<PAGE>
1933 Act Registration No. 33-02633
1940 Act File No. 811-4552
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 28 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 29 [X]
STEIN ROE INCOME TRUST
P. O. Box 804058, Chicago, Illinois 60680
Telephone Number: 1-800-338-2550
Jilaine Hummel Bauer Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd
& Secretary Three First National Plaza
Stein Roe Income Trust Suite 3200
One South Wacker Drive 70 W. Madison Street
Chicago, Illinois 60606 Chicago, Illinois 60602
(Agents for Service)
It is proposed that this filing will become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on July 1, 1996 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
Registrant has elected to register pursuant to Rule 24f-2 an
indefinite number of shares of beneficial interest of the
following series: Stein Roe Income Fund, Stein Roe Cash Reserves
Fund, Stein Roe Government Reserves Fund, Stein Roe Government
Income Fund, Stein Roe Intermediate Bond Fund, and Stein Roe
Limited Maturity Income Fund. The Rule 24f-2 Notice for the fiscal
year ended June 30, 1995 was filed on August 25, 1995.
Amending Parts A, B and C and filing exhibits.
<PAGE>
STEIN ROE INCOME TRUST
CROSS REFERENCE SHEET
ITEM
NO. CAPTION
- ----- -------
PART A (MONEY MARKET FUNDS PROSPECTUS
AND BOND FUNDS PROSPECTUS)
1 Front cover
2 Fee Table; Summary
3 (a) Financial Highlights
(b) Inapplicable
(c) [Money Market Funds] The Funds; [Bond Funds] Investment
Return
(d) [Money Market Funds] Inapplicable; [Bond Funds] Financial
Highlights
4 Organization and Description of Shares; The Funds; How the
Funds Invest; Restrictions on the Funds' Investments; Risks
and Investment Considerations; Summary--Investment Risks;
[Bond Funds] Portfolio Investments and Strategies
5 (a) Management of the Funds--Trustees and Investment Adviser
(b) Management of the Funds--Trustees and Investment Adviser,
Fees and Expenses
(c) [Money Market Funds] Inapplicable; [Bond Funds] Management
of the Funds--Portfolio Managers
(d) Inapplicable
(e) Management of the Funds--Transfer Agent
(f) Management of the Funds--Fees and Expenses; Financial
Highlights
(g) Inapplicable
5A Inapplicable
6 (a) Organization and Description of Shares; see statement of
additional information: General Information and History
(b) Inapplicable
(c) Organization and Description of Shares
(d) Organization and Description of Shares
(e) Summary
(f) Shareholder Services; Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) Inapplicable
7 How to Purchase Shares
(a) Management of the Funds--Distributor
(b) How to Purchase Shares--Purchase Price and Effective Date;
Net Asset Value
(c) Inapplicable
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
8 (a) How to Redeem Shares; Shareholder Services
(b) How to Purchase Shares--Purchases Through Third Parties
(c) How to Redeem Shares--General Redemption Policies
(d) How to Redeem Shares--General Redemption Policies
9 Inapplicable
PART A (DEFINED CONTRIBUTION PLAN PROSPECTUSES)
1 Front cover
2 Fee Table
3 (a) Financial Highlights
(b) Inapplicable
(c) [Cash Reserves and Government Reserves] The Funds;
[Government Income Fund, Intermediate Bond Fund, Income
Fund, and Limited Maturity Income Fund] Investment Return
(d) [Cash Reserves and Government Reserves] Inapplicable;
[Government Income Fund, Intermediate Bond Fund, Income
Fund, and Limited Maturity Income Fund] Financial
Highlights
4 Organization and Description of Shares; The Fund; How the
Fund Invests; Restrictions on the Fund's Investments; Risks
and Investment Considerations; [Limited Maturity Income
Fund, Government Income Fund, Intermediate Bond Fund, and
Income Fund] Portfolio Strategies and Investments
5 (a) Management of the Fund--Trustees and Investment Adviser
(b) Management of the Fund--Trustees and Investment Adviser,
Fees and Expenses
(c) [Cash Reserves and Government Reserves] Inapplicable;
[Government Income Fund, Intermediate Bond Fund, Income
Fund, and Limited Maturity Income Fund] Management of the
Fund--Portfolio Managers
(d) Inapplicable
(e) Management of the Fund--Transfer Agent
(f) Management of the Fund--Fees and Expenses; Financial
Highlights
(g) Inapplicable
5A Inapplicable
6 (a) Organization and Description of Shares; see statement of
additional information: General Information and History
(b) Inapplicable
(c) Organization and Description of Shares
(d) Organization and Description of Shares
(e) For More Information
(f) Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) Inapplicable
7 How to Purchase Shares
(a) Management of the Fund--Distributor
(b) How to Purchase Shares; Net Asset Value
(c) Inapplicable
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
8 (a) How to Redeem Shares
(b) Inapplicable
(c) Inapplicable
(d) Inapplicable
9 Inapplicable
PART B. STATEMENTS OF ADDITIONAL INFORMATION
10 Cover page
11 Table of Contents
12 General Information and History
13 Investment Policies; Portfolio Investments and Strategies;
Investment Restrictions
14 Management
15(a) Inapplicable
(b) Principal Shareholders
(c) Principal Shareholders
16(a) Investment Advisory Services; Management; see prospectus:
Management of the Funds
(b) Investment Advisory Services
(c) Inapplicable
(d) Investment Advisory Services
(e) Inapplicable
(f) Inapplicable
(g) Inapplicable
(h) Custodian; Independent Auditors
(i) Transfer Agent
17(a) Portfolio Transactions
(b) Inapplicable
(c) Portfolio Transactions
(d) [Money Market Funds] Inapplicable; [Bond Funds] Portfolio
Transactions
(e) [Money Market Funds] Inapplicable; [Bond Funds] Portfolio
Transactions
18 General Information and History
19(a) Purchases and Redemptions; see prospectus: How to Purchase
Shares, How to Redeem Shares, Shareholder Services
(b) Purchases and Redemptions; [Money Market Funds] Additional
Information on the Determination of Net Asset Value; see
prospectus: Net Asset Value
(c) Purchases and Redemptions
20 Additional Income Tax Considerations; [Bond Funds]
Portfolio Investments and Strategies--Taxation of Options
and Futures
21(a) Distributor
(b) Inapplicable
(c) Inapplicable
22 Investment Performance
23 Financial Statements
PART C
24 Financial Statements and Exhibits
25 Persons Controlled By or Under Common Control with
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriters
30 Location of Accounts and Records
31 Management Services
32 Undertakings
<PAGE>
STEIN ROE INCOME TRUST
MONEY MARKET FUNDS
------------------
STEIN ROE CASH RESERVES FUND
STEIN ROE GOVERNMENT RESERVES FUND
THE NOVEMBER 1, 1995 DATE OF THIS PROSPECTUS IS NULL AND VOID.
THE NEW DATE OF THIS PROSPECTUS IS JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to each Fund was replaced with an administrative
agreement and a management agreement. The new fee schedule for
each Fund, which does not result in a fee increase, is stated
below at an annual rate as a percentage of average daily net
assets:
MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- -------------- ------------------------ -------------------------
.250% .250% up to $500 million, .500% up to $500 million,
.200% next $500 million, .450% next $500 million,
.150% thereafter .400% thereafter
INTERFUND LENDING PROGRAM. On June 18, 1996, each Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Funds' Investments (pages 11-12 of the
Prospectus) is revised to read as follows:
"No Fund may make loans except that each Fund may (1)
purchase money market securities and enter into repurchase
agreements; (2) acquire publicly-distributed or privately-
placed debt securities; and (3) participate in an interfund
lending program with other Stein Roe Funds. A Fund may not
borrow money, except for non-leveraging, temporary, or
emergency purposes or in connection with participation in the
interfund lending program. Neither a Fund's aggregate
borrowings (including reverse repurchase agreements) nor a
Fund's aggregate loans at any one time may exceed 33 1/3% of
its total assets."
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (pages 6 and 7 of the Prospectus) is updated
by adding the following unaudited financial information for the
six months ended December 31, 1995:
CASH RESERVES GOVERNMENT RESERVES
------------- -------------------
NET ASSET VALUE, BEGINNING OF PERIOD $1.000 $1.000
------ ------
Net investment income 0.027 0.027
Distributions from net investment income (0.027) (0.027)
------ ------
NET ASSET VALUE, END OF PERIOD $1.000 $1.000
------ ------
------ ------
Ratio of net expenses to average net
assets (a) *0.77% *0.70%
Ratio of net investment income to average
net assets (b) *5.20% *5.16%
Total return (b) **2.61% **2.60%
Net assets, end of period (000 omitted ) $483,786 $89,019
_____________________
*Annualized.
**Not annualized.
(a) If Government Reserves Fund had paid all of its expenses and
there had been no reimbursement of expenses by the Adviser,
this ratio would have been 0.81% for the period ended
December 31, 1995.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
NEW ADDRESS FOR ORDERS. Effective July 1, 1996, orders for
purchases and redemptions of Fund shares should be mailed to
SteinRoe Services Inc. at P.O. Box 8900, Boston, Massachusetts
02205. Participants in the Stein Roe Counselor [service mark]
Program should send orders to SteinRoe Services Inc. at P.O. Box
____, Chicago, Illinois 60680.
The Statement of Additional Information and the most recent
financial statements may be obtained without charge by writing to
the Secretary of the Trust at P.O. Box ___, Chicago, Illinois
60680, or by calling 800-338-2550.
NEW INSTRUCTIONS FOR PURCHASES BY WIRE TRANSFER. Effective
July 1, 1996, wire transfers for the purchase of Fund shares
should be addressed as follows:
First National Bank of Boston
ABA Routing No. 011000390
Boston, Massachusettsx
Attention: Custody
Fund No. ___; Stein Roe Cash Reserves Fund
OR Fund No. ___; Stein Roe Government Reserves Fund
Account of (exact name(s) in registration)
Shareholder Account No. ________
Participants in the Stein Roe Counselor [service mark]
program should continue to use the instructions on page 15 of the
Prospectus for wire transfer purchases.
________________________
<PAGE> 1
CASH RESERVES FUND.
The Fund seeks to obtain maximum current income consistent with
capital preservation and maintenance of liquidity. The Fund
invests solely in money market instruments maturing in thirteen
months or less from the time of investment.
GOVERNMENT RESERVES FUND
The Fund seeks to obtain maximum current income consistent with
safety of capital and maintenance of liquidity. The Fund invests
in U.S. Government Securities maturing in thirteen months or less
from the date of purchase and repurchase agreements for U.S.
Government Securities regardless of the maturities of such
securities. U.S. Government Securities include securities issued
or guaranteed by the U.S. Government or by its agencies or
instrumentalities.
Each Fund is a "no-load" money market fund and attempts to
maintain its net asset value at $1.00 per share. SHARES OF THE
FUNDS ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT
AND THERE CAN BE NO ASSURANCE THAT THE FUNDS WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE.
There are no sales or redemption charges, and the Funds have no
12b-1 plans. The Funds are series of the STEIN ROE INCOME TRUST.
This prospectus contains information you should know before
investing in the Funds. Please read it carefully and retain it
for future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at the address shown on the back cover or by calling
800-338-2550.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November 1, 1995.
