445 14558.5 14185.8
6/30/94 14345.4 14338.7 14106.4
6/30/95 16181.6 16257.2 15924.7
6/30/96 17110.4 17182.2 16775.1
6/30/97 18871 18895.3 18138.9
6/30/98 20516.6 20875.5 19780.5
6/30/99 20623.3 20986.2 20488.6
6/30/00 21637.9 21464.6 21248.7
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. Each illustration above assumes a $10,000
investment on June 30, 1990 and compares fund performance to an index, which is
an unmanaged group of fixed-income securities that differs from the composition
of each Stein Roe fund; they are not available for direct investment. Source of
data: Lipper, Inc., a monitor of mutual fund performance; Bloomberg and Liberty
Funds Distributor, Inc.
3
<PAGE>
Investment Comparison
--------------------------------------------------------------------------------
Growth of a $10,000 Investment November 1, 1996 through June 30, 2000
Stein Roe High Yield Fund
[CHART DATA]
High Lipper High Merrill Lynch
Yield Current Yield Fund High Yield
Fund Average (162 Funds) Master II Index
11/1/96 10000 10000 10000
11/30/96 10076 10200.8 10183
12/31/96 10271.5 10583.2 10308.2
3/31/97 10423.5 10677.7 10384.5
6/30/97 11088.5 11213 10936
9/303/97 11656.2 11703.1 11532
12/31/97 11898.7 11987.2 11699.2
3/31/98 12648.3 12343.7 12197.6
6/30/98 12682.5 12535.6 12250
9/30/98 11873.3 12009.9 11366.8
12/31/98 12411.2 12341.1 11688.5
3/31/99 13044.1 12566.8 12026.3
6/30/99 13123.7 12647.9 12111.6
9/30/99 12882.2 12480.8 11927.5
12/31/99 13431 12650.8 12238.9
3/31/00 13124.8 12443.9 12073.6
6/30/00 13058.8 12524.8 12042.2
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. Each illustration above assumes a $10,000
investment on November 1, 1996 (the date on which the Fund commenced operation)
and compares fund performance to an index, which is an unmanaged group of
fixed-income securities that differs from the composition of each Stein Roe
fund; they are not available for direct investment. Source of data: Lipper,
Inc., a monitor of mutual fund performance; Bloomberg and Liberty Funds
Distributor, Inc.
4
<PAGE>
Questions & Answers
--------------------------------------------------------------------------------
An Interview with Michael Kennedy, Portfolio Manager of Stein Roe Intermediate
Bond Fund and SR&F Intermediate Bond Portfolio
Q: How did the Fund perform during the fiscal year ended June 30, 2000?
KENNEDY: The Stein Roe Intermediate Bond Fund generated a return of 4.62%,
exceeding the average 3.42% return of its Lipper peer group and the 4.23% return
of the Lehman Brothers Intermediate Government/Corporate Bond Index. The Fund
experienced some rough periods in conjunction with erratic overall bond market
activity, but held strong positions in sectors that performed well. This kept
performance ahead of the peer group.
Q: Where did you focus investments throughout the year, and why?
KENNEDY: We invested the majority of the Fund's assets in the corporate bond
market throughout the fiscal year. We held an average of 65%-75% of the Fund's
assets in this category, as this is where we found the best value for our
investment dollars.
Because of our heavy corporate bond weighting, the Fund's performance hinged
on that segment's reactions to economic events and other concerns. From July
through September of 1999, fears of Y2K affected the market and limited overall
performance of the corporate bond sector. As calendar year 1999 drew to a close
and it became evident that Y2K problems would have a smaller-than-expected
impact, the market recovered.
Fund Data
Investment Objective:
Seeks its total return by pursuing current income and opportunities for
capital preservation. The Fund invests primarily in a diversified portfolio
of marketable debt securities. The dollar-weighted average life of its
portfolio is expected to be between three and 10 years.
Fund Inception:
December 5, 1978
Net Assets:
$406.2 million
By that time, Y2K fears were priced into the market, providing excellent
investment opportunities as corporate bonds handsomely outperformed Treasurys
through the end of January 2000. Corporate bonds and Treasury bonds changed
favor again from the end of January until the end of May, 2000, during a period
where the Federal Reserve made several increases in short-term interest rates
and created a more conservative investment environment.
Mike Kennedy
[MIKE KENNEDY PHOTO HERE]
5
<PAGE>
Questions & Answers Continued
--------------------------------------------------------------------------------
Q: What other significant events defined the fiscal year for the Fund?
KENNEDY: As the Federal Reserve increased interest rates on short-term debt
(1.50% over the entire fiscal year) and the Treasury bought back longer-term
debt and drove down long-term rates, an inverted yield curve occurred. (See
chart on page 7.) This means that short-term interest rates actually exceeded
long-term interest rates, which is unusual because investors typically demand
higher returns in exchange for the increased risk associated with long-term
investing.
The inversion of the yield curve put pressure on non-Treasury sectors from
the end of January through May. However, in the final weeks of the period, a
number of key economic indicators seemed to signal that the economy was slowing,
signaling an end to the Federal Reserve's cycle of raising rates. Since that
time investor sentiment has shifted back toward higher-risk debt, improving
investment prospects for non-Treasury areas of the bond market. This is good
news for the Fund, considering our strong position in corporate bonds and other
non-Treasury positions.
Q: How did the Fund's mortgage-backed position fare during the fiscal year?
KENNEDY: The mortgage-backed securities sector rode much the same course as the
corporate market this year, losing favor from January through May due to
Treasury market outperformance. We continue to hold a significant position in
mortgage-backed securities, favoring commercial mortgage holdings that provide
high credit quality, attractive yield and good protection from an early
unfavorable loan payoff.
Q: The Fund's allocation to international bonds is back up after a poor period
for international investing. What countries provided good opportunities during
this rebound?
KENNEDY: Mexican bonds were a profitable investment for us during the fiscal
year. We held nearly one percent of the Fund's assets in that country's debt,
and these holdings benefited as the country was upgraded to investment grade. A
peaceful election should support an additional upgrade by Standard & Poor's,
earning the country full investment-grade status and allowing for further
appreciation of the Fund's Mexican bond holdings. We also profited from
investments in bonds of foreign banks, particularly in Europe, where credit
quality continues to improve and bank bonds offered attractive yields.
Q: What other factors helped performance?
KENNEDY: The Fund benefited from an overweighted position in BBB-rated bonds
as the sector
6
<PAGE>
Questions & Answers Continued
--------------------------------------------------------------------------------
performed well early in 2000. Strong allocation to the energy sector was also a
plus. The run-up in the price of oil proved beneficial for bond holdings such as
Noble Drilling, Baker Hughes and Gulf Canada (1.2%, 1.3% and 1.2% of net
assets).
Q: What areas do you believe will provide good investment opportunities in
coming months?
KENNEDY: With the economy slowing and interest rates stabilizing, we believe
corporate bonds and higher-yielding debt will provide strong investment
opportunities. At the end of the fiscal year we held just 10% of the Fund's
assets in high-yield bonds. The lower weighting was intentional, the result of
selling a few issues that were unattractive, and enjoying the upgrade of several
other holdings during the period. We intend to increase our allocation to
high-yield bonds now that this market is more attractive, while maintaining a
strong position in higher-quality corporate bonds.
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 includes changes in share price and reinvestment of income and capital
gains distributions. Portfolio holdings are as of 06/30/00, and are subject to
change.
Investing in high-yield bonds involves greater credit and other risks not
associated with investing in higher-quality bonds. Bond investing also involves
interest rate risk, which means that bond prices may change as interest rates
increase or decrease. Foreign investments involve market, political, accounting
and currency risks not associated with other investments. The Lehman Brothers
Intermediate Government/Corporate Bond Index is an unmanaged group of bonds that
vary in quality; it is not available for direct investment. Source of Lipper
data: Lipper, Inc.
Inversion of the Yield Curve
--------------------------------------------------------------------------------
June 30, 1999 through June 30, 2000
[CHART DATA]
June 30, 1999 June 30, 2000
3-month Treasury bond yield 4.75 5.86
1-year Treasury bond yield 5.05 6.06
5-year Treasury bond yield 5.65 6.18
10-year Treasury bond yield 5.79 5.97
30-year Treasury bond yield 6.02 5.90
The Federal Reserve raised short-term interest rates throughout the fiscal year,
while a budget surplus allowed for buyback of long-term Treasurys. These events
combined to invert the yield curve and reshape the bond investment environment
during the year.
Past performance does not guarantee future results.
7
<PAGE>
Portfolio Highlights
--------------------------------------------------------------------------------
SR&F Intermediate Bond Portfolio
Securities Type Breakdown
PORTFOLIO PORTFOLIO
6/30/00 6/30/99
-----------------------------------
Corporate Bonds 66.0% 68.7%
Mortgage-Backed Securities 15.5 18.2
Asset-Backed Securities 8.5 2.4
Foreign Securities 5.0 0.0
U.S. Treasuries Securities 4.1 10.3
Cash and Equivalents 0.9 0.4
-----------------------------------
Total Investments 100.0% 100.0%
Portfolio Statistics
PORTFOLIO PORTFOLIO
6/30/00 6/30/99
-----------------------------------
Adjusted Duration 5.0 years 4.9 years
Average Weighted Life 9.1 years 8.2 years
Average Weighted Coupon 7.86% 7.18%
--------------------------------------------------------------------------------
Maturity
As of 6/30/00
[CHART DATA]
Greater than 20 Years 15.6%
10-20 Years 8.4%
5-10 Years 45.3%
1-5 Years 28.4%
Less than 1 Year 2.3%
As of 6/30/99
[CHART DATA]
Greater than 20 Years 8.8%
10-20 Years 9.7%
5-10 Years 47.3%
1-5 Years 33.8%
Less than 1 Year 0.4%
--------------------------------------------------------------------------------
Quality
As of 6/30/00
[CHART DATA]
BB and Below 9.9%
BBB 27.5%
A 26.8%
AA 8.1%
AAA 27.7%
As of 6/30/99
[CHART DATA]
BB and Below 13.4%
BBB 24.0%
A 26.0%
AA 8.1%
AAA 28.5%
8
<PAGE>
Questions & Answers
--------------------------------------------------------------------------------
An Interview with Steve Lockman, Portfolio Manager of Stein Roe Income Fund
and SR&F Income Portfolio
Q: How did the Fund perform during the fiscal year ended June 30, 2000?
LOCKMAN: The Stein Roe Income Fund experienced higher-than-normal volatility in
conjunction with the erratic movement of the bond market. For the 12-month
period ended June 30, 2000, the Fund produced a total return of 4.92% at net
asset value, outperforming its benchmark, the Lehman Brothers Intermediate
Corporate Bond Index, which returned 3.71% for the same period. The Fund
performed relatively well in comparison to its Lipper peer group average, which
returned 2.28% for the period.
Q: What events affected the Fund's investment environment throughout the fiscal
year?
LOCKMAN: The strong economy and the positive effect it had on the federal budget
allowed the government to buy back longer-dated Treasury securities this year.
This created artificial demand in the Treasury market as longer-maturity
Treasury bonds became scarce. At the same time, the Federal Reserve was raising
short-term interest rates (1.50% over the fiscal year). The culmination of these
events was an inverted yield curve, which means that short-term interest rates
exceeded long-term interest rates (see chart on page 7). This event influenced
prices and returns in the overall bond market.
Steve Lockman
[STEVE LOCKMAN PHOTO HERE]
Fund Data
Investment Objective:
Seeks its total return by investing for a high level of current income and,
to a lesser extent, capital appreciation. The Fund invests primarily in
medium- or higher-quality debt securities and, to a lesser extent,
lower-quality securities, which may involve greater credit and other risks.
Fund Inception:
March 5, 1986
Net Assets:
$227.1 million
Q: How did these events influence your investment strategy for the Fund?
LOCKMAN: We focused much of the Fund's investment activity toward staying ahead
of interest rate increases imposed by the Federal Reserve by managing the Fund's
duration, which measures a portfolio's sensitivity to interest rate
9
<PAGE>
Questions & Answers Continued
--------------------------------------------------------------------------------
changes. The shorter the duration, the less the Fund's value is impacted by
interest rate fluctuations, and vice versa. As we saw continued strength in our
economy's growth and we believed that the Federal Reserve might impose
additional rate increases, we held our defensive position by keeping duration
steady.
Because of the inverted yield curve, we also focused Fund activity on
maneuvering around the yield curve. We increased our allocation of
longer-maturity bonds, in order to add exposure to the long end of the curve,
because we believed these securities would fare better during the Treasury
buyback.
Q: Did you maintain a strong high-yield allocation?
LOCKMAN: We held a strong position in high-yield bonds during the first part of
the fiscal year, which provided extra income. It also helped performance, as
that group benefited from the improving economy, strong equity market and
positive global growth. In the latter months of the fiscal year, the high-yield
market suffered. There was also pressure in high-yield bonds due to illiquidity
and high default rates. Higher-quality investments were performing better, so we
increased our allocation to AAA, AA and A-rated bonds at the expense of BBB and
B-rated bonds.
We maintained a strong position in high-yield issues in short- to
intermediate-length securities, which help to cushion the Fund against
instability caused by interest rate increases. Heavy redemptions subsided during
June, which should help market liquidity. If we see the market becoming more
liquid we may lower the quality of our investment-grade holdings.
Q: What industries or holdings were acquired during the period?
LOCKMAN: When we upgraded the portfolio's quality near the end of the period, we
bought Abbey National Capital Trust, an AA-rated UK bank, and Tosco Corp. (1.6%
and 1.1% of net assets). Both companies are operating in strong markets and
exhibit attractive business fundamentals.
Q: What industries or holdings did you avoid during the period?
LOCKMAN: As is always our position, we underweighted credits in cyclical
industries, as these bonds tend to provide greater volatility over time. We also
sold electric utility bond positions in the first half of the year. We exercised
caution toward investing in segments of the market where excessive merger
activity is creating angst, such as the manufacturing sector.
10
<PAGE>
Questions & Answers Continued
--------------------------------------------------------------------------------
Q: What is your outlook for the future?
LOCKMAN: We have an extremely positive outlook for the bond market for the next
fiscal year. Although the bond market has been suffering for an extended period
of time, many positive signs appear on the horizon. We foresee a slowdown in
economic growth, stable inflation, and a strong possibility that the Federal
Reserve will maintain interest rates near current levels. From a historical
standpoint, corporate bonds are now relatively attractive and even look good
versus the equity market. This should draw the interest of more buyers, which
should result in higher bond values. In this environment, we look forward to
money coming back into bond funds, which would provide strong support for the
market and the Fund.
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 LESS SHARES. Total
return includes changes in share price and reinvestment of income and capital
gains distributions. Portfolio holdings are as of 06/30/00 and are subject to
change.
Investing in high-yield bonds involves greater credit and other risks not
associated with investing in higher-quality bonds. Bond investing also involves
interest rate risk, which means that bond prices may change as interest rates
increase or decrease. Foreign investments involve market, political, accounting
and currency risks not associated with other investments. The Lehman Brothers
Intermediate Corporate Bond Index is an unmanaged group of bonds that vary in
quality; it is not available for direct investment. Source of Lipper data:
Lipper, Inc.
11
<PAGE>
Portfolio Highlights
--------------------------------------------------------------------------------
SR&F Income Portfolio
Securities Type Breakdown
PORTFOLIO PORTFOLIO
6/30/00 6/30/99
-----------------------------------
Financial 32.8% 33.0%
Industrial 18.0 20.5
Media/Communication 10.0 13.7
Consumer Noncyclical 8.4 11.8
Foreign Sovereign 6.9 0.0
Utilities 8.9 7.6
Energy 7.1 6.4
Consumer cyclical 6.4 5.5
Technology 1.5 1.5
-----------------------------------
Total Investments 100.0% 100.0%
Portfolio Statistics
PORTFOLIO PORTFOLIO
6/30/00 6/30/99
-----------------------------------
Adjusted Duration 5.6 years 5.6 years
Average Weighted Maturity 11.9 years 10.4 years
Average Weighted Coupon 8.35% 7.96%
--------------------------------------------------------------------------------
Maturity
[CHART DATA]
As of 6/30/99 As of 6/30/00
Greater than 20 years 11.9 20.8
10-20 years 12.3 9.6
5-10 years 48.0 38.6
1-5 years 26.9 25.9
Less than 1 year 0.9 5.1
--------------------------------------------------------------------------------
Quality
As of 6/30/99 As of 6/30/00
A 18.7 22.9
AAA & AA 11.2 14.2
BBB 37.1 29.4
BB&B 27.5 28.2
CCC/Not Rated* 5.5 5.3
* Includes Cash
Industry sectors in the following financial statements are based upon the
standard industrial classification (SIC) as published by the U.S. Office of
Management and Budget. The sector classifications used on this page are based
upon the Advisor's defined criteria as used in the investment process.
12
<PAGE>
Questions & Answers
--------------------------------------------------------------------------------
An Interview with Steve Lockman, Portfolio Manager of Stein Roe High Yield
Fund and SR&F High Yield Portfolio
Q: How did the Fund perform during the period?
LOCKMAN: For the fiscal year ended June 30, 2000, the Stein Roe High Yield Fund
continued to outperform its peers, returning
negative 0.48%, while the Fund's Lipper peer group average returned negative
0.77%. The Merrill Lynch High Yield Master II Index returned negative 1.00% for
the same period.
The Fund's performance in the first half of the fiscal year was exception
ally strong, as robust equity market activity supported the performance of the
high-yield bond market. Companies issued high-yield debt as well as equities,
and the market was receptive to both investment categories.
As the fiscal year progressed, high default rates and rising short-term
interest rates became problematic for the high-yield market. Combined with a
sell-off in equities in the second half of the fiscal year, these factors hurt
the market, particularly the lower-rated credits and the telecommunications
sector.
Fund Data
Investment Objective:
Seeks its total return by investing for a high level of current income and
capital appreciation. The Fund invests primarily in high-yield, high-risk
debt securities.
Fund Inception:
November 1, 1996
Net Assets:
$35.3 million
Q: Where did you position the majority of the Fund's assets, and why?
LOCKMAN: The majority of the Fund's exposure has historically been in the
B-rated bond category, where there is a large dispersion of value and
valuations. That area underperformed during the second half of the year,
reflecting the high-yield market downfalls. We took advantage of the tremendous
value we saw in BBB-rated bonds at that time, and increased the Fund's
allocation to around 8%.
In December of 1999 and again in June 2000, the Fund received a large influx
of cash. We used some of those assets to make the BBB-rated bond purchases and
are reserving the rest to invest in the anticipated market recovery in the
coming months.
Q: How did the high-yield market's default rate impact the Fund?
LOCKMAN: The high default rate has caused a great deal of
13
<PAGE>
Questions & Answers Continued
--------------------------------------------------------------------------------
uncertainty in the high-yield market in recent months, but has only had an
indirect effect on the Fund's performance. The default trend has escalated over
the past 12 months, fueled in large part by the excessive amount of new issuance
from 1997 through 1999. (During this time, new issuance caused the bond market
to swell to two-and-a-half times the size it was four years ago.) Much of the
issuance came from lower-quality companies that are now not succeeding because
of either a cyclical nature or an inability to execute their business plans as
expected.
This trend will likely continue going forward, but we expect it to be less
severe. So far, new issuance in the year 2000 is 50%-60% lower than one year
ago. Like the stock market of late, the high-yield bond market has become much
less receptive to funding new issues from lower-quality companies.
Thus far, the Fund has been able to avoid serious default problems due to our
knowledge and experience in this complex market. Our in-house research staff
carefully reviews the creditworthiness of all issuers before we make an
investment decision. Going forward, we think much of the uncertainty related to
excessive defaults will be priced into the market. This should provide an
excellent opportunity for long-term, high-yield investing.
Q: Are there any sectors that had a strong impact on the market and the Fund?
LOCKMAN: Media and telecommunications continue to be the driving sectors in the
high-yield bond market, making up well over three-quarters of the market's new
issuance in 2000, and 35%-45% of the existing issues in the market. These "new
economy" companies use the high-yield market as a key source of their funding,
along with banks and the equity market. The decline in the NASDAQ during recent
months has dramatically affected the valuations of these companies in general,
which has impacted the high-yield market.
Despite recent frustrations, we expect continued dominance from media and
telecommunications sectors. Media and telecommuni cations companies are still in
their development phases and therefore will likely need continued access to the
high-yield market. We plan to maintain a market weighting to these sectors. We
always focus on owning the largest players, or well-funded companies that are
the leaders within their subsectors, such as Global Crossing fiber optics
provider, NextLink Communications Inc.
14
<PAGE>
Questions & Answers Continued
--------------------------------------------------------------------------------
and PSInet Inc. (1.1%, 0.72% and 1.1% of total assets, respectively).
We are also investing in the European telecommunications sector because of
deregulation and a newly open market. We perceive an opportunity to take market
share and build substantial businesses away from the large incumbent
government-owned telephone companies across Europe. We believe that holdings
such as Viatel Inc. and Communications Tele1 Europe Holding will benefit (0.87%
and 1.2% of total net assets, respectively).
Q: What is your outlook for the remainder of calendar year 2000?
LOCKMAN: We expect high-yield bonds to improve in the intermediate term. We
anticipate taking profits from higher-quality investments and reinvesting assets
in lower-tier credits with strong appreciation potential.
The market is coming off of a two-and-a-half year period of below-average
returns due to defaults and higher interest rates. We will maintain strong
exposure to B-rated bonds, as this sector provides diversification opportunities
across different industries. We expect strong demand to materialize in the
high-yield market due to the tremendous relative value and an investment
alternative to a volatile stock market. High-yield bonds also could also benefit
from heavy merger and acquisition activity this year, and we look forward to an
excellent market environment for the Stein Roe High Yield Fund.
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 includes changes in share price and reinvestment of income and capital
gains distributions. Portfolio holdings are as of 6/30/00, and are subject to
change.
Investing in high-yield bonds involves greater credit and other risks not
associated with investing in higher-quality bonds. Bond investing also involves
interest rate risk, which means that bond prices may change as interest rates
increase or decrease. Foreign investments involve market, political, accounting
and currency risks not associated with other investments. The Merrill Lynch High
Yield Master II Index is an unmanaged group of bonds that vary in quality; it is
not available for direct investment. Source of Lipper data: Lipper, Inc.
15
<PAGE>
Portfolio Highlights
--------------------------------------------------------------------------------
SR&F High Yield Portfolio
Securities Type Breakdown
PORTFOLIO PORTFOLIO
6/30/00 6/30/99
-----------------------------------
Media/Communications 40.6% 33.2%
Consumer Cyclical 13.5 16.9
Consumer Noncyclical 14.4 16.9
Industrial 19.3 26.6
Technology 0.8 3.6
Utilities 1.5 0.0
Energy 4.6 1.8
Financial 5.3 1.0
-----------------------------------
Total Investments 100.0% 100.0%
Portfolio Statistics
PORTFOLIO PORTFOLIO
6/30/00 6/30/99
-----------------------------------
Adjusted Duration 4.8 years 5.7 years
Average Weighted Maturity 7.5 years 8.8 years
Average Weighted Coupon 8.77% 8.50%
--------------------------------------------------------------------------------
Maturity
As of 6/30/00 As of 6/30/99
Greater than 20 years 9.4% 4.4%
5-10 years 76.7% 89.5%
1-5 years 5.5% 3.5%
Less than 1 year 8.4% 2.6%
--------------------------------------------------------------------------------
Quality
As of 6/30/00 As of 6/30/99
B 65.2% 72.7%
BB 13.8% 16.5%
BBB 8.7% N/A
CCC/Not Rated* 9.8% 10.8%
Other 2.5% N/A
* Includes Cash
Industry sectors in the following financial statements are based upon the
standard industrial classification (SIC) as published by the U.S. Office of
Management and Budget. The sector classifications used on this page are based
upon the Advisor's defined criteria as used in the investment process.