<PAGE> 2
TABLE OF CONTENTS
Page
Summary ................................2
Fee Table ..............................4
Financial Highlights....................5
The Funds...............................8
How the Funds Invest ...................9
Cash Reserves........................9
Government Reserves.................10
Restrictions on the Funds' Investments 11
Risks and Investment Considerations ...12
How to Purchase Shares.................14
By Check ...........................14
By Wire.............................15
By Electronic Transfer .............15
By Exchange ........................15
Purchase Price and Effective Date ..15
Conditions of Purchase .............16
Purchases Through Third Parties.....16
How to Redeem Shares ..................16
By Written Request .................16
By Exchange.........................17
Special Redemption Privileges ......18
General Redemption Policies.........20
Shareholder Services...................21
Net Asset Value........................23
Distributions and Income Taxes.........24
Management of the Funds................25
Organization and Description of Shares.27
Certificate of Authorization ..........29
SUMMARY
Stein Roe Government Reserves Fund ("Government Reserves") and Stein
Roe Cash Reserves Fund ("Cash Reserves") are series of the Stein Roe
Income Trust, an open-end diversified management investment
company organized as a Massachusetts business trust. The Funds
are "no-load" funds--there are no sales or redemption charges.
(See The Funds and Organization and Description of Shares.)
NET ASSET VALUE.
Each Fund attempts to maintain its price per share at $1.00.
There is no assurance that the Funds will always be able to do so.
(See Net Asset Value.)
INVESTMENT OBJECTIVES AND POLICIES.
Each Fund is a money market fund with the objective of seeking
maximum current income consistent with safety of capital and
maintenance of liquidity. Government Reserves pursues its
objective by
<PAGE> 3
investing in U.S. Government Securities maturing in
thirteen months or less from the date of purchase and repurchase
agreements for U.S. Government Securities (regardless of the
maturities of such securities). U.S. Government Securities include
securities issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities. Cash Reserves pursues its objective
by investing in a wide range of high-quality U.S. dollar-denominated
money market instruments maturing in thirteen months or less from
the date of purchase. Under normal market conditions, Cash Reserves
will invest at least 25% of its total assets in securities of issuers
in the financial services industry. The securities in which Cash
Reserves may invest generally yield more than the securities in
which Government Reserves may invest. (See How the Funds Invest.)
INVESTMENT RISKS.
Cash Reserves' policy of normally investing at least 25% of its
assets in securities of issuers in the financial services industry
may cause the Fund to be more adversely affected by changes in
market or economic conditions and other circumstances affecting
the financial services industry. In addition, since Cash
Reserves' investment policy permits it to invest in securities of
foreign branches of U.S. banks, U.S. branches of foreign banks,
and foreign banks and their foreign branches, such as negotiable
certificates of deposit (Eurodollar CDs), and securities of
foreign governments, investment in that Fund might involve risks
that are different in some respects from an investment in a fund
that invests only in debt obligations of U.S. domestic issuers.
Because Government Reserves' investment policy permits it to
invest in U.S. Government Securities that are not backed by the
full faith and credit of the U.S. Treasury, investment in that Fund
might involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury.
(For a discussion of risks, see Risks and Investment Considerations.)
PURCHASES.
The minimum initial investment for each Fund is $2,500, and
additional investments must be at least $100 (only $50 for
purchases by electronic transfer). Shares may be purchased by
check, by bank wire, by electronic transfer, or by exchange from
another
<PAGE> 4
Stein Roe Fund. For more detailed information, see How to
Purchase Shares.
REDEMPTIONS.
For information on redeeming Fund shares, including the special
redemption privileges, see How to Redeem Shares.
DISTRIBUTIONS.
Dividends are declared each business day and are paid monthly.
Dividends will be reinvested into your Fund account unless you
elect to have them paid in cash, deposited by electronic transfer
into your bank checking account, or invested into another Stein
Roe Fund account. (See Distributions and Income Taxes and
Shareholder Services.)
ADVISER AND FEES.
Stein Roe & Farnham Incorporated (the "Adviser") is investment
adviser to the Funds. For a description of the Adviser and the
advisory fees paid by the Funds, see Management of the Funds.
If you have any additional questions about the Funds, please feel
free to discuss them with an account representative by calling
800-338-2550.
FEE TABLE
Cash Government
Reserves Reserves
--------- ----------
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None None
Sales Load Imposed on Reinvested Dividends None None
Deferred Sales Load None None
Redemption Fees None* None*
Exchange Fees None None
ANNUAL FUND OPERATING EXPENSES (after
expense reimbursement in the case of
Government Reserves; as a percentage
of average net assets)
Management Fees (after expense reimburse-
ment in the case of Government Reserves) 0.50% 0.45%
12b-1 Fees None None
Other Expenses 0.22% 0.25%
----- ------
Total Fund Operating Expenses (after
expense reimbursement in the case of
Government Reserves) 0.72% 0.70%
----- ------
----- ------
____________________
*There is a $3.50 charge for wiring redemption proceeds to your
bank.
EXAMPLES.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Cash Reserves $7 $23 $40 $89
Government Reserves 7 22 39 87
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in a Fund. The table is based upon
actual expenses incurred in the last fiscal year, except for Cash
Reserves, which has been adjusted to reflect changes in the Fund's
transfer agency services and fees. (Also see
<PAGE> 5
Management of the Funds--Fees and Expenses.) From time to time,
the Adviser may voluntarily absorb certain expenses of a Fund.
The Adviser has agreed to voluntarily absorb the expenses of
Government Reserves to the extent that the Fund's expenses exceed
0.7 of 1% of its annual average net assets through October 31,
1996, subject to earlier termination by the Adviser on 30 days'
notice. Any such absorption will temporarily lower the Fund's
overall expense ratio and increase its overall return to investors.
Absent such expense undertaking, Mangement Fees and Total Fund
Operating Expenses for Government Reserves would have been 0.50%
and 0.75%, respectively.
For purposes of the Examples above, the figures assume that the
percentage amounts for the respective Funds listed under Annual
Fund Operating Expenses remain the same during each of the
periods, that all income dividends and capital gain distributions
are reinvested in additional Fund shares, and that, for purposes
of management fee breakpoints, if any, the Funds' respective net
assets remain at the same levels as in the most recently completed
fiscal year.
The figures in the Examples are not necessarily indicative of past
or future expenses, and actual expenses may be greater or less
than those shown. Although information such as that shown in the
Fee Table and Examples is useful in reviewing the Funds' expenses
and in providing a basis for comparison with other mutual funds,
it should not be used for comparison with other investments using
different assumptions or time periods.
FINANCIAL HIGHLIGHTS
The tables below reflect the results of operations of the Funds on
a per-share basis and have been audited by Ernst & Young LLP,
independent auditors. These tables should be read in conjunction
with the financial statements and notes thereto, which may be
obtained from the Trust without charge upon request.
<PAGE> 6-7
CASH RESERVES
<TABLE>
<CAPTION>
Six
Months
Ended
Years Ended December 31, June 30, Years Ended June 30,
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net investment income 0.075 0.061 0.060 0.032 0.081 0.079 0.068 0.044 0.028 0.028 0.048
Distributions from net
investment income (0.075) (0.061) (0.060) (0.032) (0.081) (0.079) (0.068) (0.044) (0.028) (0.028) (0.048)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE,
END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Ratio of expenses to
average net assets 0.72% 0.72% 0.72% *0.70% 0.75% 0.76% 0.78% 0.78% 0.79% 0.79% 0.76%
Ratio of net investment
income to average net
assets 7.55% 6.05% 6.02% *6.36% 8.13% 7.94% 6.81% 4.40% 2.81% 2.77% 4.83%
Total return 7.79% 6.25% 6.15% *6.43% 8.41% 8.20% 6.98% 4.49% 2.83% 2.81% 4.96%
Net assets, end of
period (000 omitted) $738,634 $814,544 $962,901 $930,074 $948,018 $949,803 $840,525 $711,087 $627,110 $554,713 $498,163
<FN>
*Annualized.
</TABLE>
GOVERNMENT RESERVES
<TABLE>
<CAPTION>
Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income 0.064 0.050 0.058 0.080 0.078 0.066 0.044 0.027 0.027 0.047
Distributions from net
investment income (0.064) (0.050) (0.058) (0.080) (0.078) (0.066) (0.044) (0.027) (0.027) (0.047)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of net expenses to
average net assets (a) 1.03% 1.03% 0.87% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment
income to average net
assets (b) 6.35% 4.97% 5.75% 8.02% 7.79% 6.41% 4.27% 2.75% 2.71% 4.65%
Total return 6.57% 5.11% 5.90% 8.27% 8.05% 6.74% 4.45% 2.78% 2.74% 4.78%
Net assets, end of
period (000 omitted) $33,232 $34,799 $41,787 $50,185 $53,400 $102,860 $132,982 $104,220 $105,488 $93,318
<FN>
(a) If Government Reserves had paid all of its expenses and there
had been no reimbursement of expenses by the Adviser, this
ratio would have been 1.07%, 1.05%, 1.04%, 0.93%, 0.98%, 0.83%,
0.79%, 0.76%, 0.75% and 0.75% for the years ended June 30, 1985
and 1986, and 1988 through 1995, respectively.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
</TABLE>
<PAGE> 8
THE FUNDS
STEIN ROE CASH RESERVES FUND ("Cash Reserves") and STEIN ROE GOVERNMENT
RESERVES FUND ("Government Reserves") (collectively, the "Funds") are
no-load, diversified "mutual funds." Mutual funds sell their own
shares to investors and use the money they receive to invest in a
portfolio of securities. A mutual fund allows you to pool your
money with that of other investors in order to obtain professional
investment management. Mutual funds generally make it possible
for you to obtain greater diversification of your investments and
simplify your recordkeeping. Because the Funds invest only in
money market instruments, they are called "money market funds."
No-load funds do not impose commissions or charges when shares are
purchased or redeemed.
The Funds are series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Although there can be no assurance that it will always be able to
do so, each Fund follows procedures designed to stabilize its
price per share at $1.00. The Statement of Additional Information
describes these procedures.
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory, administrative, and recordkeeping and
accounting services to the Funds. The Adviser also manages
several other no-load mutual funds with different investment
objectives, including international funds, equity funds and
taxable and tax-exempt bond funds. To obtain prospectuses and
other information on any of those mutual funds, please call 800-
338-2550.
Because the Funds strive to maintain a $1.00 per share value,
their return is usually quoted either as a current seven-day
yield, calculated by totaling the dividends on a Fund share for
the previous seven days and restating that yield as an annual
rate, or as an effective yield, calculated by adjusting the
current yield to assume daily compounding. Cash Reserves' current
and effective yields for the seven-day period ended September 29,
1995, were 5.14% and 5.27%, respectively. Government Reserves'
current and effective yields for the seven-day period ended
September 29, 1995, were 5.19% and 5.32%, respectively. Absent
the expense limitation referred to above, current and effective
yields for Government Reserves for the seven-day period ended
September 29, 1995, would have
<PAGE> 9
been 5.09% and 5.22%, respectively. To obtain current yield
information, you may call 800-338-2550 or write to the address
shown on the back cover.
From time to time, the Funds may also quote total return figures.
The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
Comparison of a Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. Past performance is not
necessarily indicative of future results.
HOW THE FUNDS INVEST
CASH RESERVES.