16
<PAGE>
SR&F Intermediate Bond Portfolio
--------------------------------------------------------------------------------
June 30, 2000, (All amounts in thousands)
BOND & NOTES - 97.6%
CORPORATE FIXED INCOME BONDS & NOTES - 65.1% Par Value
--------------------------------------------------------------------------------
FINANCE, INSURANCE & REAL ESTATE - 24.6%
DEPOSITORY INSTITUTIONS - 6.9%
Citicorp, 8.040% 12/15/19 (a)..................... $ 9,000 $ 8,957
GS Escrow Corp., 7.000% 8/1/03.................... 3,000 2,762
Merita Bank Ltd., 7.150% 9/11/49.................. 4,500 4,377
National Australia Bank Ltd., 8.600% 5/19/10...... 3,750 3,923
Sovereign Bancorp, Inc., 10.500% 11/15/06......... 2,750 2,728
The Bank of Tokyo-Mitsubishi, Ltd., 8.400% 4/15/10 5,500 5,561
--------
28,308
FINANCIAL SERVICES - 5.4%
LaBranche & Co., Inc., 12.000% 3/1/07 (a)......... 3,300 3,275
Registered Diversified Funding, 9.250% 3/15/30 (a) 8,250 7,763
TPSA Finance BV, 7.750% 12/10/08 (a).............. 6,000 5,672
Zurich Capital Trust, 8.376% 6/1/37 (a)........... 6,130 5,691
--------
22,401
HOLDING & OTHER INVESTMENT OFFICES - 4.6%
Applied Global Finance Ltd., 9.727% 10/4/01....... 1,000 1,040
Federal Realty Investment Trust, 6.625% 12/1/05... 2,750 2,494
First Industrial, L.P., 7.600% 7/15/28............ 1,250 1,038
HSBC Holdings PLC:
9.547% 12/31/49 (a)............................ 4,500 4,666
10.176% 12/31/49 (a)........................... 5,000 5,324
Meditrust Cos., 7.820% 9/10/26.................... 1,700 1,292
Storage USA, 7.125% 11/1/03....................... 3,250 3,116
--------
18,970
INSURANCE AGENTS & BROKERS - 1.8%
GE Global Insurance Holding Corp., 7.500% 6/15/10 7,500 7,419
--------
INSURANCE CARRIERS - 2.2%
Florida Windstorm Underwriting Assoc., 7.125% 2/25/19 (a) 2,375 2,144
Prudential Insurance Co. of America, 7.650% 7/1/07 (a) 7,250 7,035
--------
9,179
NONDEPOSITORY CREDIT INSTITUTIONS - 1.9%
Countrywide Home Loans, Inc., 6.850% 6/15/04...... 5,000 4,798
KBC Bank Fund Trust III, 9.860% 11/29/49 (a)...... 3,000 3,061
--------
7,859
SECURITY BROKERS & DEALERS - 1.8%
Broad Index Secured Trust Offering, Series 1997 1A,
Class B,
9.500% 12/31/02 (a)............................ 3,000 2,829
Diversified REIT Trust, Series 1999-1A, Class C,
6.780% 3/18/11 (a)............................. 5,000 4,513
--------
7,342
MANUFACTURING - 9.9%
CHEMICALS & ALLIED PRODUCTS - 1.2%
Eastman Chemical Co., 7.625% 6/15/24.............. 5,000 4,830
--------
ELECTRONIC & ELECTRICAL EQUIPMENT - 2.4%
Citizens Utilities Co., 7.000% 11/1/25............ 6,500 5,492
Raytheon Co., 8.300% 3/1/10 (a)................... 4,475 4,546
--------
10,038
MACHINERY & COMPUTER EQUIPMENT - 1.3%
Baker Hughes, Inc., 6.875% 1/15/29 (a)............ 6,250 5,491
--------
17
<PAGE>
SR&F Intermediate Bond Portfolio
--------------------------------------------------------------------------------
Continued
Par Value
--------------------------------------------------------------------------------
MANUFACTURING - CONT.
MISCELLANEOUS MANUFACTURING - 1.7%
PDVSA Finance Ltd., Series 1-A, 7.400% 8/15/16.... $ 2,500 $ 1,908
Reliant Energy, 8.125% 7/15/05 (a)................ 5,000 4,993
--------
6,901
PETROLEUM REFINING - 1.6%
USX Corp., 7.200% 2/15/04 ........................ 6,800 6,674
--------
PRINTING & PUBLISHING - 0.5%
World Color Press, Inc., 7.75% 2/15/09............ 2,000 1,872
--------
TOBACCO PRODUCTS - 1.2%
US Tobacco, 8.800% 3/15/05........................ 5,000 4,836
--------
MINING & ENERGY - 7.0%
METAL MINING - 1.1%
Freeport-McMoran Copper & Gold, Inc., 7.500% 11/15/06 2,700 1,782
PT Alatief Freeport Financial Corp., 9.750% 4/15/01 2,900 2,683
--------
4,465
OIL & GAS EXTRACTION - 3.9%
Gulf Canada Resources Ltd., 8.375% 11/15/05....... 5,000 4,940
Noble Drilling Corp., 7.500% 3/15/19.............. 5,310 5,035
Yosemite Securities Trust I, 8.250% 11/15/04 (a).. 6,000 5,958
--------
15,933
OIL & GAS FIELD SERVICES - 2.0%
Phillips Petroleum Co., 8.500% 5/25/05............ 3,000 3,101
Tosco Corp., 8.125% 2/15/30 (b)................... 4,900 4,941
--------
8,042
RETAIL TRADE - 4.4%
GENERAL MERCHANDISE STORES - 1.7%
Buhrmann US, Inc., 12.250% 11/1/09................ 3,000 3,120
Kmart Corp., 8.375% 12/1/04 ...................... 4,100 3,887
--------
7,007
MISCELLANEOUS RETAIL - 2.7%
Price/Costco, Inc., 7.125% 6/15/05................ 5,250 5,159
Royal & Sun Alliance Insurance Group PLC,
8.950% 10/15/29 (a)............................. 6,000 6,018
--------
11,177
SERVICES - 3.6%
AMUSEMENT & RECREATION - 0.7%
Prime Hospitality Corp., 9.250% 1/15/06........... 2,950 2,891
--------
BUSINESS SERVICES - 0.8%
Federal Express Corp., Series A1, 7.530% 9/23/06.. 3,111 3,087
--------
HEALTH SERVICES - 0.9%
Tenet Healthcare Corp., 7.875% 1/15/03............ 4,000 3,905
--------
HOTELS, CAMPS & LODGING - 1.2%
Marriott International, Inc., 7.875% 9/15/09...... 5,000 4,813
--------
18
<PAGE>
SR&F Intermediate Bond Portfolio
--------------------------------------------------------------------------------
Continued
Par Value
--------------------------------------------------------------------------------
TRANSPORTATION, COMMUNICATION, ELECTRIC,
GAS & SANITARY SERVICES - 14.7%
AIR TRANSPORTATION - 1.3%
Air 2 US, 8.027% 10/1/19 (b)...................... $ 5,450 $ 5,464
--------
CABLE - 1.0%
CSC Holdings, Inc., 7.875% 2/15/18................ 4,250 3,901
--------
COMMUNICATIONS - 0.8%
PDVSA Finance Ltd., Series 1999 F, 8.750% 2/15/04. 3,283 3,221
--------
ELECTRIC SERVICES - 7.3%
AES Eastern Energy, L.P. 9.670% 1/2/29............ 4,000 3,817
Endesa-Chile Overseas Co., 8.500% 4/1/09 ......... 6,000 5,881
Israel Electric Corp., Ltd., 8.250% 10/15/09 ..... 8,500 8,430
Niagara Mohawk Power Corp., 8.875% 5/15/07........ 8,000 8,306
Oglethorpe Power Corp., 6.974% 6/30/11 (a)........ 3,685 3,466
--------
29,900
TELECOMMUNICATION - 3.9%
Deutsche Telekom Integrated Finance:
7.750% 6/15/05 ................................ 4,750 4,796
8.250% 6/15/30 ................................ 4,800 4,882
Frontier Corp., 7.250% 5/15/04 ................... 7,000 6,462
--------
16,140
--------
TRANSPORTATION SERVICES - 0.4%
Stagecoach Holdings PLC, 8.625% 11/15/09 ......... 2,075 1,767
--------
WHOLESALE TRADE - 0.9%
NONDURABLE GOODS - 0.9%
Lilly Del Mar, Inc., 7.717% 8/1/29 ............... 3,750 3,687
--------
TOTAL CORPORATE FIXED INCOME BONDS & NOTES
(cost of $292,874) ............................... 267,520
--------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS - 15.5%
U.S. GOVERNMENT & AGENCY OBLIGATIONS - 10.6%
Federal Home Loan Mortgage Association, 12.000% 2020 1,402 1,546
--------
Federal National Mortgage Association:
6.000% 2009-2024 (b)........................... 15,401 14,643
6.500% 2028 (b)................................ 6,313 5,952
8.500% 2021 ................................... 89 90
9.250% 2018 (b)................................ 1,386 1,450
--------
22,135
Government National Mortgage Association:
6.625% 2025 ARM (b)............................ 1,271 1,278
8.000% 2018 (b)................................ 2,148 2,180
9.000% 2016 (b)................................ 167 174
--------
3,632
19
<PAGE>
SR&F Intermediate Bond Portfolio
--------------------------------------------------------------------------------
Continued
Par Value
--------------------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS - CONT.
U.S. Treasury Notes:
6.500% 2/15/10................................. $ 5,000 $ 5,171
6.750% 5/15/05 (b)............................. 11,000 11,256
--------
16,427
--------
--------------------------------------------------------------------------------
FOREIGN GOVERNMENT & AGENCY OBLIGATIONS - 4.9%
Korea Development Bank, 7.125% 4/22/04 ........... 3,000 2,899
Philippines (Rep) 10.625% 3/16/25................. 3,000 2,571
State of Qatar:
9.500% 5/21/09 (a)............................. 3,500 3,599
9.750% 6/15/30 (a)............................. 7,500 7,359
United Mexican States, 9.875% 2/1/10 ............. 3,500 3,652
--------
20,080
--------
TOTAL GOVERNMENT & OBLIGATIONS
(cost of $57,883) ................................ 63,820
--------
--------------------------------------------------------------------------------
NON AGENCY MORTGAGE-BACKED SECURITIES &
ASSET BACKED SECURITIES - 17.0%
MORTGAGE BACKED SECURITIES - 8.6%
American Mortgage Trust, Series 1993-3,
8.190% 9/27/22 1,391 1,252
Kidder Peabody Acceptance Corp., Series 1994-C3,
Class A2,
8.500% 4/1/07 ................................. 2,239 2,298
LB Commercial Conduit Mortgage Trust, Series 1998-C4,
Class A1B,
6.210% 10/15/08 ............................... 10,000 9,069
Mellon Residential Funding Corp., Series 1998-TBC1,
Class A3,
5.610% 10/25/28 ............................... 4,500 4,334
Merrill Lynch Mortgage Investors, Inc., Series 1995-C3,
Class A3,
7.059% 12/26/25 ............................... 4,000 3,907
Merrill Lynch Trust, Series 20, Class D,
8.000% 12/20/18 1,097 1,095
Nomura Asset Securities Corp., Series 1996-MD5,
Class A1B,
7.120% 4/13/36................................. 3,000 2,918
Option One Mortgage Securities Corp., Series 1999-B,
Class 2A,
9.660% 3/26/29 (a)............................. 2,959 2,869
PNC Mortgage Securities Corp., Series 1996-1,
Class A5,
7.500% 6/25/26................................. 3,314 3,230
Structured Asset Securities Corp.:
Series 1996-CFL, Class C, 6.525% 2/25/28....... 3,420 3,393
Series 1996-CFL, Class X-IO, 1.525% 2/25/28.... 22,930 1,146
--------
35,511
ASSET BACKED SECURITIES - 8.4%
Asset Securitization Corp., Series 1997-D5,
Class A1-IO,
6.750% 2/14/41 ................................ 6,500 6,184
Cigna CBO 1996-1 Ltd., Series 1996-1, Class A2,
6.460% 11/15/08 (a)............................ 5,000 5,034
First Boston Mortgage Securities Corp.,
Series 1993-H1, Class AIO,
2.108% 9/28/13................................. 1,298 6
Green Tree Home Improvement Loan Trust,
Series 1994-A, Class A,
7.050% 3/15/14 ................................ 699 675
GS Mortgage Securities Corp., Series 1998-3,
Class A,
7.750% 9/20/27 (a)............................. 5,616 5,581
JP Morgan Commercial Mortgage Finance Corp.,
Series 1999-C8,
Class A2, 7.400% 7/15/31....................... 10,000 9,892
20
<PAGE>
SR&F Intermediate Bond Portfolio
--------------------------------------------------------------------------------
Continued
Par Value
--------------------------------------------------------------------------------
ASSET BACKED SECURITIES - (CONTINUED)
YPF Sociedad Anonima, 7.500% 10/26/02 ............ $ 2,173 $ 2,156
YPF Sociedad Anonima, 10.000% 11/2/28 ............ 2,000 2,149
United Airlines, Inc., 9.200% 3/22/08 ............ 2,763 2,892
--------
34,569
-------
TOTAL NON AGENCY MORTGAGE-BACKED SECURITIES & ASSET-BACK SECURITIES
(cost of $59,824) ................................ 70,080
-------
--------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 0.9%
--------------------------------------------------------------------------------
COMMERCIAL PAPER
Associates First Capital 6.950% (c) 7/3/00........... 3,895 3,893
(cost of $3,893) -------
--------------------------------------------------------------------------------
TOTAL INVESTMENTS
(cost of $414,474) (d)............................ 405,313
-------
OTHER ASSETS & LIABILITIES, NET - 1.5%............... 6,202
-------
NET ASSETS - 100.0% ................................. $411,515
=======
--------------------------------------------------------------------------------
NOTES TO INVESTMENT PORTFOLIO:
--------------------------------------------------------------------------------
(a) Represents private placement securities issued under Rule 144A, which are
exempt from the registration of the Securities Act of 1933 These securities
are generally issued to qualified institutional buyers, such as the
Portfolio, and any resale by the Portfolio must be an exempt transaction,
normally to other qualified institutional investors. At June 30, 2000, the
aggregate amortized value of the Portfolio's private placement securities
was $115,844 which represented 28.2% of net assets.
(b) These securities, or a portion thereof, with a total market value of
$47,338 is being used to collateralize short future contracts.
(c) Rate represents yield at date of purchase.
(d) At June 30, 2000, the cost of investments for federal tax purposes is
$414,864.
Short futures contracts open at June 30, 2000:
Par value Unrealized
covered by Expiration depreciation
Type contracts month at 06/30/00
----------- ---------- ---------- ----------
Treasury Bond 24,300 September $169
Treasury Note 10,800 September 109
-----
$278
-----
See accompanying Notes to Financial Statements.
21
<PAGE>
SR&F Income Portfolio
--------------------------------------------------------------------------------
June 30, 2000, (All amounts in thousands)
CORPORATE BONDS - 88.8% Par Value
--------------------------------------------------------------------------------
CONSTRUCTION - 1.2%
BUILDING CONSTRUCTION
Beazer Homes USA, Inc., 8.875% 4/1/08............. $ 3,000 $ 2,700
--------
FINANCE, INSURANCE & REAL ESTATE - 36.0%
DEPOSITORY INSTITUTIONS - 14.7%
Abbey National Capital Trust, 8.963% 12/29/49..... 3,750 3,715
Citicorp, 8.040% 12/15/19 (a)..................... 4,000 3,981
Credit Suisse First Boston London,
7.900% 12/15/26 (a)............................ 3,500 3,253
Deutsche Bank Capital Funding Trust,
7.872% 12/29/49 (a)............................ 3,000 2,782
GS Escrow Corp., 7.125% 8/1/05.................... 3,000 2,658
Merrill Lynch Bank & Trust Co. Cayman Islands,
8.390% 8/1/01 (a).............................. 3,000 3,040
National Australia Bank Ltd., 8.600% 5/19/10...... 2,250 2,354
Sovereign Bancorp, Inc., 10.500% 11/15/06......... 1,500 1,488
Swiss Bank Corp., 7.375% 7/15/15.................. 4,000 3,834
The Bank of Tokyo-Mitsubishi, Ltd.,
8.400% 4/15/10................................. 3,500 3,539
The Export-Import Bank of Korea, 6.375% 2/15/06... 3,000 2,732
--------
33,376
FINANCIAL SERVICES - 6.6%
ACE Capital Trust II, 9.700% 4/1/30............... 5,000 5,185
Labranche & Co., 12.000% 3/1/07 (a)............... 2,000 1,985
Orion Power Holdings, Inc., 12.000% 5/1/10 (a).... 1,000 1,050
Registered Diversified Funding, 9.250% 3/15/30 (a) 4,250 3,999
TP SA Finance BV, 7.750% 12/10/08 (a)............. 3,000 2,836
--------
15,055
HOLDING & OTHER INVEST OFFICE - 9.3%
American Health Properties, Inc., 7.050% 1/15/02.. 3,000 2,858
Carramerica Realty Corp., 7.200% 7/1/04........... 3,000 2,853
First Industrial, L.P., 7.600% 7/15/28............ 1,250 1,038
HSBC Holdings plc, 9.547% 12/31/49 (a)............ 2,500 2,592
Meditrust Cos., 7.375% 7/15/00.................... 2,000 2,000
SUSA Partnership, L.P., 7.125% 11/1/03............ 3,000 2,877
The Prudential Property Separate Account,
6.625% 4/1/09(a)............................... 3,000 2,714
TriNet Corporate Realty Trust, Inc.,
7.300% 5/15/01................................. 4,500 4,358
--------
21,290
INSURANCE CARRIERS - 2.5%
Florida Windstorm Underwriting Assoc.,
7.125% 2/25/19 (a)............................. 2,000 1,805
The Prudential Property Separate Account,
7.125% 7/1/07 (a).............................. 4,000 3,777
--------
5,582
NONDEPOSITORY CREDIT INSTITUTIONS - 0.9%
KBC Bank Fund Trust III, 9.860% 11/29/49 (a)...... 2,000 2,041
--------
REAL ESTATE - 0.8%
Property Trust of America, 6.875% 2/15/08......... 2,000 1,871
--------
SECURITY BROKERS & DEALERS - 1.2%
Broad Index Secured Trust Offering,
Series 1997 1A, Class B,
9.500% 12/31/02 (a)............................ 3,000 2,829
--------
22
<PAGE>
SR&F Income Portfolio Continued
--------------------------------------------------------------------------------
Par Value
--------------------------------------------------------------------------------
MANUFACTURING - 10.4%
CHEMICALS & ALLIED PRODUCTS - 2.2%
Eastman Chemical Co., 7.625% 6/15/24.............. $ 3,000 $ 2,898
Lyondell Chemical Co., 9.750% 9/4/03 (a).......... 2,000 2,022
--------
4,920
ELECTRONIC & ELECTRICAL EQUIPMENT - 1.8%
Citizens Utilities Co., 7.000% 11/1/25............ 3,000 2,535
L-3 Communications Corp. 10.375% 5/1/07........... 1,500 1,523
--------
4,058
FOOD & KINDRED PRODUCTS - 2.3%
Coca-Cola Bottling Co. Consolidated,
Series A, 8.560% 2/26/02....................... 2,000 2,031
Panamerican Beverages, Inc., 7.250% 7/1/09........ 2,000 1,729
Pepsi-Gemex SA, 9.750% 3/30/04.................... 1,500 1,485
--------
5,245
MACHINERY & COMPUTER EQUIPMENT - 1.6%
Cincinnati Milacron, Inc., 8.375% 3/15/04......... 2,000 1,964
Deere & Co., 8.100% 5/15/30....................... 1,750 1,770
--------
3,734
MISCELLANEOUS MANUFACTURING - 0.8%
PDVSA Finance Ltd., Series 1-A, 7.400% 8/15/16.... 2,500 1,908
--------
TOBACCO PRODUCTS - 1.3%
U.S. Tobacco 8.800% 3/15/05....................... 3,000 2,902
--------
TRANSPORTATION EQUIPMENT - 0.4%
Derlan Manufacturing, Inc., 10.000% 1/15/07....... 1,019 968
--------
MINING & ENERGY - 7.3%
METAL MINING - 1.0%
PT Alatief Freeport Financial Corp.,
9.750% 4/15/01................................. 2,500 2,313
--------
OIL & GAS EXTRACTION - 5.2%
Husky Oil Ltd., 8.900% 8/15/28.................... 3,000 2,862
Noble Drilling Corp., 7.500% 3/15/19.............. 3,500 3,319
YPF Sociedad Anonima, 7.500% 10/26/02............. 2,719 2,697
Yosemite Securities Trust I, 8.250% 11/15/04 (a).. 3,000 2,979
--------
11,857
OIL & GAS FIELD SERVICES - 1.1%
Tosco Corp., 8.125% 2/15/30....................... 2,400 2,420
--------
RETAIL - 1.4%
GENERAL MERCHANDISE STORES - 1.4%
Buhrmann US, Inc., 12.250% 11/1/09................ 3,000 3,120
--------
SERVICES - 10.2%
AMUSEMENT &RECREATION SERVICES - 0.3%
Premier Parks, Inc., 9.750% 1/15/07............... 750 750
--------
BUSINESS SERVICES - 1.7%
ARA Service Group, 10.625% 8/1/00................. 800 800
DynCorp., Inc., 9.500% 3/1/07..................... 1,000 800
Iron Mountain, Inc., 10.125% 10/1/06.............. 2,000 2,005
NationsRent, Inc., 10.375% 12/15/08............... 500 320
--------
3,925
HEALTH SERVICES - 1.2%
Universal Health Services, Inc., 8.750% 8/15/05... 2,800 2,779
--------
23
<PAGE>
SR&F Income Portfolio Continued
--------------------------------------------------------------------------------
Par Value
--------------------------------------------------------------------------------
SERVICES - CONT.