The Fund seeks to obtain maximum current income consistent with
the preservation of capital and the maintenance of liquidity by
investing all of its assets in U.S. dollar-denominated money
market instruments maturing in thirteen months or less from time
of investment. Each security must be rated (or be issued by an
issuer that is rated with respect to its short-term debt) within
the highest rating category for short-term debt by at least two
nationally recognized statistical rating organizations ("NRSRO"),
or, if unrated, determined by or under the direction of the Board
of Trustees to be of comparable quality. These securities may
include:
(1) Securities issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities ("U.S. Government
Securities");
(2) Securities issued or guaranteed by the government of any
foreign country that are rated at time of purchase A or better
(or equivalent rating) by at least one NRSRO; /1/
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of
- -------------------
/1/ For a description of certain NRSRO commercial paper, note, and
bond ratings, see the Appendix to the Statement of Additional
Information.
- --------------------
<PAGE> 10
$1 billion, or the equivalent in other currencies
(as of the date of the most recent available financial
statements) or of any branches, agencies or subsidiaries (U.S.
or foreign) of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term obligations.
In accordance with its investment objectives and policies, the
Fund may invest in variable and floating rate money market
instruments which provide for periodic or automatic adjustment in
coupon interest rates that are reset based on changes in amount
and directions of specified short-term interest rates.
Under normal market conditions, the Fund will invest at least 25%
of its total assets in securities of issuers in the financial
services industry (which includes, but is not limited to, banks,
personal credit and business credit institutions, and other
financial services institutions).
The Fund maintains a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset
value per share, and not in excess of 90 days. It is a
fundamental policy /3/ that the maturity of any instrument that
grants the holder an optional right to redeem at par plus interest
and without penalty will be deemed at any time to be the next date
provided for payment on exercise of such optional redemption
right.
GOVERNMENT RESERVES.
The Fund seeks to obtain maximum current income consistent with
safety of capital and maintenance of liquidity by investment in
U.S. Government Securities maturing in thirteen months or less
from the date of purchase. These securities include:
(1) Securities issued by the U.S. Treasury;
(2) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are backed by the full faith and credit guarantee of the U.S.
Government;
- ------------------
/2/ A sale of securities to the Fund in which the seller (a bank
or securities dealer that the Adviser believes to be financially
sound) agrees to repurchase the securities at a higher price,
which includes an amount representing interest on the purchase
price, within a specified time.
/3/A fundamental policy may be changed only with the approval of a
"majority of the outstanding voting securities" of a Fund as
defined in the Investment Company Act of 1940.
- ------------------
<PAGE> 11
(3) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are not backed by the full faith and credit guarantee of the
U.S. Government;
(4) Repurchase agreements for securities listed in (1), (2); and
(3) above, regardless of the maturities of such underlying
securities.
In accordance with its investment objectives and policies, the
Fund may invest in variable and floating rate money market
instruments which provide for periodic or automatic adjustment in
coupon interest rates that are reset based on changes in amount
and directions of specified short-term interest rates.
The U.S. Government Securities in which the Fund is permitted to
invest include: (i) bills, notes, bonds, and other debt
securities, differing as to maturity and rates of interest, that
are issued by and are direct obligations of the U.S. Treasury; and
(ii) other securities that are issued or guaranteed as to
principal and interest by agencies or instrumentalities of the U.S.
Government and that include, but are not limited to, Federal Farm
Credit Banks, Federal Home Loan Banks, Government National Mortgage
Association, Farmers Home Administration, Federal Home Loan Mortgage
Corporation, and Federal National Mortgage Association.
RESTRICTIONS ON THE FUNDS' INVESTMENTS
Neither Fund will: (1) invest more than 10% of its net assets in
illiquid securities, including repurchase agreements maturing in
more than seven days (however, there is otherwise no limitation on
the percentage of a Fund's assets which may be invested in
repurchase agreements); or (2) with respect to 75% of its total
assets, invest more than 5% of its total assets in the securities
of any one issuer--this restriction does not apply to
U.S. Government Securities or repurchase agreements for such
securities. Notwithstanding the limitation on investment in a
single issuer, each Fund may invest all or substantially all of
its assets in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund.
Neither Fund may make loans with the exception that each Fund may
invest in money market securities and enter into repurchase agreements.
Neither Fund may borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then the aggregate
borrowings at any one time may not exceed 33 1/3% of its assets
(at market value). A Fund
<PAGE> 12
may not purchase additional securities when its borrowings,
less proceeds receivable from sales of portfolio securities,
exceed 5% of total assets.
The policies described in the preceding two paragraphs, which
summarize certain important investment restrictions of the Funds,
and Cash Reserves' policy with respect to concentration of
investment in the financial services industry, can be changed only
with the approval of a "majority of the outstanding voting
securities" of a Fund, as defined in the Investment Company Act of
1940. All of the investment restrictions are set forth in the
Statement of Additional Information.
RISKS AND INVESTMENT CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. There can be no
guarantee that a Fund will achieve its objective or be able at all
times to maintain its net asset value per share at $1.00.
In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Fund could experience both delays in
liquidating the underlying securities and losses, including: (a)
possible decline in the value of the collateral during the period
in which the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
Each Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in a Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.
Cash Reserves' policy of investing at least 25% of its assets in
securities of issuers in the financial services industry may cause
the Fund to be more adversely affected by changes in market or
economic conditions and other circumstances affecting the
financial services industry. Because Cash Reserves' investment
policy permits it to invest in: securities of foreign branches of
U.S. banks (Eurodollars), U.S. branches of foreign banks (Yankee
dollars), and foreign banks and their foreign branches, such as
negotiable certificates of deposit; securities of foreign
governments; and securities of foreign issuers, such as commercial
paper and corporate notes, bonds and debentures, investment in
that Fund might involve risks that are different in some respects
from an investment in a fund that invests
<PAGE> 13
only in debt obligations of U.S. domestic issuers. Such risks
may include future political and economic developments; the possible
imposition of foreign withholding taxes on interest income payable
on securities held in the portfolio; possible seizure or
nationalization of foreign deposits; the possible establishment
of exchange controls; or the adoption of other foreign governmental
restrictions that might adversely affect the payment of principal
and interest on securities in the portfolio. Additionally, there
may be less public information available about foreign banks and
their branches. Foreign banks and foreign branches of foreign
banks are not regulated by U.S. banking authorities, and generally
are not bound by accounting, auditing, and financial reporting standards
comparable to U.S. banks.
Because Government Reserves' investment policy permits it to
invest in U.S. Government Securities that are not backed by the
full faith and credit of the U.S. Treasury, investment in that
Fund may involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and interest
on the securities in the Fund's portfolio that are supported only
by the issuing or guaranteeing U.S. Government agency or
instrumentality, since the Fund must look principally or solely to
that entity for ultimate repayment.
Each Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these
securities are established at the time the Fund enters into the
commitment, the securities may be delivered and paid for a month
or more after the date of purchase, when their value may have
changed and the yields then available in the market may be
greater. The Funds will make such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for
investment reasons.
Each Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.
The securities in which Cash Reserves may invest generally yield
more than the securities in which Government Reserves may invest.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in money market securities directly, each Fund
may in the future seek to achieve its investment objective by
<PAGE> 14
pooling its assets with assets of other mutual funds managed by
the Adviser for investment in another investment
company having the same investment objective and substantially the
same investment policies and restrictions as the Fund. The
purpose of such an arrangement is to achieve greater operational
efficiencies and reduce costs. It is expected that any such
investment company would be managed by the Adviser in
substantially the same manner as the Fund. Shareholders of a Fund
will be given at least 30 days' prior notice of any such
investment, although they will not be entitled to vote on the
action. Such investment would be made only if the Trustees
determine it to be in the best interests of the Fund and its
shareholders.
HOW TO PURCHASE SHARES
You may purchase shares of either Fund by check, by wire, by
electronic transfer, or by exchange from your account with another
Stein Roe Fund. The initial purchase minimum per Fund account is
$2,500; the minimum for Uniform Gifts/Transfers to Minors Act
("UGMA") accounts is $1,000; the minimum for accounts established
under an automatic investment plan (i.e., Regular Investments,
Dividend Purchase Option, or the Automatic Exchange Plan) is
$1,000 for regular accounts and $500 for UGMA accounts; and the
minimum per account for Stein Roe IRAs is $500. The initial
purchase minimum is waived for shareholders who participate in the
Stein Roe Counselor [service mark] or Stein Roe Counselor
Preferred [service mark] Programs and for clients of the Adviser.
Subsequent purchases must be at least $100, or at least $50 if you
purchase by electronic transfer. If you wish to purchase shares
to be held by a tax-sheltered retirement plan sponsored by the
Adviser, you must obtain special forms for those plans. (See
Shareholder Services.)
BY CHECK.
To make an initial purchase of shares of a Fund, please complete
and sign the Application and mail it to P.O. Box 804058, Chicago,
Illinois 60680, together with a check made payable to Stein Roe
Funds.
You may make subsequent investments by submitting a check along
with either the stub from your Fund account confirmation statement
or a note indicating the amount of the purchase, your account
number, and the name in which your account is registered. Each
individual check submitted for purchase must be at least $100, and
the Trust generally will not accept cash, drafts, third party
checks, or checks drawn on banks outside of the United States.
Should an order to purchase shares of a Fund be
<PAGE> 15
cancelled because your check does not clear, you will be responsible
for any resulting loss incurred by that Fund.
BY WIRE.
You may also pay for shares by instructing your bank to wire
federal funds (monies of member banks within the Federal Reserve
System) to the Funds' custodian bank. Your bank may charge you a
fee for sending the wire. If you are opening a new account by
wire transfer, you must first telephone the Trust to request an
account number and furnish your social security or other tax
identification number. Neither the Funds nor the Trust will be
responsible for the consequences of delays, including delays in
the banking or Federal Reserve wire systems. Your bank must
include the full name(s) in which your account is registered and
your Fund account number, and should address its wire as follows:
State Street Bank and Trust Company
Boston, Massachusetts
ABA Routing No. 011000028
Attention: Custody
Fund No. ____; Stein Roe _____ Reserves Fund
Account of (exact name(s) in registration)
Shareholder Account No. ___________
Fund Numbers:
7102--Cash Reserves
7109--Government Reserves
BY ELECTRONIC TRANSFER.
You may also make subsequent investments by an electronic transfer
of funds from your bank checking account. Electronic transfer
allows you to make purchases at your request ("Special
Investments") by calling 800-338-2550 or at pre-scheduled
intervals ("Regular Investments"). (See Shareholder Services.)
Electronic transfer purchases are subject to a $50 minimum and a
$100,000 maximum. You may not open a new account through
electronic transfer. Should an order to purchase shares of a Fund
be cancelled because your electronic transfer does not clear, you
will be responsible for any resulting loss incurred by that Fund.
BY EXCHANGE.
You may purchase shares by exchange of shares from another Stein
Roe Fund account either by phone (if the Telephone Exchange
Privilege has been established on the account from which the
exchange is being made), by mail, in person, or automatically at
regular intervals (if you have elected Automatic Exchanges).
Restrictions apply; please review the information under How to
Redeem Shares--By Exchange.
PURCHASE PRICE AND EFFECTIVE DATE.
Each purchase of a Fund's shares is made at that Fund's net asset
value (see Net Asset Value) as follows:
<PAGE> 16
Check purchases--net asset value next determined after your check
is converted into federal funds (currently one business day after
receipt of your check). Your investment will begin earning
dividends on the day of purchase.
Wire purchases--net asset value next determined after receipt of
the wire. If your wire is received before 11:00 a.m., Chicago
time, your investment will begin earning dividends on the day of
purchase. If your wire is received at or after 11:00 a.m.,
Chicago time, your investment will begin earning dividends on the
following day.
Electronic transfer--net asset value next determined after the
Fund receives the electronic transfer from your bank. A Special
Electronic Transfer Investment order received by telephone on a
business day before 2:00 p.m., Chicago time, is effective on the
next business day. Your investment will begin earning dividends
on the day following the date of purchase.
CONDITIONS OF PURCHASE.
Each purchase order for a Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of that Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of a Fund's shareholders. The Trust also
reserves the right to waive or lower its investment minimums for
any reason. The Trust does not issue certificates for shares.
PURCHASES THROUGH THIRD PARTIES.
You may purchase (or redeem) shares through investment dealers,
banks, or other financial institutions. These institutions may
charge for their services or place limitations on the extent to
which you may use the services offered by the Trust. There are no
charges or limitations imposed by the Trust (other than those
described in this prospectus) if shares are purchased (or
redeemed) directly from the Trust.
Some financial institutions which maintain nominee accounts with
the Funds for their clients who are Fund shareholders charge an
annual fee of up to 0.25% of the average net assets held in such
accounts for accounting, servicing, and distribution services they
provide with respect to the underlying Fund shares. Such fees are
paid by the Adviser.
HOW TO REDEEM SHARES
BY WRITTEN REQUEST.
You may redeem all or a portion of your shares of a Fund by
submitting a
<PAGE> 17
written request in "good order" to the Trust at P.O.
Box 804058, Chicago, Illinois 60680. A redemption request will be
considered to have been received in good order if the following
conditions are satisfied:
(1) the request must be in writing, indicate the number of shares
or dollar amount to be redeemed, and identify the shareholder's
account number;
(2) the request must be signed by the shareholder(s) exactly as
the shares are registered;
(3) the request must be accompanied by any certificates for the
shares, either properly endorsed for transfer, or accompanied
by a stock assignment properly endorsed exactly as the shares
are registered;
(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) must be
guaranteed (a signature guarantee is not a notarization, but is
a widely accepted way to protect you and the Funds by verifying
your signature);
(5) corporations and associations must submit with each request a
completed Certificate of Authorization included in this
prospectus (or a form of resolution acceptable to the Trust);
and
(6) other supporting legal documents may be required from
organizations, executors, administrators, trustees, or others
acting on accounts not registered in their names.
BY EXCHANGE.
You may redeem all or any portion of your Fund shares and use the
proceeds to purchase shares of any other Stein Roe Fund offered
for sale in your state if your signed, properly completed
Application is on file. AN EXCHANGE TRANSACTION IS A SALE AND
PURCHASE OF SHARES FOR FEDERAL INCOME TAX PURPOSES AND MAY RESULT
IN CAPITAL GAIN OR LOSS. Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. The
registration of the account to which you are making an exchange
must be exactly the same as that of the Fund account from which
the exchange is made and the amount you exchange must meet any
applicable minimum investment of the Stein Roe Fund being
purchased. Unless you have elected to receive your dividends in
cash, on an exchange of all shares, any accrued unpaid dividends
will be invested in the Stein Roe Fund to which you exchange on
the next business day. An exchange may be made by following the
redemption procedure described above under By Written Request and
indicating the Stein Roe Fund to be purchased, except that a
<PAGE> 18
signature guarantee normally is not required. (See also the
discussion below of the Telephone Exchange Privilege and Automatic
Exchanges.)
SPECIAL REDEMPTION PRIVILEGES.
The Telephone Exchange Privilege and the Telephone Redemption by
Check Privilege will be established automatically for you when you
open your account unless you decline these Privileges on your
Application. Other Privileges must be specifically elected. If
you do not want the Telephone Exchange and Redemption Privileges,
check the box(es) under the section "Telephone Redemption Options"
when completing your Application. In addition, a signature
guarantee may be required to establish a Privilege after you open
your account. If you establish both the Telephone Redemption by
Wire Privilege and the Electronic Transfer Privilege, the bank
account that you designate for both Privileges must be the same.
You may not use any of the Special Redemption Privileges if you
hold certificates for any of your Fund shares. The Telephone
Redemption by Check, Telephone Redemption by Wire and Check-
Writing Privileges, and Special Electronic Transfer Redemptions
are not available to redeem shares held by a tax-sheltered
retirement plan sponsored by the Adviser. (See also General
Redemption Policies.)
Telephone Exchange Privilege. You may use the Telephone Exchange
Privilege to exchange an amount of $50 or more from your account
by calling 800-338-2550 or by sending a telegram; new accounts
opened by exchange are subject to the $2,500 initial purchase
minimum. GENERALLY, YOU WILL BE LIMITED TO FOUR TELEPHONE
EXCHANGE ROUND-TRIPS PER YEAR AND THE FUNDS MAY REFUSE REQUESTS
FOR TELEPHONE EXCHANGES IN EXCESS OF FOUR ROUND-TRIPS (A ROUND-
TRIP BEING THE EXCHANGE OUT OF A FUND INTO ANOTHER STEIN ROE FUND,
AND THEN BACK TO THAT FUND). Also, the Trust's general redemption
policies apply to redemptions of shares by Telephone Exchange.
(See General Redemption Policies.)
The Trust reserves the right at any time without prior notice to
suspend or terminate the use of the Telephone Exchange Privilege
by any person or class of persons. The Trust believes that use of
the Telephone Exchange Privilege by investors utilizing market-
timing strategies adversely affects the Funds. THEREFORE, THE
TRUST GENERALLY WILL NOT HONOR REQUESTS FOR TELEPHONE EXCHANGES BY
SHAREHOLDERS IDENTIFIED BY THE TRUST AS "MARKET-TIMERS."
Moreover, the Trust reserves the right at any time without prior
notice to suspend, limit, modify, or terminate the Telephone
Exchange Privilege in its
<PAGE> 19
entirety. Because such a step would be
taken only if the Board of Trustees believes it would be in the
best interests of the Funds, the Trust expects that it would
provide shareholders with prior written notice of any such action
unless it appears that the resulting delay in the suspension,
limitation, modification, or termination of the Telephone Exchange
Privilege would adversely affect the Funds. IF THE TRUST WERE TO
SUSPEND, LIMIT, MODIFY, OR TERMINATE THE TELEPHONE EXCHANGE
PRIVILEGE, A SHAREHOLDER EXPECTING TO MAKE A TELEPHONE EXCHANGE
MIGHT FIND THAT AN EXCHANGE COULD NOT BE PROCESSED OR THAT THERE
MIGHT BE A DELAY IN THE IMPLEMENTATION OF THE EXCHANGE. (See How
to Redeem Shares--By Exchange.) During periods of volatile
economic and market conditions, you may have difficulty placing
your exchange by telephone.
Automatic Exchanges. You may use the Automatic Exchange Privilege
to automatically redeem a fixed amount from your Fund account for
investment in another Stein Roe Fund account on a regular basis.
Telephone Redemption by Check Privilege. You may use the
Telephone Redemption by Check Privilege to redeem an amount of
$1,000 or more from your account by calling 800-338-2550. The
proceeds will be sent by check to your registered address.
Telephone Redemption by Wire Privilege. You may use this
Privilege to redeem an amount of $1,000 or more from your account
by calling 800-338-2550. The proceeds will be transmitted by
wire to your account at a commercial bank previously designated by
you that is a member of the Federal Reserve System. The fee for
wiring proceeds (currently $3.50 per transaction) will be deducted
from the amount wired.
Check-Writing Privilege. You may also redeem shares by writing
special checks in the amounts of $50 or more. Your checks are
drawn against a special checking account maintained with the
custodian, and you will be subject to the custodian's procedures
and rules relating to its checking accounts and to this Privilege.
Electronic Transfer Privilege. You may redeem shares by calling
800-338-2550 and requesting an electronic transfer ("Special
Redemption") of the proceeds to a checking account previously
designated by you at a bank that is a member of the Automated
Clearing House or at scheduled intervals ("Automatic Redemptions"-
- -see Shareholder Services). Electronic transfers are subject to a
$50 minimum and a $100,000 maximum. A Special Redemption request
received by telephone after 2:00 p.m., Chicago time, is deemed
received on the next business day.
<PAGE> 20
GENERAL REDEMPTION POLICIES.
You may not cancel or revoke your redemption order once
instructions have been received and accepted. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions. Please telephone
the Trust if you have any questions about requirements for a
redemption before submitting your request. If you wish to redeem
shares held by a tax-sheltered retirement plan sponsored by the
Adviser, special procedures of those plans apply. (See
Shareholder Services--Tax-Sheltered Retirement Plans.) The Trust
reserves the right to require a properly completed Application
before making payment for shares redeemed.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon that Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares, even though
each Fund attempts to maintain its net asset value at $1.00
(rounded to the nearest one cent), and may result in a realized
capital gain or loss.
The Trust normally intends to pay proceeds of a redemption within
two business days and generally no later than seven days after
proper instructions are received. If a request for Telephone
Redemption by Wire is received before 11:00 a.m., Chicago time,
the proceeds will be paid on the day the order is received;
proceeds of an order received at or after 11:00 a.m., Chicago
time, will be paid on the next business day. The Trust will not
be responsible for the consequences of delays, including delays in
the mail, banking, or Federal Reserve wire systems. If you
attempt to redeem shares within 15 days after they have been
purchased by check or electronic transfer, the Trust may delay
payment of the redemption proceeds to you until it can verify that
payment for the purchase of those shares has been (or will be)
collected. To reduce such delays, the Trust recommends that your
purchase be made by federal funds wire through your bank.
The Trust reserves the right at any time without prior notice to
suspend, limit, modify, or terminate any Privilege or its use in
any manner by any person or class.
Neither the Trust, its transfer agent, nor their respective
officers, trustees, directors, employees, or agents will be
responsible for the authenticity of instructions provided under
the Privileges, nor for any loss, liability, cost or expense for
acting upon instructions furnished
<PAGE> 21
thereunder if they reasonably believe that such instructions are
genuine. The Funds employ procedures reasonably designed to
confirm that instructions communicated by telephone under any
Special Redemption Privilege or the Special Electronic Transfer
Redemption Privilege are genuine. Use of any Special Redemption
Privilege or the Special Electronic Transfer Redemption Privilege
authorizes the Funds and their transfer agent to tape-record all
instructions to redeem. In addition, callers are asked to identify
the account number and registration, and may be required to provide
other forms of identification. Written confirmations of transactions
are mailed promptly to the registered address; a legend on the
confirmation requests the shareholder to review the transactions
and inform the Fund immediately if there is a problem. If a Fund
does not follow reasonable procedures for protecting shareholders
against loss on telephone transactions, it may be liable for any
losses due to unauthorized or fraudulent instructions.
Generally, you may not use the Exchange Privilege or any Special
Redemption Privilege to redeem shares purchased by check (other
than certified or cashiers' checks) or electronic transfer until
15 days after their date of purchase.
The Trust reserves the right to redeem shares in any account and
send the proceeds to the owner if the shares in the account do not
have a value of at least $1,000. A shareholder would be notified
that his account is below the minimum and allowed 30 days to
increase the account before the redemption is processed.
Shares in any account you maintain with a Fund or any of the other
Stein Roe Funds may be redeemed to the extent necessary to
reimburse any Stein Roe Fund for any loss it sustains that is
caused by you (such as losses from uncollected checks and
electronic transfers or any Stein Roe Fund liability under the
Internal Revenue Code provisions on backup withholding).
SHAREHOLDER SERVICES
REPORTING TO SHAREHOLDERS.