HOTELS, CAMPS & LODGING - 5.7%
Hyatt Equities LLC, 7.000% 5/15/02 (a)............ $ 5,000 $ 4,869
Marriott International, Inc., 6.875% 11/15/05..... 5,000 4,716
Prime Hospitality Corp., 9.750% 4/1/07............ 3,500 3,395
--------
12,980
OTHER SERVICES - 1.3%
ERAC USA Finance Co., 8.250% 5/1/05 (a)........... 3,000 3,023
--------
TRANSPORTATION,COMMUNICATION,ELECTRIC,
GAS & SANITARY SERVICES - 20.2%
AIR TRANSPORTATION - 2.7%
Air 2 US, 8.027% 10/1/19 (a)...................... 2,750 2,757
American Airlines, Inc., Pass Through Certificates,
Series 91-A,
9.710% 1/2/07.................................. 2,381 2,539
Continental Airlines, Inc., Pass Through
Certificates, Series 97-CI,
7.420% 4/1/07.................................. 940 907
--------
6,203
CABLE - 3.1%
CSC Holdings Inc., 7.875% 2/15/18................. 3,750 3,442
Continental Cablevision, Inc., 8.875% 9/15/05..... 3,500 3,682
--------
7,124
COMMUNICATIONS - 1.7%
Century Communications Corp., 9.750% 2/15/02...... 1,850 1,840
PDVSA Finance Ltd., Series 1999 F, 8.750% 2/15/04. 2,000 1,962
--------
3,802
ELECTRIC , GAS & SANITARY SERVICES - 3.2%
Ametek, Inc., 7.200% 7/15/08 (a).................. 1,000 907
CMS Energy Corp., 8.375% 7/1/03................... 5,000 4,832
National Power Corp., 9.000% 7/5/02 (a)........... 1,500 1,485
--------
7,224
ELECTRIC SERVICES - 5.7%
AES Eastern Energy LP, 9.670% 1/2/29.............. 2,500 2,386
Endesa-Chile Overseas Co., 8.500% 4/1/09.......... 4,000 3,920
Israel Electric Corp., Ltd., 8.250% 10/15/09 (a).. 3,750 3,719
Texas Utilities Electric Co., 9.750% 5/1/21....... 2,000 2,062
The AES Corp., 8.375% 8/15/07..................... 1,000 913
--------
13,000
TELECOMMUNICATION - 3.4%
Frontier Corp., 7.250% 5/15/04.................... 5,000 4,616
Rogers Cantel, Inc., 9.375% 6/1/08................ 3,000 3,090
--------
7,706
TRANSPORTATION SERVICES - 0.4%
Stagecoach Holdings PLC, 8.625% 11/15/09.......... 1,200 1,022
--------
WHOLESALE TRADE - 2.1%
DURABLE GOODS - 1.1%
Building Materials Corp. of America,
Series B, 7.750% 7/15/05....................... 3,000 2,475
--------
NONDURABLE GOODS - 1.0%
Lilly Del Mar, Inc., 7.717% 8/1/29 (a)............ 2,250 2,212
--------
TOTAL CORPORATE BONDS
(Cost of $214,568)................................ 202,414
--------------------------------------------------------------------------------
24
<PAGE>
SR&F Income Portfolio Continued
--------------------------------------------------------------------------------
GOVERNMENT OBLIGATIONS - 6.5% Par Value
--------------------------------------------------------------------------------
GOVERNMENT BONDS - 6.5%
FOREIGN GOVERNMENT BONDS - 4.5%
Comtel Brasileira Ltd., 10.750% 9/26/04 (a)....... $ 2,000 $ 1,893
Republic of Panama, 7.875% 2/13/02 (a)............ 2,000 1,963
State of Qatar:
9.500% 5/21/09 (a)............................. 2,000 2,057
9.750% 6/15/30 (a)............................. 2,750 2,698
United Mexican States,
9.875% 2/1/10.................................. 1,500 1,565
--------
10,176
US GOVERNMENT BONDS - 2.0%
U. S. Treasury Note, 6.500% 2/15/10............... 4,500 4,654
--------
TOTAL GOVERNMENT OBLIGATIONS
(cost of $4,649).................................. 14,830
--------------------------------------------------------------------------------
ASSET BACKED OBLIGATIONS - 1.0%
--------------------------------------------------------------------------------
ASSET BACKED SECURITIES
Asset-Backed Securities Option One Mortgage Securities Corp.,
Series 1999-B, Class 2A, 9.660% 3/26/29 (a)....... 2,228 2,161
--------
TOTAL ASSET BACKED SECURITIES
(cost of $7,514).................................. 2,161
--------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 0.7% Par
--------------------------------------------------------------------------------
COMMERCIAL PAPER
Associated First Capital Corp. 6.950% 7/03/00
(cost $1,697)..................................... $ 1,700 1,700
--------------------------------------------------------------------------------
TOTAL INVESTMENTS
(cost of $228,695) (b)............................ 221,105
--------
OTHER ASSETS & LIABILITIES - 3.0%.................... 6,837
--------
NET ASSETS - 100.0% ................................. $227,942
========
--------------------------------------------------------------------------------
NOTES TO INVESTMENT PORTFOLIO:
--------------------------------------------------------------------------------
(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, 2000, the aggregate of
the Portfolio's private placement securities was $73,429 which represented
32.2% of net assets.
(b) At June 30, 2000, the cost of investments for financial reporting and
federal income tax purposes was $228,722.
See accompanying Notes to Financial Statements.
25
<PAGE>
SR&F High Yield Portfolio
--------------------------------------------------------------------------------
June 30, 2000, (All amounts in thousands)
CORPORATE FIXED INCOME BONDS & NOTES - 87.5% Par Value
--------------------------------------------------------------------------------
CONSTRUCTION - 1.5%
BUILDING CONSTRUCTION
Beazer Homes USA, Inc., 8.875% 4/1/08............. $ 1,000 $ 900
D.R. Horton, Inc., 8.000% 2/1/09 ................. 500 430
-------
1,330
FINANCE, INSURANCE & REAL ESTATE - 7.3%
DEPOSITORY INSTITUTIONS - 0.9%
Sovereign Bancorp, Inc., 10.500% 11/15/06......... 750 744
-------
FINANCIAL SERVICES - 5.0%
Finova Capital Corp., 7.250% 11/8/04.............. 1,000 875
Grupo Elektra SA, 12.000% 4/1/08 (a).............. 1,000 902
LaBranche & Co., Inc., 12.000% 3/1/07 (a)......... 1,500 1,489
Orion Power Holdings, Inc., 12.000% 5/1/10 (a).... 1,000 1,050
-------
4,316
NONDEPOSITORY CREDIT INSTITUTIONS - 0.8%
Mego Mortgage Home Loan Trust, Series 1997-3,
Class CTFS,
8.010% 8/25/23................................. 1,000 690
-------
REAL ESTATE - 0.6%
Lennar Corp., 9.950% 5/1/10....................... 500 490
-------
MANUFACTURING - 21.5%
CHEMICALS & ALLIED PRODUCTS - 3.2%
Allied Waste North America, Inc., 10.000% 8/1/09.. 1,000 835
Bio-Rad Laboratories, Inc., 11.625% 2/15/07 (a)... 1,000 1,030
Cia Petrolifera Marlim, 13.125% 12/17/04 (a)...... 900 929
-------
2,794
ELECTRONIC & ELECTRICAL EQUIPMENT - 0.9%
Flextronics International Ltd., 9.875% 7/1/10 (a). 750 759
-------
FOOD & KINDRED PRODUCTS - 1.1%
Pepsi-Gemex S.A., 9.750% 3/30/04.................. 1,000 990
-------
FURNITURE & FIXTURES - 1.1%
Sleepmaster LLC, 11.000% 5/15/09.................. 1,000 940
-------
MACHINERY & COMPUTER EQUIPMENT - 1.4%
Axia, Inc., 10.750% 7/15/08....................... 1,500 1,170
-------
MEASURING & ANALYZING INSTRUMENTS - 1.8%
Lifepoint Hospitals, Inc., 10.750% 5/15/09........ 1,500 1,541
-------
MISCELLANEOUS MANUFACTURING - 2.4%
Chippac International Co. Ltd., 12.750% 8/1/09.... 1,000 1,085
Station Casinos, 9.875% 7/1/10 (a)................ 1,000 1,005
-------
2,090
PAPER PRODUCTS - 0.3%
Indah Kiat Finance Mauritius, 10.000% 7/1/07...... 500 302
-------
PRINTING & PUBLISHING - 2.1%
Perry-Judd's, Inc., 10.625% 12/15/07.............. 1,000 840
World Color Press, Inc., 8.375% 11/15/08.......... 1,000 955
-------
1,795
RUBBER & PLASTIC - 3.4%
Callahan Nordrhein, 14.000% 7/15/10 (a)........... 1,500 1,504
Metromedia Fiber Network, Inc., 10.000% 12/15/09.. 1,500 1,470
-------
2,974
26
<PAGE>
SR&F High Yield Portfolio Continued
--------------------------------------------------------------------------------
Par Value
--------------------------------------------------------------------------------
MANUFACTURING - CONT.
TRANSPORTATION EQUIPMENT - 3.8%
BE Aerospace, Inc.,
8.000% 3/1/08 ................................. $ 1,000 $ 845
9.500% 11/1/08................................. 750 686
Derlan Manufacturing, Inc., 10.000% 1/15/07....... 583 554
Fairchild Corp., 10.750% 4/15/09.................. 1,000 670
Westinghouse Air Brake Co., 9.375% 6/15/05........ 600 579
-------
3,334
MINING & ENERGY - 3.0%
COAL MINING - 0.2%
AEI Resources, Inc., 11.500% 12/15/06 (a)......... 1,500 150
-------
OIL & GAS EXTRACTION - 1.3%
Key Energy Services, Inc., 14.000% 1/15/09........ 1,000 1,125
-------
OIL & GAS FIELD SERVICES - 1.5%
Lomak Petroleum, Inc., 8.750% 1/15/07............. 1,500 1,290
-------
RETAIL TRADE - 6.9%
APPAREL & ACCESSORY STORES - 1.1%
William Carter Co., 10.375% 12/1/06............... 1,000 950
-------
FOOD STORES - 2.6%
Marsh Supermarkets, Inc., 8.875% 8/1/07........... 1,000 935
Stater Bros. Holdings, Inc., 10.750% 8/15/06...... 1,500 1,320
-------
2,255
GENERAL MERCHANDISE STORES - 1.8%
Buhrmann US, Inc., 12.250% 11/1/09................ 1,500 1,560
-------
RESTAURANTS - 1.4%
AFC Enterprises, Inc., 10.250% 5/15/07............ 1,250 1,194
-------
SERVICES - 15.1%
AMUSEMENT & RECREATION - 6.1%
Boyd Gaming Corp., 9.500% 7/15/07................. 750 718
Horseshoe Gaming Holding Corp., 8.625% 5/15/09.... 1,000 930
Mohegan Tribal Gaming Authority, 8.750% 1/1/09.... 1,000 950
Park Place Entertainment, 9.375% 2/15/07.......... 1,000 1,002
Premier Parks, Inc.;
9.250% 4/1/06.................................. 250 237
9.750% 1/15/07................................. 250 250
(b) 4/1/08..................................... 1,750 1,194
-------
5,281
BUSINESS SERVICES - 3.1%
NationsRent, Inc., 10.375% 12/15/08............... 500 320
PSINet, Inc., 10.000% 2/15/05..................... 1,000 925
Penhall Acquisition Corp., 12.000% 8/1/06......... 1,500 1,440
-------
2,685
HEALTH SERVICES - 4.2%
Express Scripts, Inc., 9.625% 6/15/09............. 500 487
InSight Health Services Corp., 9.625% 6/15/08..... 1,250 1,119
Tenet Healthcare Corp., 9.250% 9/1/10 (a)......... 1,000 1,008
Triad Hospitals Holdings, Inc., 11.000% 5/15/09... 1,000 1,025
-------
3,639
27
<PAGE>
SR&F High Yield Portfolio Continued
--------------------------------------------------------------------------------
Par Value
--------------------------------------------------------------------------------
SERVICES - CONT.
HOTELS, CAMPS & LODGING - 1.7%
Prime Hospitality Corp., 9.750% 4/1/07............ $ 1,490 $ 1,445
-------
TRANSPORTATION, COMMUNICATION, ELECTRIC, GAS &
SANITARY SERVICES - 32.2%
AIR TRANSPORTATION - 1.1%
Atlas Air, Inc., 9.375% 11/15/06.................. 1,000 970
-------
BROADCASTING - 1.2%
Knology Holdings, Inc., (b) 10/15/07.............. 2,000 1,080
-------
CABLE - 1.2%
Charter Communications Holding LLC:
10.000% 4/1/09.................................... 500 485
(b) 4/1/11........................................ 1,000 568
-------
1,053
COMMUNICATIONS - 11.2%
BTI Telecom Corp., 10.500% 9/15/07................ 1,000 763
Concentric Network Corp., 12.750% 12/15/07........ 1,500 1,579
Exodus Communications, 11.625% 7/15/10 (a)........ 1,000 1,005
Focal Communications Corp., 11.875% 1/15/10 (a)... 1,000 995
Holt Group, Inc., 9.750% 1/15/06.................. 1,000 100
ICG Services, Inc., (b) 5/1/08.................... 2,250 1,195
Intermedia Communications, Inc., (b) 3/1/09....... 1,500 885
MGC Communications, Inc., 13.000% 4/1/10.......... 845 794
Nextlink Communications, Inc., (b) 6/1/09......... 1,000 620
Tele1 Europe BV, 13.000% 5/15/09.................. 1,000 1,005
Viatel, Inc., 11.250% 4/15/08..................... 1,000 750
-------
9,691
TELECOMMUNICATION - 15.8%
Allegiance Telecom, Inc., (b) 2/15/08............. 1,500 1,095
Comtel Brasileira Ltd., 10.750% 9/26/04 (a)....... 250 237
Crown Castle International Corp., 10.750% 8/1/11.. 750 761
Carrier One International SA, 13.250% 2/15/09..... 1,000 985
Covad Communications Group, Inc., 12.000% 2/15/10. 1,000 840
GT Group Telecom, Inc., (b) 2/1/10 (a)............ 1,750 963
Global Crossing Ltd., 9.125% 11/15/06............. 1,000 963
GlobeNet Communications Group Ltd.,
13.000% 7/15/07................................ 1,500 1,523
Level 3 Communications, Inc.,
(b) 12/1/08 (a)................................ 1,000 600
11.000% 3/15/08 (a)............................ 1,000 990
MetroNet Communications Corp.,
12.000% 8/15/07................................ 1,000 1,133
(b) 6/15/08.................................... 1,000 795
Primus Telecommunications Group, Inc.,
12.750% 10/15/09............................... 1,000 800
Rhythms NetConnections, Inc., 12.750% 4/15/09..... 1,500 1,050
Versatel Telecom International BV,
11.875% 7/15/09................................ 1,000 970
-------
13,705
TRANSPORTATION SERVICES - 1.7%
RailWorks Corp., 11.500% 4/15/09.................. 1,500 1,440
-------
TOTAL CORPORATE FIXED INCOME BONDS & NOTES
(cost of $83,091)................................. 75,772
-------
--------------------------------------------------------------------------------
28
<PAGE>
SR&F High Yield Portfolio Continued
--------------------------------------------------------------------------------
COMMON STOCKS - 1.0% Shares Value
--------------------------------------------------------------------------------
MANUFACTURING - 0.7%
Communications Equipment RCN Corp................. 23 $ 581
-------
TRANSPORTATION, COMMUNICATION, ELECTRIC, GAS &
SANITARY SERVICES - 0.4%
Communications Tele1 Europe Holding AB ADR........ 18 212
Viatel, Inc....................................... 4 115
-------
327
-------
TOTAL COMMON STOCKS
(cost of $642).................................... 908
-------
--------------------------------------------------------------------------------
WARRANTS - 1.8%
--------------------------------------------------------------------------------
INTERNET SERVICES - 0.5%
Concentric Network 12/15/07 ...................... 1 470
-------
OIL & GAS - 0.1%
Key Energy Services 01/15/09...................... 2 90
-------
TELECOMMUNICATIONS - 0.5%
MetroNet Communications Corp., 08/15/07 (a)....... 1 90
MGC Communications 10/01/04....................... 1 300
-------
390
TELEPHONE - 0.7%
Allegiance Telecom, Inc. 02/03/08................. 2 255
Carrier One International 02/15/09................ 1 330
Knology Holdings, Inc. 10/15/07................... 2 9
-------
594
-------
TOTAL WARRANTS
(cost of $20)..................................... 1,544
-------
--------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 12.7% Par
--------------------------------------------------------------------------------
COMMERCIAL PAPER
Associates First Capital, 6.950% (c) 7/3/00....... $ 4,000 3,998
Eaton Corp., 7.050% (c) 7/5/00.................... 2,975 2,973
Target Corp., 7.100% (c) 7/5/00................... 4,000 3,996
-------
TOTAL SHORT-TERM OBLIGATIONS
(cost of 10,967).................................. 10,967
-------
--------------------------------------------------------------------------------
TOTAL INVESTMENTS
(cost of $94,720) (d)............................. 89,191
OTHER ASSETS, LESS LIABILITIES - (3.0)%.............. (2,600)
-------
NET ASSETS - 100.0%.................................. $86,591
=======
--------------------------------------------------------------------------------
NOTES TO INVESTMENT PORTFOLIO:
--------------------------------------------------------------------------------
(a) Represents private placement securities issued under Rule 144A, which are
exempt from the registration of the Securities Act of 1933. These
securities are generally issued to qualified institutional buyers, such as
the Portfolio, and any resale by the Portfolio must be an exempt
transaction, normally to other qualified institutional investors. At June
30, 2000, the aggregate amortized cost of the Portfolio's private placement
securities was $14,706 which represented 17.0% of net assets.
(b) Zero coupon bond.
(c) Rate represents yield at time of purchase.
(d) At June 30, 2000, the cost of investments for federal tax purposes is
$94,722.
29
<PAGE>
Statements of Assets and Liabilities
--------------------------------------------------------------------------------
June 30, 2000
(All amounts in thousands)
SR&F
INTERMEDIATE SR&F SR&F
BOND INCOME HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
------------- --------- ----------
ASSETS
Investments, at market value (cost of $414,474,
$228,695 and $94,720 respectively)......... $405,313 $221,105 $ 89,191
Receivable for investments sold............... 36,347 11,272 1,001
Interest receivable........................... 6,002 5,057 948
Receivable for variation margin on futures.... 26 -- --
Cash.......................................... 1 3 2
Other......................................... 98 3 --
--------- --------- --------
Total assets............................... 447,787 237,440 91,142
--------- --------- --------
LIABILITIES
Payable for investments purchased............. 35,643 9,248 4,496
Accrued:
Management fee........................... 118 46 31
Bookkeeping fee.......................... 3 2 1
Transfer agent fee ...................... 1 1 1
Other......................................... 507 201 22
--------- --------- --------
Total liabilities ......................... 36,272 9,498 4,551
--------- --------- --------
Net assets applicable to investors'
beneficial interest..................... $411,515 $227,942 $ 86,591
======== ======== ========
See accompanying Notes to Financial Statements.
30
<PAGE>
Statements of Operations
--------------------------------------------------------------------------------
For the Year Ended June 30, 2000
(All amounts in thousands)
SR&F
INTERMEDIATE SR&F SR&F
BOND INCOME HIGH YIELD
PORTFOLIO PORTFOLIO PORTFOLIO
------------- --------- -----------
INVESTMENT INCOME
Interest income.......................... $32,415 $21,183 $ 9,822
Dividend income.......................... 155 117 57
-------- -------- --------
Total income.......................... 32,570 21,300 9,879
EXPENSES
Management fees ......................... 1,451 1,225 424
Transfer agent fees...................... 6 6 6
Bookkeeping fees ........................ 34 30 25
Trustees' fees .......................... 17 16 14
Custodian fees .......................... 8 12 1
Audit fees .............................. 16 16 17
Legal fees............................... 2 4 1
Other.................................... 24 14 8
-------- -------- --------
Total expenses........................ 1,558 1,323 496
-------- -------- --------
Net investment income................. 31,012 19,977 9,383
-------- -------- --------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES TRANSACTIONS
Net realized loss on investments......... (10,966) (8,592) (5,197)
Net realized loss on futures
transactions........................ (479) -- --
Net change in unrealized
appreciation/depreciation on
investments and futures
transactions........................ 472 1,135 (3,682)
-------- -------- --------
Net loss on investments and
futures transactions................ (10,973) (7,457) (8,879)
-------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............. $20,039 $12,520 $ 504
======== ======== ========
See accompanying Notes to Financial Statements.
31
<PAGE>
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
(All amounts in thousands)
<TABLE>
<CAPTION>
SR&F SR&F SR&F
INTERMEDIATE INCOME HIGH YIELD
BOND PORTFOLIO PORTFOLIO PORTFOLIO
----------------------- ----------------------- ----------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income...................... $ 31,012 $ 29,891 $ 19,977 $ 26,822 $ 9,383 $ 7,208
Net realized gain (loss) on
investments and futures transactions.. (11,445) 147 (8,592) (9,978) (5,197) (632)
Net change in unrealized appreciation/
depreciation on investments
and futures transactions.............. 472 (17,001) 1,135 (14,331) (3,682) (2,238)
--------- --------- --------- --------- -------- --------
Net increase in net assets
resulting from operations............. 20,039 13,037 12,520 2,513 504 4,338
--------- --------- --------- --------- -------- --------
TRANSACTIONS IN INVESTORS'
BENEFICIAL INTEREST
Contributions.............................. 267,691 97,305 73,665 13,011 64,109 51,100
Withdrawals................................ (309,774) (116,948) (154,954) (167,955) (66,345) (45,602)
--------- --------- --------- --------- -------- --------
Net increase (decrease) from
transactions in investors'
beneficial interest................... (42,083) (19,643) (81,289) (154,944) (2,236) 5,498
--------- --------- --------- --------- -------- --------
Net increase (decrease)
in net assets......................... (22,044) (6,606) (68,769) (152,431) (1,732) 9,836
NET ASSETS
Beginning of period........................ 433,559 440,165 296,711 449,142 88,323 78,487
--------- --------- --------- --------- -------- --------
End of period.............................. $411,515 $433,559 $227,942 $296,711 $86,591 $88,323
========= ========= ========= ========= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
32-33 [SPREAD]
<PAGE>
Statements of Assets and Liabilities
--------------------------------------------------------------------------------
June 30, 2000
(All amounts in thousands, except per-share data)
<TABLE>
<CAPTION>
STEIN ROE
INTERMEDIATE STEIN ROE STEIN ROE
BOND INCOME HIGH YIELD
FUND FUND FUND
----------- ----------- -----------
ASSETS
<S> <C> <C> <C>
Investment in Portfolio, at value......................................... $411,409 $227,861 $35,372
Receivable for fund shares sold........................................... 580 57 15
Expense reimbursement due from Advisor.................................... 3 -- 32
Other..................................................................... 46 91 1
--------- -------- --------
Total assets........................................................... 412,038 228,009 35,420
--------- -------- --------
LIABILITIES
Payable for fund shares repurchased....................................... 4,689 246 5
Dividends payable......................................................... 961 568 89
Accrued:
Administration fee..................................................... 48 25 4
Bookkeeping fee........................................................ 3 3 --
Transfer agent fee..................................................... 45 46 3
Other..................................................................... 76 31 20
--------- --------- --------
Total liabilities...................................................... 5,822 919 121
--------- --------- --------
Net Assets............................................................. $406,216 $227,090 $35,299
======== ======== =======
ANALYSIS OF NET ASSETS
Paid-in capital........................................................... $435,361 $254,010 $39,922
Undistributed (overdistributed) net investment income..................... (109) 34 (68)
Accumulated net realized loss on investments and futures transactions..... (19,590) (19,393) (2,678)
Net unrealized depreciation on investments and futures transactions....... (9,446) (7,561) (1,877)
--------- --------- --------
Net Assets............................................................. $406,216 $227,090 $35,299
======== ======== =======
Shares outstanding (unlimited number authorized).......................... 48,291 24,819 3,898
======== ======== =======
Net asset value per share................................................. $ 8.41 $ 9.15 $ 9.05
======== ======== =======
</TABLE>
34-35 [SPREAD]
<PAGE>
Statements of Operations
--------------------------------------------------------------------------------
For the Year Ended June 30, 2000
(All amounts in thousands)
<TABLE>
<CAPTION>
STEIN ROE
INTERMEDIATE STEIN ROE STEIN ROE
BOND INCOME HIGH YIELD
FUND FUND FUND
----------- ----------- -----------
INVESTMENT INCOME
<S> <C> <C> <C>
Interest income allocated from Portfolio.......................... $32,374 $21,178 $3,498
Dividend income allocated from Portfolio.......................... 155 117 45
-------- -------- -------
Total investment income........................................ 32,529 21,295 3,543
-------- -------- -------
EXPENSES
Expenses allocated from Portfolio................................. 1,556 1,322 177
Administrative fees............................................... 619 340 46
Bookkeeping fees.................................................. 34 31 25
Transfer agent fees............................................... 601 380 48
Trustees' fees.................................................... 5 5 8
Custodian fees.................................................... 1 1 1
Legal fees........................................................ 4 2 --
Audit fees........................................................ 10 9 10
Registration fees................................................. 13 18 23
Reports to shareholders........................................... 54 38 16
Other............................................................. 78 35 9
-------- -------- -------
Total expenses................................................. 2,975 2,181 363
Reimbursement of expenses by investment Advisor................... -- -- (57)
-------- -------- -------
Net expenses................................................... 2,975 2,181 306
-------- -------- -------
Net investment income.......................................... 29,554 19,114 3,237
-------- -------- -------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FUTURES TRANSACTIONS ALLOCATED FROM PORTFOLIO
Net realized loss on investments and futures transactions......... (11,381) (8,590) (1,919)
Net change in unrealized appreciation/depreciation
on investments and futures transactions...................... 442 1,162 (1,147)
-------- -------- -------
Net loss....................................................... (10,939) (7,428) (3,066)
-------- -------- -------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS.............. $18,615 $11,686 $ 171
========== ========== =========
</TABLE>
See accompanying Notes to Financial Statements.