You will receive a confirmation statement reflecting each of your
purchases and redemptions of shares of a Fund, as well as periodic
statements detailing distributions made by that Fund. Shares
purchased by reinvestment of dividends, by cross-reinvestment of
dividends from another Fund, or pursuant to an automatic
investment plan will be confirmed to you quarterly. In addition,
the Trust will send you semiannual and annual reports showing Fund
portfolio holdings and will provide you annually with tax
information.
<PAGE> 22
FUNDS-ON-CALL [REGISTERED TRADEMARK] 24-HOUR INFORMATION SERVICE.
To access the Stein Roe Funds-on-Call [registered trademark]
automated telephone service, just call 800-338-2550 on any
touch-tone telephone and follow the recorded instructions. Funds-
on-Call [registered trademark] provides yields, prices, latest
dividends, account balances, last transaction, and other
information 24 hours a day, seven days a week.
FUNDS-ON-CALL [REGISTERED TRADEMARK] AUTOMATED TELEPHONE
TRANSACTIONS.
If you have established the Funds-on-Call [registered trademark]
transaction privilege (Funds-on-Call [registered trademark]
Application will be required), you may initiate Special
Investments and Redemptions, Telephone Exchanges, and Telephone
Redemptions by Check 24 hours a day, seven days a week by calling
800-338-2550 on a touch-tone telephone. These transactions are
subject to the terms and conditions of the individual privileges.
(See How to Purchase Shares and How to Redeem Shares.)
STEIN ROE COUNSELOR [SERVICE MARK] PROGRAM.
The Adviser offers a Stein Roe Counselor [service mark] and a
Stein Roe Counselor Preferred [service mark] program. The
programs are designed to provide investment guidance in helping
investors to select a portfolio of Stein Roe Mutual Funds. The
Stein Roe Counselor Preferred [service mark] program, which
automatically adjusts client portfolios, has a fee of up to 1%
of assets.
RECORDKEEPING AND ADMINISTRATION SERVICES.
If you oversee or administer investments for a group of investors,
we offer a variety of services.
TAX-SHELTERED RETIREMENT PLANS.
Booklets describing the following programs and special forms
necessary for establishing them are available on request. You may
use all of the Stein Roe Funds, except those investing primarily
in tax-exempt securities, in these plans. Please read the
prospectus for each fund in which you plan to invest before making
your investment.
Individual Retirement Accounts ("IRAs") for employed persons and
their non-employed spouses.
Prototype Money Purchase Pension and Profit-Sharing Plans for
self-employed individuals, partnerships, and corporations.
Simplified Employee Pension Plans permitting employers to provide
retirement benefits to their employees by utilizing IRAs while
minimizing administration and reporting requirements.
SPECIAL SERVICES.
The following special services are available to shareholders.
Please call 800-338-2550 or write the Trust for additional
information and forms.
<PAGE> 23
Dividend Purchase Option--to diversify your Fund investments by
having distributions from one Fund account automatically invested
in another Stein Roe Fund account. Before establishing this
option, you should obtain and read carefully the prospectus of the
Stein Roe Fund into which you wish to have your distributions
invested. The account from which distributions are made must be
of sufficient size that each distribution will usually be at least
$25. The account into which distributions are to be invested may
be opened with an initial investment of only $1,000.
Automatic Dividend Deposit (electronic transfer)--to have income
dividends and capital gain distributions deposited directly into
your bank checking account.
Telephone Redemption by Check Privilege ($1,000 minimum) and
Telephone Exchange Privilege ($50 minimum)--established
automatically when you open your account unless you decline them
on your Application. (See How to Redeem Shares--Special
Redemption Privileges.)
Telephone Redemption by Wire Privilege--to redeem shares from your
account by phone and have the proceeds transmitted by wire to your
checking account ($1,000 minimum).
Check-Writing Privilege--to redeem shares by writing special
checks against your Fund account ($50 minimum per check).
Special Redemption Option (electronic transfer)--to redeem shares
at any time and have the proceeds deposited directly to your bank
checking account ($50 minimum; $100,000 maximum).
Regular Investments (electronic transfer)--to purchase Fund shares
at regular intervals directly from your bank checking account ($50
minimum; $100,000 maximum).
Special Investments (electronic transfer)--to purchase Fund shares
by telephone and pay for them by electronic transfer of funds from
your checking account ($50 minimum; $100,000 maximum).
Automatic Exchange Plan--to automatically redeem a fixed dollar
amount from your Fund account and invest it in another Stein Roe
Fund account on a regular basis ($50 minimum; $100,000 maximum).
Automatic Redemptions (electronic transfer)--to have a fixed
dollar amount redeemed and sent at regular intervals directly to
your bank checking account ($50 minimum; $100,000 maximum).
Systematic Withdrawals--to have a fixed dollar amount, declining
balance, or fixed percentage of your account redeemed and sent at
regular intervals by check to you or another payee.
NET ASSET VALUE
The purchase and redemption price of each Fund's shares is its net
<PAGE> 24
asset value per share. The net asset value of a share of each
Fund is normally determined twice each day: at 11:00 a.m., Chicago
time, and as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., Chicago time). The net asset value
per share is computed by dividing the difference between the
values of the Fund's assets and liabilities by the number of
shares outstanding and rounding to the nearest cent. Net asset
value will not be determined on days when the Exchange is closed
unless, in the judgment of the Board of Trustees, the net asset
value of a Fund should be determined on any such day, in which
case the determination will be made at 3:00 p.m., Chicago time.
Each Fund attempts to maintain its net asset value at $1.00 per
share. Portfolio securities are valued based on their amortized
cost, which does not take into account unrealized gains or losses.
Other assets and securities of a Fund for which this valuation
method does not produce a fair value are valued at a fair value
determined by the Board. The extent of any deviation between the
Fund's net asset value based upon market quotations or equivalents
and $1.00 per share based on amortized cost will be examined by
the Board of Trustees. If such deviation were to exceed 1/2 of
1%, the Board would consider what action, if any, should be taken,
including selling portfolio instruments, increasing, reducing or
suspending distributions, or redeeming shares in kind.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS.
A dividend from net income of a Fund is declared each business day
to shareholders of record immediately before 3:00 p.m., Chicago
time. (See How to Purchase Shares.) Dividends are paid monthly
and confirmed at least quarterly. If a Fund's net asset value per
share were to decline, or were believed likely to decline, below
$1.00 (rounded to the nearest cent), the Board might temporarily
reduce or suspend dividends in an effort to maintain net asset
value at $1.00 per share.
All of your income dividends and capital gain distributions will
be reinvested in additional shares unless you elect to have
distributions either (1) paid by check; (2) deposited by
electronic transfer into your bank checking account; (3) applied
to purchase shares in your account with another Stein Roe Fund; or
(4) applied to purchase shares in a Stein Roe Fund account of
another person. (See Shareholder Services.) Reinvestment
normally occurs on the payable date. The Trust reserves the right
to reinvest the proceeds and future distributions in additional
Fund shares if
<PAGE> 25
checks mailed to you for distributions are returned
as undeliverable or are not presented for payment within six
months.
INCOME TAXES.
Your distributions will be taxable to you, under income tax law,
whether received in cash or reinvested in additional shares. For
federal income tax purposes, any distribution that is paid in
January but was declared in the prior calendar year is deemed paid
in the prior calendar year.
You will be subject to federal income tax at ordinary rates on
income dividends and distributions of net short-term capital gain.
Distributions of net long-term capital gain will be taxable to you
as long-term capital gain regardless of the length of time you
have held your shares.
You will be advised annually as to the source of distributions.
If you are not subject to tax on your income, you will not be
required to pay tax on these amounts. Because each Fund's
investment income consists primarily of interest, it is expected
that none of the dividends paid by the Funds will qualify under
the Internal Revenue Code for the dividends received deduction
available to corporations.
For federal income tax purposes, each Fund is treated as a
separate taxable entity distinct from the other series of the
Trust.
This section is not intended to be a full discussion of income tax
laws and their effect on shareholders. You may wish to consult
your own tax advisor.
BACKUP WITHHOLDING.
If (a) you fail to (i) furnish your properly certified social
security or other tax identification number or (ii) certify that
your tax identification number is correct or that you are not
subject to backup withholding due to the underreporting of certain
income, or (b) the Internal Revenue Service informs the Trust that
your tax identification number is incorrect, the Trust may be
required to withhold federal income tax ("backup withholding") from
certain payments (including redemption proceeds) to you. These
certifications are contained in the Application that you should
complete and return when you open an account. The Funds must
promptly pay to the IRS all amounts withheld. Therefore, usually
it is not possible for a Fund to reimburse you for amounts withheld.
However, you may claim the amount withheld as a credit on your
federal income tax return.
MANAGEMENT OF THE FUNDS
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Funds. See the Statement of
<PAGE> 26
Additional Information for the names of and other information
about the trustees and officers. The Funds' Adviser, Stein Roe &
Farnham Incorporated, One South Wacker Drive, Chicago, Illinois
60606, is responsible for managing each Fund's investment
portfolio and the business affairs of the Funds and the Trust,
subject to the direction of the Board. The Adviser is registered
as an investment adviser under the Investment Advisers Act.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
In approving the use of a single combined prospectus, the Board
considered the possibility that one Fund might be liable for
misstatements in the prospectus regarding information concerning
another Fund.
FEES AND EXPENSES.
In return for its services, the Adviser receives a monthly fee
from each Fund, computed and accrued daily, based on that Fund's
average net assets. Effective November 1, 1995, the annualized
fee for each Fund is .50 of 1% of the first $500 million, .45 of
1% of the next $500 million, and .40 of 1% on assets over $1
billion. Prior to that date, that of Cash Reserves was .50 of 1%
on the first $1 billion, .475 of 1% on the next $500 million, and
.45 of 1% thereafter; and that of Government Reserves
was .50 of 1% of average net assets. The annualized fees for Cash
Reserves and Government Reserves, after the expense limitation
described under Fee Table in the case of Government Reserves,
amounted to .50% and .45% of average net assets, respectively, for
the year ended June 30, 1995.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Funds,
including computation of each Fund's net asset value and
calculation of its net income and capital gains and losses on
disposition of Fund assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of each
Fund's portfolio securities. In doing so, the Adviser seeks to
obtain the best combination of price and execution, which involves
a number of judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc., One South Wacker Drive, Chicago, Illinois
60606, a wholly owned indirect subsidiary of Liberty Mutual, is
the agent of the Trust for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.
<PAGE> 27
DISTRIBUTOR.
The shares of each Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Funds or to their shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the
Funds. Foreign securities are maintained in the custody of
foreign banks and trust companies that are members of the Bank's
Global Custody Network or foreign depositories used by such
members. (See Custodian in the Statement of Additional
Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular Fund shall look only to the assets of the Trust or of
the respective Fund for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss
<PAGE> 28
on account of shareholder liability is believed to be remote,
because it would be limited to circumstances in which the disclaimer
was inoperative and the Trust was unable to meet its obligations.
The risk of a particular Fund incurring financial loss on account
of unsatisfied liability of another Fund of the Trust is also
believed to be remote, because it would be limited to claims to
which the disclaimer did not apply and to circumstances in which
the other Fund was unable to meet its obligations.
<PAGE> 29
CERTIFICATE OF AUTHORIZATION
(FOR USE BY CORPORATIONS AND ASSOCIATIONS ONLY)
A corporation or association must complete this Certificate and
submit it with the Fund Application, each written redemption,
transfer or exchange request, and each request to terminate or
change any of the Privileges or special service elections.
If the entity submitting the Certificate is an association, the
word "association" shall be deemed to appear each place the word
"corporation" appears. If the officer signing this Certificate is
named as an authorized person, another officer must countersign
the Certificate. If there is no other officer, the person signing
the Certificate must have his signature guaranteed. If you are
not sure whether you are required to complete this Certificate,
call the office of the Stein Roe Funds, 800-338-2550 toll-free.
The undersigned hereby certifies that he is the duly elected
Secretary of ____________________________ (the "Corporation")
(name of Corporation/Association)
and that the following individual(s):
Authorized Persons
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title
is (are) duly authorized by resolution or otherwise to act on
behalf of the Corporation in connection with the Corporation's
ownership of shares of any mutual fund managed by Stein Roe &
Farnham Incorporated (individually, the "Fund" and collectively,
the "Funds") including, without limitation, furnishing any such
Fund and its transfer agent with instructions to transfer or
redeem shares of that Fund payable to any person or in any manner,
or to redeem shares of that Fund and apply the proceeds of such
redemption to purchase shares of another Fund (an "exchange"), and
to execute any necessary forms in connection therewith.
Unless a lesser number is specified, all of the Authorized Persons
must sign written instructions. Number of signatures required:
________.
If the undersigned is the only person authorized to act on behalf
of the Corporation, the undersigned certifies that he is the sole
shareholder, director, and officer of the Corporation and that the
Corporation's Charter and Bylaws provide that he is the only
person authorized to so act.
Unless expressly declined on the Application (or other form
acceptable to the Funds), the undersigned further certifies that
the Corporation has authorized by resolution or otherwise the
establishment of the Telephone Exchange and Telephone Redemption
by Check Privileges for the Corporation's account with any Fund
offering any such Privilege. If elected on the Application (or
other form acceptable to the Funds), the undersigned also
certifies that the Corporation has similarly authorized
establishment of the Electronic Transfer, Telephone Redemption by
Wire, and Check-Writing Privileges for the Corporation's account
with any Fund offering said Privileges. The undersigned has
further authorized each Fund and its transfer agent to honor any
written, telephonic, or telegraphic instructions furnished
pursuant to any such Privilege by any person believed by the Fund
or its transfer agent or their agents, officers, directors,
trustees, or employees to be authorized to act on behalf of the
Corporation and agrees that neither the Fund nor its transfer
agent, their agents, officers, directors, trustees, or employees
will be liable for any loss, liability, cost, or expense for
acting upon any such instructions.
These authorizations shall continue in effect until five business
days after the Fund and its transfer agent receive written notice
from the Corporation of any change.
IN WITNESS WHEREOF, I have hereunto subscribed my name as
Secretary and affixed the seal of this Corporation this ____ day
of ___________________, 19___.
__________________________
Secretary
__________________________
Signature Guarantee*
*Only required if the person signing the Certificate is the only
person named as "Authorized Person."
Corporate
Seal
Here
<PAGE>
[STEIN ROE MUTUAL FUNDS LOGO]
The Stein Roe Funds
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Limited Maturity Income Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe Total Return Fund
Stein Roe Prime Equities
Stein Roe Stock Fund
Stein Roe Capital Opportunities Fund
Stein Roe Special Fund
Stein Roe International Fund
Stein Roe Young Investor Fund
Stein Roe Special Venture Fund
P.O. Box 804058
Chicago, Illinois 60680
800-338-2550
In Chicago, visit our Fund Center
at One South Wacker Drive
Liberty Securities Corporation, Distributor
01004-M7A
<PAGE>
STEIN ROE INCOME TRUST
BOND FUNDS
----------
STEIN ROE LIMITED MATURITY INCOME FUND
STEIN ROE GOVERNMENT INCOME FUND
STEIN ROE INTERMEDIATE BOND FUND
STEIN ROE INCOME FUND
THE NOVEMBER 1, 1995 DATE OF THIS PROSPECTUS IS NULL AND VOID.
THE NEW DATE OF THIS PROSPECTUS IS JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to each Fund was replaced with an administrative
agreement and a management agreement. The new fee schedules,
which do not result in a fee increase, are stated below at annual
rates as a percentage of average daily net assets (dollar amounts
are in millions):
FUND MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- ------------ ---------------- ------------------ -----------------
Income Fund .500% up to $100, .150% up to $100, .650% up to $100,
.475% thereafter .125% thereafter .600% thereafter
Government
Income Fund .450% up to $100, .150% up to $100, .600% up to $100,
.425% thereafter .125% thereafter .550% thereafter
Intermediate
Bond Fund .350% .150% .500%
Limited
Maturity
Income Fund .450% up to $100, .150% up to $100, .600% up to $100,
.425% next $100, .125% next $100, .550% next $100,
.400% thereafter .100% thereafter .500% thereafter
INTERFUND LENDING PROGRAM. On June 18, 1996, each Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Funds' Investments (pages 25-26 of the
Prospectus) is revised to read as follows:
"No Fund may make loans except that each Fund may (1)
purchase money market securities and enter into repurchase
agreements; (2) acquire publicly-distributed or privately-
placed debt securities; (3) lend its portfolio securities
under certain conditions; and (4) participate in an interfund
lending program with other Stein Roe Funds. A Fund may not
borrow money, except for non-leveraging, temporary, or
emergency purposes or in connection with participation in the
interfund lending program. Neither a Fund's aggregate
borrowings (including reverse repurchase agreements) nor a
Fund's aggregate loans at any one time may exceed 33 1/3% of
its total assets."
WIRE REDEMPTION PRIVILEGE. The Telephone Redemption by Wire
Privilege permits you to request a redemption from your Fund
account by phone and have the proceeds wired to your account at a
commercial bank, previously designated by you, that is a member of
the Federal Reserve System. The wire fee (currently $3.50 per
transaction) will be deducted from the amount wired. If you also
establish the Electronic Transfer Privilege, the bank account that
you designate for both Privileges must be the same. There is a
$1,000 minimum and a $100,000 maximum amount on each Telephone
Redemption by Wire. The Funds normally intend to pay proceeds of
a Telephone Redemption by Wire on the next business day.
PRINTING ERROR. The paragraph at the bottom of page 26 and
the top of page 27 of the Prospectus should read as follows:
"Limited Maturity Income Fund is appropriate for investors who
seek higher yields than are usually available from money
market instruments with stable prices and shorter maturities,
but who also want less net asset fluctuation than that of a
longer-term fund. Unlike money market funds, however, the
Fund does not seek to maintain a stable net asset value and
may not be able to return dollar-for-dollar the money
invested. Intermediate Bond Fund is appropriate for investors
who seek high income with less net asset value fluctuation
from interest rate changes than that of a longer-term fund,
and who can accept greater levels of credit and other risks
associated with securities that are rated below investment
grade. Government Income Fund is designed for investors who
seek high income with minimum risk other than the risk of
changes in net asset value caused by fluctuations in
prevailing levels of interest rates. Income Fund is designed
for investors who seek a higher level of income and who can
accept greater levels of credit and other risks associated
with securities of medium or lower quality."
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (pages 8-11 of the Prospectus) is updated by
adding the following unaudited financial information for the six
months ended December 31, 1995:
LIMITED
MATURITY GOVERNMENT INTERMEDIATE
INCOME INCOME BOND INCOME
FUND FUND FUND FUND
-------- ---------- ------------ -------
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.70 $ 9.85 $ 8.67 $ 9.79
------ ------ ------ -------
Income from Investment Operations
Net investment income .31 .32 .30 .37
Net realized and unrealized gains
(losses) on investments .06 .32 .27 .29
------ ------ ------ -------
Total from investment operations .37 .64 .57 .66
Distributions from net investment
income (.31) (.32) (.30) (.37)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $ 9.76 $10.17 $ 8.94 $10.08
------ ------ ------ -------
------ ------ ------ -------
Ratio of net expenses to average
net assets (a) *0.52% *1.00% *0.70% *0.82%
Ratio of net investment income to
average net assets (b) *6.10% *6.06% *6.57% *7.24%
Portfolio turnover rate **12% **15% **107% **45%
Total return (b) **3.74% **6.38% **6.54% **6.74%
Net assets, end of period
(000 omitted) $36,670 $36,756 $314,381 $208,398
_______________
*Annualized.
**Not annualized.
(a) If the Funds had paid all of their expenses and there had been
no reimbursement of expenses by the Adviser, for the period
ended December 31, 1995, this ratio would have been 1.23% for
Limited Maturity Income Fund, 1.12% for Government Income
Fund, 0.73% for Intermediate Bond Fund, and 0.88% for Income
Fund.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
NEW ADDRESS FOR ORDERS. Effective July 1, 1996, orders for
purchases and redemptions of Fund shares should be mailed to
SteinRoe Services Inc. at P.O. Box 8900, Boston, Massachusetts
02205. Participants in the Stein Roe Counselor [service mark]
Program should send orders to SteinRoe Services Inc. at P.O. Box
____, Chicago, Illinois 60680.
The Statement of Additional Information and the most recent
financial statements may be obtained without charge by writing to
the Secretary of the Trust at P.O. Box ___, Chicago, Illinois
60680, or by calling 800-338-2550.
NEW INSTRUCTIONS FOR PURCHASES BY WIRE TRANSFER. Effective
July 1, 1996, wire transfers for the purchase of Fund shares
should be addressed as follows:
First National Bank of Boston
ABA Routing No. 011000390
Boston, Massachusetts
Attention: Custody
Fund No. ___; Stein Roe _____ Fund
Account of (exact name(s) in registration)
Shareholder Account No. ________
Fund Numbers:
____ Stein Roe Limited Maturity Income Fund
____ Stein Roe Government Income Fund
____ Stein Roe Intermediate Bond Fund
____ Stein Roe Income Fund
Participants in the Stein Roe Counselor [service mark]
program should continue to use the instructions on page 29 of the
Prospectus for wire transfer purchases.
__________________
<PAGE> 1
LIMITED MATURITY INCOME FUND seeks high current income by investing
primarily in U.S. Government and other high-quality debt securities.
The dollar-weighted average effective maturity will not exceed
three years.
GOVERNMENT INCOME FUND seeks high current income by investing
primarily in securities issued or guaranteed by the U.S. Government
or by its agencies or instrumentalities.
INTERMEDIATE BOND FUND seeks high current income by investing
primarily in marketable debt securities. The dollar-weighted
average life of the Fund's portfolio is expected to be between
three and ten years.
INCOME FUND seeks high current income by investing principally
in medium-quality debt securities and, to a lesser extent, in
lower-quality securities which may involve greater risk. (See
How the Funds Invest--Income Fund.)
Each Fund is a "no-load" fund. There are no sales or redemption
charges, and the Funds have no 12b-1 plans. The Funds are series
of the STEIN ROE INCOME TRUST, an open-end management investment
company.
This prospectus contains information you should know before
investing in the Funds. Please read it carefully and retain it
for future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at the address shown on the back cover or by calling
800-338-2550.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is November 1, 1995.