36-37 [SPREAD]
<PAGE>
Statements of Changes in Net Assets
--------------------------------------------------------------------------------
(All amounts in thousands)
<TABLE>
<CAPTION>
STEIN ROE INTERMEDIATE STEIN ROE HIGH YIELD
BOND FUND STEIN ROE INCOME FUND FUND
----------------------- ----------------------- ---------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 2000 1999 2000 1999
--------- --------- --------- --------- --------- ---------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C>
Net investment income....................... $ 29,554 $ 28,145 $ 19,114 $ 25,601 $ 3,237 $ 3,120
Net realized gain (loss) on
investments and
futures transactions................... (11,381) 178 (8,590) (9,974) (1,919) (759)
Net change in unrealized
appreciation/depreciation
on investments and futures
transactions........................... 442 (16,916) 1,162 (14,328) (1,147) (869)
--------- --------- --------- --------- -------- --------
Net increase in net assets
resulting from operations.............. 18,615 11,407 11,686 1,299 171 1,492
--------- --------- --------- --------- -------- --------
DISTRIBUTIONS TO SHAREHOLDERS
Distributions from net investment income.... (29,305) (28,795) (19,158) (25,599) (3,294) (3,133)
Distributions from net capital gains........ -- -- -- -- -- (1,156)
--------- --------- --------- --------- -------- --------
Total distributions to shareholders...... (29,305) (28,795) (19,158) (25,599) (3,294) (4,289)
--------- --------- --------- --------- -------- --------
SHARE TRANSACTIONS
Subscriptions to fund shares................ 404,674 218,839 100,059 67,976 76,680 53,537
Value of distributions reinvested........... 25,111 21,841 16,333 22,401 2,714 3,686
Redemptions of fund shares.................. (444,002) (229,625) (176,470) (219,840) (73,738) (63,131)
--------- --------- --------- --------- -------- --------
Net increase (decrease)
from share transactions................ (14,217) 11,055 (60,078) (129,463) 5,656 (5,908)
--------- --------- --------- --------- -------- --------
Net increase (decrease)
in net assets.......................... (24,907) (6,333) (67,550) (153,763) 2,533 (8,705)
NET ASSETS
Beginning of period......................... 431,123 437,456 294,640 448,403 32,766 41,471
--------- --------- --------- --------- -------- --------
End of period............................... $406,216 $431,123 $227,090 $294,640 $35,299 $32,766
========= ========= ========= ========= ======== ========
Undistributed (overdistributed)
net investment income.................. $ (109) $ (292) $ 34 $ 51 $ (68) $ (11)
========= ========= ========= ========= ======== ========
ANALYSIS OF CHANGES IN SHARES
OF BENEFICIAL INTEREST
Subscriptions to fund shares................ 47,825 24,753 10,851 6,948 7,931 5,211
Issued in reinvestment of distributions..... 2,968 2,470 1,774 2,304 282 362
Redemptions of fund shares.................. (52,476) (26,004) (19,126) (22,635) (7,543) (6,117)
--------- --------- --------- --------- -------- --------
Net increase (decrease) in fund shares... (1,683) 1,219 (6,501) (13,383) 670 (544)
Shares outstanding at beginning of period... 49,974 48,755 31,320 44,703 3,228 3,772
--------- --------- --------- --------- -------- --------
Shares outstanding at end of period......... 48,291 49,974 24,819 31,320 3,898 3,228
========= ========= ========= ========= ======== ========
</TABLE>
See accompanying Notes to Financial Statements.
38-39 [SPREAD]
<PAGE>
Notes to Financial Statements
--------------------------------------------------------------------------------
(All amounts in thousands) (Audited)
Note 1. Organization
Stein Roe Intermediate Bond Fund, Stein Roe Income Fund and Stein Roe High Yield
Fund are series of Liberty-Stein Roe Income Trust (the "Trust"), formerly Stein
Roe Income Trust, an open-end management investment company organized as a
Massachusetts business trust. Stein Roe Intermediate Bond Fund, Stein Roe Income
Fund and Stein Roe 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 Stein Roe High Yield Fund. SR&F Intermediate Bond Portfolio and
SR&F Income Portfolio commenced operations on February 2, 1998. At commencement,
Stein Roe Intermediate Bond Fund and Stein Roe 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. On 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 methods
approved by the Internal Revenue Service. At June 30, 2000, Stein Roe
Intermediate Bond Fund and Stein Roe Advisor Intermediate Bond Fund owned 99.9%
and less than 0.1%, respectively, of SR&F Intermediate Bond Portfolio; Income
Fund owned 100.0% of SR&F Income Portfolio; and Stein Roe High Yield Fund Fund
and Stein Roe Institutional Client High Yield Fund owned 40.8% and 59.2%,
respectively, of SR&F High Yield Portfolio.
--------------------------------------------------------------------------------
Note 2. Significant Accounting Policies
The following summarizes the significant accounting policies of the Funds and
the 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.
40
<PAGE>
Notes to Financial Statements Continued
--------------------------------------------------------------------------------
Investment Transactions and Investment Income
Investment transactions are accounted for on trade date. Dividend income is
recorded on the ex-dividend date and 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 the Portfolios had when-issued or delayed delivery purchase commitments
as of June 30, 2000.
Security Valuations
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
Advisor, 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, 2000, 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/Portfolio deposits cash or
securities with its custodian cash or securities in an amount sufficient to meet
the initial margin requirement. Subsequent payments are made or received by the
Fund/Portfolio equal to the daily change in the contract value and are recorded
as variation margin payable or receivable and offset in unrealized gains or
losses. The Fund/Portfolio recognizes a realized gain or loss when the contract
is closed or expires. See SR&F Intermediate Bond Portfolio's Investment
Portfolio
41
<PAGE>
Notes to Financial Statements Continued
--------------------------------------------------------------------------------
for a summary of open futures contracts at June 30, 2000. No other 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 methods approved by the Internal Revenue Service.
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, 2000, the Funds had capital loss carryforwards as follows:
Year of
Fund Amount Expiration
Stein Roe Intermediate
Bond Fund $ 9,061 2003-2008
Stein Roe Income Fund 12,446 2002-2008
High Yield Fund 1,497 2007-2008
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
SR&F Intermediate Bond Portfolio invests primarily in marketable debt securities
with an expected average life between three and ten years. SR&F Income Portfolio
invests principally in medium-quality debt securities. SR&F High Yield Portfolio
invests primarily in high yield, high-risk medium- and lower- quality debt
securities.
See each Portfolio's Investment Portfolio 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.
42
<PAGE>
Notes to Financial Statements Continued
--------------------------------------------------------------------------------
Note 4. Trustees' Fees and Transactions with Affiliates
Management & Administration Fee
The Funds and Portfolios pay monthly management and administrative fees,
computed and accrued daily, to Stein Roe & Farnham Incorporated (the "Advisor"),
an indirect, majority-owned subsidiary of Liberty Mutual Insurance Company, for
its services as investment advisor and manager.
The management fee for SR&F Intermediate Bond Portfolio is computed at an
annual rate of 0.35% of the average daily net assets. The management fee for
SR&F Income Portfolio is 0.50% of the first $100 million of average daily net
assets and 0.475% thereafter. The management fee for SR&F High Yield Portfolio
is 0.50% of the first $500 million of average daily net assets and 0.475%
thereafter.
The administrative fee for Stein Roe Intermediate Bond Fund is computed at an
annual rate of 0.15% of average daily net assets. The administrative fee for
Stein Roe Income Fund is 0.15% of the first $100 million of average daily net
assets and 0.125% thereafter. The administrative fee for the Stein Roe High
Yield Fund is 0.15% of the first $500 million of average daily net assets and
0.125% thereafter.
Bookkeeping Fee
The Advisor provides bookkeeping and pricing services to each Fund and Portfolio
for a monthly fee equal to $25 annually plus 0.0025% annually of each Fund's and
Portfolio's average daily net assets over $50 million.
Expense Limit
The Advisor has agreed to reimburse Stein Roe High Yield Fund to the extent that
annual expenses exceed 1.00% of average daily net assets. This commitment
expires on October 31, 2000, subject to earlier termination by the Advisor on 30
days notice.
Transfer Agent Fee
Transfer agent fees are paid to SteinRoe Services, Inc. (SSI) (the Transfer
Agent), 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 subtransfer agent for the Funds. The Transfer Agent
provides shareholder services for a monthly fee equal to 0.14% annually of each
Fund's average net assets and receives reimbursement for certain out-of-pocket
expenses.
43
<PAGE>
Notes to Financial Statements Continued
--------------------------------------------------------------------------------
Other
Certain officers and trustees of the Trusts are also officers of the Advisor. No
remuneration was paid to any other trustee or officer of the Trust who is
affiliated with the Advisor.
--------------------------------------------------------------------------------
Note 5. Line of Credit
The Trust, the Liberty-Stein Roe Municipals Trust (excluding the Stein Roe High
Yield Municipals Fund and Stein Roe Municipal Money Market Fund) and the SR&F
Base Trust (collectively, the "Trusts"), participate in unsecured line of credit
agreements provided by the custodian bank consisting of two components. The
committed line of credit entitles the Trusts to borrow from the custodian at any
time upon notice from the Trusts. The uncommitted line of credit permits the
Trusts to borrow from the custodian at the custodian's sole discretion. The
aggregate borrowings available to the Trusts for the committed and uncommitted
lines of credit are $200 million and $100 million, respectively. Borrowings may
be made to temporarily finance the repurchase of Fund shares. Interest is
charged to each Trust and, ultimately, each Fund based on its borrowings at a
rate equal to the Federal Funds Rate plus 5% per year. In addition, a commitment
fee of 0.10% per annum on each Fund's borrowings shall be paid quarterly by each
Fund based on the relative asset size of each Fund. For the year ended June 30,
2000, the Trusts had no borrowings under the agreement.
--------------------------------------------------------------------------------
Note 6. Investment Transactions
The aggregate cost of purchases and proceeds from sales of securities or
maturities, other than short-term obligations, for the year ended June 30, 2000,
were:
Purchases Sales
--------- ---------
SR&F Income Portfolio.............................. $1,305,355 $1,380,972
SR&F Intermediate Bond Portfolio................... 3,171,388 3,153,740
SR&F High Yield Portfolio.......................... 1,238,329 1,227,943
of which the following represents U.S. Government securities:
Purchases Sales
--------- ---------
SR&F Income Portfolio.............................. $190,547 $188,567
SR&F Intermediate Bond Portfolio................... 484,583 516,133
Unrealized appreciation (depreciation) at June 30, 2000 for federal income tax
purposes was:
SR&F SR&F
Intermediate SR&F High
Bond Income Yield
Portfolio Portfolio Portfolio
-------- ------- -------
Gross unrealized appreciation....... $ 2,742 $ 1,382 $ 3,742
Gross unrealized depreciation....... (12,293) (8,999) (9,273)
-------- ------- -------
Net unrealized depreciation....... $ (9,551) $(7,617) $(5,531)
======== ======= =======
44
<PAGE>
Financial Highlights
--------------------------------------------------------------------------------
SR&F Intermediate Bond Portfolio
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998(a)
---------- --------- ---------
SELECTED RATIOS
<S> <C> <C> <C>
Ratio of net expenses to average net assets ........ 0.38% 0.36% 0.39%(b)
Ratio of net investment income to average net assets 7.48% 6.41% 6.77%(b)
Portfolio turnover rate............................. 356% 253% 86%(c)
</TABLE>
(a) From commencement of operations on February 2, 1998.