<PAGE> 2
TABLE OF CONTENTS
Page
Summary.................................. 2
Fee Table................................ 5
Financial Highlights..................... 7
The Funds................................12
How the Funds Invest.....................12
Limited Maturity Income Fund..........12
Government Income Fund................14
Intermediate Bond Fund................15
Income Fund...........................17
Portfolio Investments and Strategies.....19
Restrictions on the Funds' Investments ..25
Risks and Investment Considerations..... 26
How to Purchase Shares...................28
By Check..............................28
By Wire...............................29
By Electronic Transfer............... 29
By Exchange.......................... 29
Purchase Price and Effective Date.... 30
Conditions of Purchase............... 30
Purchases Through Third Parties.......30
How to Redeem Shares.................... 30
By Written Request................... 30
By Exchange.......................... 31
Special Redemption Privileges........ 32
General Redemption Policies.......... 33
Shareholder Services.................... 35
Net Asset Value......................... 37
Distributions and Income Taxes...........38
Investment Return....................... 39
Management of the Funds..................40
Organization and Description of Shares.. 42
Certificate of Authorization.............45
<PAGE> 3
SUMMARY
Stein Roe Limited Maturity Income Fund ("Limited Maturity Income
Fund"), Stein Roe Government Income Fund ("Government Income
Fund"), Stein Roe Intermediate Bond Fund ("Intermediate Bond
Fund"), and Stein Roe Income Fund ("Income Fund") are series of
the Stein Roe Income Trust, an open-end diversified management
investment company organized as a Massachusetts business trust.
Each Fund is a "no-load" fund. There are no sales or redemption
charges. (See The Funds and Organization and Description of
Shares.)
INVESTMENT OBJECTIVES AND POLICIES.
Each Fund seeks high current income. The Funds seek to achieve
their objectives by investing primarily in debt obligations of
various types.
LIMITED MATURITY INCOME FUND seeks to provide a high level of
current income, consistent with the preservation of capital. It
attempts to achieve its objective by investing primarily in
securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities ("U.S.
Government Securities") and other high-quality fixed-income
securities.
GOVERNMENT INCOME FUND seeks high current income by investing
primarily in U.S. Government Securities. In addition, the Fund is
permitted to invest up to 20% of its assets in other types of debt
securities, including collateralized mortgage obligations.
INTERMEDIATE BOND FUND pursues a high level of current income,
consistent with capital preservation, by investing primarily in
marketable debt securities. At least 60% of the Fund's assets
will be invested in debt securities rated within the three highest
grades assigned by Moody's or by S&P, or in U.S. Government
Securities, commercial paper, and certain bank obligations. Under
normal market conditions, the Fund invests at least 65% of its
assets in securities with an average life of between three and ten
years, and expects that the dollar-weighted average life of its
portfolio will be between three and ten years.
INCOME FUND seeks high current income by investing principally in
medium-quality debt securities (such as securities rated A or Baa
by Moody's or A or BBB by S&P), with at least 60% of its assets
invested in medium- or higher-quality debt securities. Medium-
quality debt securities may have speculative characteristics. The
<PAGE> 4
Income Fund may also invest to a lesser extent in securities of
lower quality, which may entail greater risk. Lower-quality
securities are commonly referred to as "junk bonds."
For a more detailed discussion of each Fund's investment
objectives and policies, please see How the Funds Invest and
Portfolio Investments and Strategies. There is, of course, no
assurance that the Funds will achieve their investment objectives.
INVESTMENT RISKS.
The risks inherent in each Fund depend primarily upon the term and
quality of the obligations in that Fund's portfolio, as well as on
market conditions. Interest rate fluctuations will affect a
Fund's net asset value, but not the income received by the Fund
from its portfolio securities. However, because yields on debt
securities available for purchase by a Fund vary over time, no
specific yield on shares of a Fund can be assured. Limited
Maturity Income Fund is appropriate for investors who seek higher
yields than are usually available from money market instruments
with stable prices and shorter maturities, but who also want less
net asset fluctuation than that of a longer-term fund.
Intermediate Bond Fund is appropriate for investors who seek high
income with less net asset value fluctuation from interest rate
changes than that of a longer-term fund and who can accept greater
levels of credit and other risks associated with securities that
are rated below investment grade. Government Income Fund is
designed for investors who seek high income with minimum risk
other than the risk of changes in net asset value caused by
fluctuations in prevailing levels of interest rates. Income Fund
is designed for investors who seek a still higher level of income
and who can accept greater levels of credit and other risks
associated with securities of medium or lower quality. Limited
Maturity Income Fund, Intermediate Bond Fund, and Income Fund may
invest in foreign securities, which may entail a greater degree of
risk than investing in securities of domestic issuers. Please see
Restrictions on the Funds' Investments and Risks and Investment
Considerations for further information.
PURCHASES.
The minimum initial investment is $2,500. Additional investments
must be at least $100 (only $50 for purchases by electronic
transfer). Shares may be purchased by check, by bank wire, by
electronic transfer, or by exchange from another Stein Roe Fund.
(See How to Purchase Shares.)
REDEMPTIONS.
For information on redeeming Fund shares, including
<PAGE> 5
the special redemption privileges, please see How to Redeem Shares.
DISTRIBUTIONS.
Dividends are declared each business day and are paid monthly.
Dividends will be reinvested into your Fund account unless you
elect to have them paid in cash, deposited by electronic transfer
into your bank checking account, or invested into another Stein
Roe Fund account. (See Distributions and Income Taxes and
Shareholder Services.)
MANAGEMENT AND FEES.
Stein Roe & Farnham Incorporated (the "Adviser") is investment
adviser to the Funds. For a description of the Adviser and the
fees paid by the Funds, see Management of the Funds.
If you have any additional questions about the Funds, please feel
free to discuss them with an account representative by calling
800-338-2550.
FEE TABLE
Limited Govern- Inter-
Maturity ment mediate
Income Income Bond Income
Fund Fund Fund Fund
-------- ------- ------ ------
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None None None None
Sales Load Imposed on Reinvested
Dividends None None None None
Deferred Sales Load None None None None
Redemption Fees None None None None
Exchange Fees None None None None
ANNUAL FUND OPERATING EXPENSES
(after expense reimbursement in
the case of each Fund; as a
percentage of average net assets)
Management Fees (after expense
reimbursements) 0.00% 0.51% 0.49% 0.60%
12b-1 Fees None None None None
Other Expenses (after expense
reimbursement in the case of
Limited Maturity Income Fund) 0.65% 0.49% 0.21% 0.22%
----- ----- ----- -----
Total Fund Operating Expenses
(after expense reimbursements) 0.65% 1.00% 0.70% 0.82%
----- ----- ----- -----
----- ----- ----- -----
<PAGE> 6
EXAMPLES.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------- -------- ------- --------
Limited Maturity
Income Fund $7 $21 $36 $81
Government Income Fund 10 32 55 122
Intermediate Bond Fund 7 22 39 87
Income Fund 8 26 46 101
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in a Fund. The table is based upon
actual expenses incurred in the last fiscal year, adjusted for
each Fund's expense limitation in effect on November 1, 1995.
From time to time, the Adviser may voluntarily absorb certain
expenses of a Fund. The Adviser has agreed to voluntarily absorb
the expenses of Limited Maturity Income Fund for expenses in
excess of 0.65 of 1% of average net assets (effective November 1,
1995); Government Income Fund for expenses in excess of 1% of
average net assets; Intermediate Bond Fund for expenses in excess
of 0.70 of 1% of average net assets (effective May 1, 1995); and
Income Fund for expenses in excess of 0.82 of 1% of average net
assets. These commitments expire on October 31, 1996, subject to
earlier termination by the Adviser on 30 days' notice, except for
Income Fund, which expires on October 31, 1998. Prior
to November 1, 1995, the Adviser undertook to reimburse Limited
Maturity Income Fund for expenses in excess of 0.45 of 1%. Absent
such expense undertakings, Management Fees, Other Expenses and
Total Fund Operating Expenses for Limited Maturity Income Fund
would have been 0.60%, 0.67% and 1.27%; and Management Fees and
Total Fund Operating Expenses for Government Income Fund,
Intermediate Bond Fund, and Income Fund would have been 0.60% and
1.09%, 0.50% and 0.71%, and 0.63% and 0.85%, respectively.
Any such absorption will temporarily lower a Fund's overall
expense ratio and increase its overall return to investors. (Also
see Management of the Funds--Fees and Expenses.)
For purposes of the Examples above, the figures assume that the
percentage amounts listed for the respective Funds under Annual
Fund Operating Expenses remain the same during each of the
periods, that all income dividends and capital gain distributions
are reinvested in additional Fund shares, and that, for purposes
of management fee breakpoints, if any, the Funds' respective net
assets remain at the same levels as in the most recently completed
fiscal year.
<PAGE> 7
The figures in the Examples are not necessarily indicative of past
or future expenses, and actual expenses may be greater or less
than those shown. Although information such as that shown in the
Examples and Fee Table is useful in reviewing the Funds' expenses
and in providing a basis for comparison with other mutual funds,
it should not be used for comparison with other investments using
different assumptions or time periods.
FINANCIAL HIGHLIGHTS
The tables below reflect the results of operations of the Funds on
a per-share basis. The tables for Limited Maturity Income Fund
and Income Fund and information for the years beginning after June
30, 1987, for Government Income Fund and Intermediate Bond Fund
have been audited by Ernst & Young LLP, independent auditors. All
of the auditors' reports related to information for these periods
were unqualified. These tables should be read in conjunction with
the respective Fund's financial statements and notes thereto. The
Funds' annual report, which may be obtained from the Trust without
charge upon request, contains additional performance information.