(b) Annualized.
(c) Not annualized.
--------------------------------------------------------------------------------
SR&F Income Portfolio
<TABLE>
<CAPTION>
YEAR YEAR PERIOD
ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998(a)
---------- --------- ---------
SELECTED RATIOS
<S> <C> <C> <C>
Ratio of net expenses to average net assets ........ 0.52% 0.50% 0.51%(b)
Ratio of net investment income to average net assets 7.91% 7.17% 7.23%(b)
Portfolio turnover rate............................. 205% 203% 77%(c)
</TABLE>
(a) From commencement of operations on February 2, 1998.
(b) Annualized.
(c) Not annualized.
--------------------------------------------------------------------------------
SR&F High Yield Portfolio
<TABLE>
<CAPTION>
YEAR YEAR PERIOD PERIOD
ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2000 1999 1998(A) 1997(a)
---------- --------- --------- --------
SELECTED RATIOS
<S> <C> <C> <C> <C>
Ratio of net expenses to average net assets........ 0.59% 0.57% 0.65% 0.89%(b)
Ratio of net investment income to average net assets 11.06% 8.27% 8.13% 8.24%(b)
Portfolio turnover rate............................ 144% 296% 426% 168%(c)
</TABLE>
(a) From commencement of operations on November 1, 1996.
(b) Annualized.
(c) Not annualized.
45
<PAGE>
Financial Highlights Continued
--------------------------------------------------------------------------------
Stein Roe Intermediate Bond Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C>
BEGINNING OF PERIOD............. $ 8.63 $ 8.97 $ 8.74 $ 8.58 $ 8.67
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......... 0.60 0.56 0.58 0.60 0.59
Net realized and unrealized
gain (loss) on investments
and futures transactions ... (0.22) (0.33) 0.23 0.17 (0.10)
-------- -------- -------- -------- --------
Total from investment
operations................ 0.38 0.23 0.81 0.77 0.49
-------- -------- -------- -------- --------
DISTRIBUTIONS
Net investment income.......... (0.60) (0.57) (0.58) (0.61) (0.58)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD.... $ 8.41 $ 8.63 $ 8.97 $ 8.74 $ 8.58
========== ======== ======== ======== ========
Ratio of net expenses to
average net assets (a)....... 0.72% 0.72% 0.72% 0.73% 0.70%
Ratio of net investment income
to average net assets ....... 7.16% 6.31% 6.51 6.97%(b) 6.79%(b)
Portfolio turnover ................ -- -- 138%(c) 210% 202%
Total return ...................... 4.62% 2.60% 9.51% 9.31%(b) 5.76%(b)
Net assets, end of period (000's).. $406,216 $431,123 $437,456 $328,784 $298,112
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the Advisor, this ratio would have been 0.75% and 0.75%
and for the years ended June 30, 1997 and 1996, respectively.
(b) Computed giving effect to the Advisor's expense limitation undertaking.
(c) Prior to commencement of operations of the Portfolio.
46
<PAGE>
Financial Highlights Continued
--------------------------------------------------------------------------------
Stein Roe Income Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
NET ASSET VALUE,
<S> <C> <C> <C> <C> <C>
BEGINNING OF PERIOD............. $9.41 $10.03 $ 9.88 $ 9.63 $ 9.79
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.......... 0.70 0.67 0.69 0.70 0.71
Net realized and unrealized
gain (loss) on investments... (0.26) (0.62) 0.15 0.25 (0.16)
-------- -------- -------- -------- --------
Total from investment
operations................ 0.44 0.05 0.84 0.95 0.55
-------- -------- -------- -------- --------
DISTRIBUTIONS
Net investment income.......... (0.70) (0.67) (0.69) (0.70) (0.71)
-------- -------- -------- -------- --------
NET ASSET VALUE, END OF PERIOD.... $ 9.15 $ 9.41 $ 10.03 $ 9.88 $ 9.63
======== ======== ======== ======== ========
Ratio of net expenses to
average net assets (a)....... 0.86% 0.84% 0.83% 0.84% 0.82%
Ratio of net investment income
to average net assets........... 7.58% 6.91% 6.89% 7.26%(b) 7.26%(b)
Portfolio turnover................. -- -- 59%(c) 138% 135%
Total return....................... 4.92% 0.52% 8.72% 10.34%(b) 5.70%(b)
Net assets, end of period (000's).. $227,090 $294,640 $448,403 $375,272 $309,564
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the Advisor, this ratio would have been 0.85% and 0.88%
for the years ended June 30, 1997 and 1996 respectively.
(b) Computed giving effect to the Advisor's expense limitation undertaking.
(c) Prior to commencement of operations of the Portfolio.
47
<PAGE>
Financial Highlights Continued
--------------------------------------------------------------------------------
Stein Roe High Yield Fund
Selected per-share data (for a share outstanding throughout each period), ratios
and supplemental data.
<TABLE>
<CAPTION>
PERIOD
ENDED
YEARS ENDED JUNE 30, JUNE 30,
2000 1999 1998 1997(C)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $ 10.15 $ 11.00 $ 10.54 $ 10.00
------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................. 1.05 0.85 0.85 0.52
Net realized and unrealized gain (loss)
on investments ..................... (1.09) (0.53) 0.61 0.54
------- ------- ------- -------
Total from investment operations.... (0.04) 0.32 1.46 1.06
------- ------- ------- -------
DISTRIBUTIONS
Net investment income................. (1.06) (0.85) (0.85) (0.52)
Net realized gains.................... -- (0.32) (0.15) --
------- ------- ------- -------
Total distributions................. (1.06) (1.17) (1.00) (0.52)
------- ------- ------- -------
NET ASSET VALUE, END OF PERIOD........... $ 9.05 $ 10.15 $ 11.00 $ 10.54
======= ======= ======= =======
Ratio of net expenses to
average net assets (a).............. 1.00% 1.00% 1.00% 1.00%(d)
Ratio of net investment income to average
net assets (b)........................ 10.67% 8.23% 7.79% 8.05%(d)
Total return (b)......................... (0.48)% 3.50% 14.38% 10.88%(e)
Net assets, end of period (000's)........ $35,299 $32,766 $41,471 $13,482
</TABLE>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the Advisor, this ratio would have been 1.20%, 1.22% and
1.32% for the years ended June 30, 2000, 1999 and 1998, respectively, and
2.29% for the period ended June 30, 1997.
(b) Computed giving effect to the Advisor's expense limitation undertaking.
(c) From commencement of operations on November 1, 1996.
(d) Annualized.
(e) Not annualized.
48
<PAGE>
Report of Ernst & Young LLP,
Independent Auditors
--------------------------------------------------------------------------------
To the Shareholders, Holders of Investors' Beneficial Interests and Board of
Trustees of Liberty-Stein Roe Funds Income Trust and SR&F Base Trust
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe High Yield Fund
SR&F Intermediate Bond Portfolio
SR&F Income Portfolio
SR&F High 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
(three series of Liberty-Stein Roe Funds Income Trust, formerly, Stein Roe
Income Trust), and the accompanying statements of assets and liabilities,
including the portfolios of investments, of SR&F Intermediate Bond Portfolio,
SR&F Income Portfolio and SR&FHigh Yield Portfolio (three series of SR&F Base
Trust) as of June 30, 2000, and the related statements of operations for the
year then ended, the statements of changes in net assets for each of the two
years in the period then ended and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Trusts' management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and financial highlights. Our procedures included
confirmation of securities owned as of June 30, 2000, by correspondence with the
custodian and brokers or by other appropriate auditing procedures where replies
from brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of each
of the aforementioned series of Liberty-Stein Roe Funds
49
<PAGE>
Report of Ernst & Young LLP,
Independent Auditors Continued
--------------------------------------------------------------------------------
Income Trust and SR&F Base Trust at June 30, 2000, the results of their
operations, the changes in their net assets, and their financial highlights for
the periods indicated therein, in conformity with accounting principles
generally accepted in the United States.
/S/ERNST & YOUNG LLP
Boston, Massachusetts
August 18, 2000
50
<PAGE>
To Contact Us...
--------------------------------------------------------------------------------
By Phone 800-338-2550
You can discuss your investment questions with a Stein Roe account
representative by calling us toll free. We'll be happy to answer questions about
your current account, or to provide you with information about opening a Stein
Roe account, including Stein Roe Traditional, Roth and Education IRAs. We're
available Monday through Friday, from 8 a.m. to 8 p.m. ET, and Saturdays and
Sundays from 10 a.m. to 2 p.m. ET.
Stein Roe's Funds-on-Call(R)
24-Hour Service Line
Using a touch-tone phone, call our toll-free number, day or night, for your
current account balance, the latest Stein Roe Fund prices and yields and other
information. In addition, if you have a Personal Identification Number (PIN),
you may place orders for the following transactions 24 hours a day:
o Exchange shares between your Stein Roe accounts;
o Purchase fund shares by electronic transfer;
o Order additional account statements and money market fund checks;
o Redeem shares by check, wire or electronic transfer.
Retirement Plan Accounts
Call us for information about how we can assist you with your defined
contribution plan, including 401(k) plans. You can reach us toll free at
800-322-1130. For information on Traditional, Roth and Education IRA plans, call
us toll free at 800-338-2550.
By Mail or E-Mail
If you prefer to contact us by mail, please address all correspondence to:
P.O. Box 8900, Boston, MA 02205-8900. To contact us by email, send
correspondence directly to: [email protected] or visit us at
www.steinroe.com on the Internet.
Additional Reports
The Funds mail one shareholder report to each shareholder address. If you would
like more than one report, please call 800-338-2550 and additional reports will
be sent to you.
Must be preceded or
accompanied by a prospectus
51
<PAGE>
This page intentionally left blank.
52
<PAGE>
Liberty-Stein Roe Funds Income Trust
-------------------------------------------------------------------------------
Trustees
John A. Bacon, Jr.
Private Investor
William W. Boyd
Chairman and Director, Sterling Plumbing Group Inc.
Lindsay Cook
Executive Vice President, Liberty Financial Companies, Inc.
Douglas A. Hacker
Executive Vice President and Chief Financial Officer, United Airlines
Janet Langford Kelly
Executive Vice President, Secretary and General Counsel, Kellogg Company
Charles R. Nelson
Van Voorhis Professor of Political Economy, University of Washington
Thomas C. Theobald
Managing Director, William Blair Capital Partners
Officers
Stephen E. Gibson, President
William D. Andrews, Executive Vice President
Kevin M. Carome, Executive Vice President
Loren A. Hansen, Executive Vice President
Joseph Palombo, Executive Vice President
Nancy L. Conlin, Senior Vice President, Secretary
Pamela McGrath, Senior Vice President, Treasurer
Kevin Connaughton, Controller
Agents and Advisors
Stein Roe & Farnham Incorporated
Investment Advisor
State Street Bank and Trust Company
Custodian
Stein Roe Services, Inc.
Transfer Agent
Bell, Boyd & Lloyd, LLC
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
53
<PAGE>
THE STEIN ROE MUTUAL FUNDS
FIXED INCOME FUNDS
Cash Reserves Fund
Municipal Money Market Fund
Intermediate Municipals Fund
Managed Municipals Fund
High-Yield Municipals Fund
Intermediate Bond Fund
Income Fund
High Yield Fund
EQUITY FUNDS
Balanced Fund
Growth & Income Fund
Disciplined Stock Fund*
Growth Stock Fund
Growth Investor Fund
Young Investor Fund
Large Company Focus Fund
Midcap Growth Fund**
Capital Opportunities Fund
International Fund
Small Company Growth Fund
INTERNATIONAL FUNDS
Asia Pacific Fund
Small Cap Tiger Fund
* Formerly Special Fund
** Formerly Growth Opportunities Fund
Stein Roe Mutual Funds
P.O. Box 8900
Boston, MA 02205-8900
Financial Advisors call: 800-322-0593
Shareholders call: 800-338-2550
www.steinroe.com
Liberty Funds Distributor, Inc.
DIR-02/005C-0700(8/00) 00/1392