<PAGE> 8-9
LIMITED MATURITY INCOME FUND
Period
Ended
June 30, Years Ended June 30,
1993 (a) 1994 1995
-------- ------- ------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.01 $9.61
-------- ------- ------
Income from Investment Operation
Net investment income .12 .47 .56
Net realized and unrealized gains
on investments .01 (.40) .09
-------- ------- ------
Total from investment operations .13 .07 .65
Distributions from net investment
income (.12) (.47) (.56)
-------- ------- ------
NET ASSET VALUE, END OF PERIOD $10.01 $9.61 $9.70
-------- ------- ------
-------- ------- ------
Ratio of net expenses to average
net assets (b) *0.45% 0.45% 0.45%
Ratio of net investment income to
average net assets (c) *4.18% 4.81% 5.83%
Portfolio turnover rate **20% 122% 64%
Total return **1.43% 0.66% 6.96%
Net assets, end of period
(000 omitted) $7,619 $35,383 $27,907
GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Period
Ended
June 30, Years Ended June 30,
1986(a) 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- ---- ----- ------ ------ ----- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.00 $10.10 $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
Income from Investment
Operations
Net investment income .24 .72 .74 .78 .76 .75 .72 .64 .56 .62
Net realized and
unrealized gains
(losses) on investments .10 (.31) (.15) .18 (.11) .15 .59 .31 (.77) .37
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
Total from investment
operations .34 .41 .59 .96 .65 .90 1.31 .95 (.21) .99
Distributions
Net investment income (.24) (.72) (.74) (.78) (.76) (.75) (.72) (.64) (.56) (.62)
Net realized capital
gains -- -- (.05) -- -- -- -- (.25) (.01) --
In excess of realized
gains -- -- -- -- -- -- -- -- (.20) --
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
Total distributions (.24) (.72) (.79) (.78) (.76) (.75) (.72) (.89) (.77) (.62)
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
NET ASSET VALUE,
END OF PERIOD $10.10 $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48 $ 9.85
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
Ratio of expenses to
average net assets (b) 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.99% 0.95% 0.98% 1.00%
Ratio of net investment
income to average net
assets (c) *7.61% 7.13% 7.68% 8.19% 7.90% 7.65% 7.05% 6.25% 5.49% 6.56%
Portfolio turnover rate **91% 205% 237% 239% 181% 136% 139% 170% 167% 225%
Total return **3.35% 4.01% 6.35% 10.61% 6.92% 9.61% 13.75% 9.60% (2.26%) 10.94%
Net assets, end of
period (000 omitted) $11,970 $22,656 $26,859 $32,011 $46,853 $49,952 $58,978 $61,591 $45,836 $37,280
</TABLE>
<PAGE> 10-11
INTERMEDIATE BOND FUND
<TABLE>
<CAPTION>
Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $8.89 $9.92 $8.77 $8.51 $8.65 $8.38 $8.53 $8.99 $9.26 $8.44
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income from Investment
Operations
Net investment income .84 .74 .68 .74 .73 .69 .69 .65 .56 .58
Net realized and
unrealized gains
(losses) on investments 1.03 (.41) (.12) .14 (.28) .16 .46 .27 (.59) .23
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations 1.87 .33 .56 .88 .45 .85 1.15 .92 (.03) .81
Distributions
Net investment income (.84) (.74) (.68) (.74) (.72) (.70) (.69) (.65) (.56) (.58)
Net realized capital gains -- (.74) (.14) -- -- -- -- -- (.08) --
In excess of realized
gains -- -- -- -- -- -- -- -- (.15) --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (.84) (1.48) (.82) (.74) (.72) (.70) (.69) (.65) (.79) (.58)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE,
END OF PERIOD $9.92 $8.77 $8.51 $8.65 $8.38 $8.53 $8.99 $9.26 $8.44 $8.67
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ratio of expenses to
average net assets (b) 0.69% 0.68% 0.73% 0.73% 0.74% 0.73% 0.70% 0.67% 0.70% 0.70%
Ratio of net investment
income to average net
assets (c) 9.03% 7.94% 7.97% 8.71% 8.60% 8.17% 7.87% 7.22% 6.20% 6.94%
Portfolio turnover rate 334% 230% 273% 197% 296% 239% 202% 214% 206% 162%
Total return 21.90% 3.40% 6.92% 10.97% 5.33% 10.62% 14.02% 10.59% (0.47%) 10.11%
Net assets, end of
period (000 omitted) $183,440 $188,674 $162,225 $165,056 $161,439 $184,444 $242,948 $311,728 $302,507 $301,733
</TABLE>
INCOME FUND
<TABLE>
<CAPTION>
Period
Ended
June 30, Years Ended June 30,
1986(a) 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.00 $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income .30 .98 .95 .95 .92 .80 .76 .75 .69 .71
Net realized and
unrealized gains (losses)
on investments (.06) (.23) (.11) .05 (.70) -- .56 .59 (.74) .43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .24 .75 .84 1.00 .22 .80 1.32 1.34 (.05) 1.14
Distributions from net
investment income (.30) (.98) (.95) (.95) (.92) (.80) (.76) (.75) (.69) (.71)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36 $ 9.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of expenses to
average net assets (b) *1.00% 0.96% 0.91% 0.90% 0.93% 0.95% 0.90% 0.82% 0.82% 0.82%
Ratio of net investment
income to average net
assets (c) *10.07% 9.90% 10.08% 9.97% 10.02% 8.98% 8.20% 7.62% 6.94% 7.55%
Portfolio turnover rate **84% 153% 158% 94% 90% 77% 76% 39% 53% 64%
Total return **2.42% 7.70% 9.38% 11.06% 2.48% 9.30% 15.30% 14.64% (0.69%) 12.79%
Net assets, end of
period (000 omitted) $32,034 $91,916 $96,611 $110,376 $89,023 $93,952 $112,706 $151,594 $158,886 $174,327
<FN>
*Annualized.
**Not annualized.
(a) Government Income Fund and Income Fund commenced operations on
March 5, 1986 and Limited Maturity Income Fund commenced
operations on March 11, 1993.
(b) If the Funds had paid all of their expenses and there had been
no reimbursement of expenses by the Adviser, these ratios would
have been: for Limited Maturity Income Fund, 3.63% for the
period ended June 30, 1993 and 1.14% and 1.27% for the years
ended June 30, 1994 and 1995, respectively; for Government Income
Fund, 3.33% for the period ended June 30, 1986, and 1.44%, 1.37%,
1.21%, and 1.07% for the years ended June 30, 1987 through 1990,
respectively, and 1.09% for the year ended June 30, 1995; for
Intermediate Bond Fund, 0.71% for the year ended June 30, 1995;
and for Income Fund, 2.01% for the period ended June 30, 1986,
and 0.83% and 0.85% for the years ended June 30, 1994 and 1995,
respectively.
(c) Computed giving effect to the Adviser's expense limitation
undertaking.
</TABLE>
<PAGE> 12
THE FUNDS
The mutual funds offered by this prospectus are STEIN ROE LIMITED
MATURITY INCOME FUND ("Limited Maturity Income Fund"), STEIN ROE
GOVERNMENT INCOME FUND ("Government Income Fund"), STEIN ROE
INTERMEDIATE BOND FUND ("Intermediate Bond Fund"), and STEIN ROE
INCOME FUND ("Income Fund") (collectively, the "Funds"). Each of
the Funds is a no-load, diversified "mutual fund." No-load funds
do not impose commissions or charges when shares are purchased or
redeemed. Mutual funds sell their own shares to investors and
invest the proceeds in a portfolio of securities. A mutual fund
allows you to pool your money with that of other investors in
order to obtain professional investment management. Mutual funds
generally make it possible for you to obtain greater diversification
of your investments and simplify your recordkeeping.
The Funds are series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") is investment
adviser to the Funds. The Adviser also manages several other no-
load mutual funds with different investment objectives, including
equity funds, international funds, tax-exempt bond funds, and
money market funds. To obtain prospectuses and other information
on any of those mutual funds, please call 800-338-2550.
HOW THE FUNDS INVEST
Each Fund seeks a high level of current income. Each Fund
invests as described below. Further information on portfolio
investments and strategies may be found under Portfolio
Investments and Strategies in this prospectus and in the Statement
of Additional Information.
LIMITED MATURITY INCOME FUND.
This Fund's investment objective is to provide a high level of
current income, consistent with the preservation of capital. The
Fund attempts to achieve its objective by investing primarily in
securities issued or guaranteed as to principal and interest by
the U.S. Government or by its agencies or instrumentalities ("U.S.
Government Securities") and other high-quality fixed-income
securities. Depending on market conditions, the Fund may invest a
substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC.
<PAGE> 13
In addition, the Fund may invest in principal portions or coupon
portions of U.S. Government Securities that have been separated
(stripped) by banks, brokerage firms, or other entities. Stripped
securities are usually sold separately in the form of receipts or
certificates representing undivided interests in the stripped
portion and are not considered to be issued or guaranteed by the
U.S. Government. Stripped securities may be more volatile than
non-stripped securities. The staff of the Securities and Exchange
Commission believes that mortgage-backed stripped securities are
illiquid. The Fund has temporarily agreed to treat stripped
securities as subject to the Fund's restriction on investment
in illiquid securities.
The Fund may also invest in other types of debt securities;
however, under normal circumstances, at least 65% of the Fund's
total assets will be invested in U.S. Government Securities, non-
U.S. Government Securities that are rated at least AA by Standard
& Poor's Corporation ("S&P") or Aa by Moody's Investors Service,
Inc. ("Moody's") and high-quality money market instruments. The
Fund may invest up to 35% of its assets in other debt securities
that are rated at least investment grade (BBB by S&P or Baa by
Moody's). Securities rated BBB by S&P or Baa by Moody's are
neither highly protected nor poorly secured. Such securities have
some speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity of the issuers of such securities to make
principal and interest payments than is the case for issuers of
higher grade securities. If the rating of a security held by the
Fund is lost or reduced below investment grade, the Fund is not
required to dispose of the security, but the Adviser will consider
that fact in determining whether the Fund should continue to
hold the security.
Under normal circumstances, the dollar-weighted average maturity
of the portfolio is expected to be no more than ten years. The
average dollar-weighted maturity of the portfolio is the dollar-
weighted average of the stated maturities of all debt instruments
held in the portfolio. In addition, it is expected that under
normal circumstances, the Fund will invest at least 65% of its
total assets in securities with an effective maturity of three
years or less and that the dollar-weighted average effective
maturity of the portfolio will not exceed three years. The
effective maturity of a debt instrument is the weighted average
period over which the Adviser expects the principal to be paid,
and differs from stated
<PAGE> 14
maturity in that it estimates the effect of expected principal
prepayments and call provisions. With respect to GNMA securities
and other mortgage-backed securities, the effective maturity is
likely to be substantially less than the stated maturity of the
mortgages in the underlying pools. With respect to obligations
with call provisions, the effective maturity is typically the next
call date on which the obligation reasonably may be expected to be
called. Securities without prepayment or call provisions generally
have an effective maturity equal to their stated maturity. During
periods of rising interest rates, the effective maturity of
mortgage-backed securities and callable obligations may increase
because they are less likely to be prepaid, which may result in
greater net asset value fluctuation.
GOVERNMENT INCOME FUND.
This Fund's investment objective is to provide a high level of
current income. It invests primarily in U.S. Government
Securities. Depending on market conditions, the Fund may invest a
substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC.
Because the Fund's investment policy permits it to invest in U.S.
Government Securities that are not backed by the full faith and
credit of the U.S. Treasury, investment in the Fund may involve
risks that are different in some respects from an investment in a
fund that invests only in securities that are backed by the full
faith and credit of the U.S. Treasury. Such risks may include a
greater risk of loss of principal and interest on the securities
in the Fund's portfolio that are supported only by the issuing or
guaranteeing U.S. Government agency or instrumentality, since the
Fund must look principally or solely to that entity for ultimate
repayment.
Under normal market conditions, the Fund will invest at least 80%
of its assets in U.S. Government Securities. The Fund may also
invest up to 20% of its assets in other types of debt securities,
including collateralized mortgage obligations ("CMOs") and
principal portions or coupon portions of U.S. Government
Securities that have been separated (stripped) by banks, brokerage
firms, or other entities. Stripped securities are usually sold
separately in the form of receipts or certificates representing
undivided interests in the stripped portion. CMOs are securities
collateralized by mortgages and mortgage-backed securities. CMOs
are not guaranteed by either the U.S. Government or by its
agencies or instrumentalities. Stripped securities may be more
volatile than non-stripped securities. The staff of the Securities and
Exchange Commission
<PAGE> 15
believes that stripped securities are illiquid. The
Fund has temporarily agreed to treat stripped securities as
subject to the Fund's restriction on investment in illiquid
securities. The Fund will invest in debt securities rated at
least investment grade or, if unrated, deemed by the Adviser to be
of comparable quality. Securities rated in the fourth grade are
neither highly protected nor poorly secured. Such securities have
some speculative characteristics, and changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity of the issuers of such securities to make
principal and interest payments than is the case for issuers of
higher grade securities. If the rating of a security held by the
Fund is lost or reduced below investment grade, the Fund is not
required to dispose of the security, but the Adviser will consider
that fact in determining whether the Fund should continue to hold
the security.
INTERMEDIATE BOND FUND.
This Fund's investment objective is to provide a high level of
current income, consistent with the preservation of capital, by
investing primarily in marketable debt securities. Under normal
market conditions, the Fund will invest at least 65% of the value
of its total assets (taken at market value at the time of
investment) in convertible and non-convertible bonds and
debentures, and at least 60% of its assets will be invested in the
following:
(1) Marketable straight-debt securities of domestic issuers, and
of foreign issuers payable in U.S. dollars, rated at time of
purchase within the three highest grades assigned by Moody's or
by S&P;
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P at
time of purchase, or, if unrated, issued or guaranteed by a
corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements, of banks
having total assets in excess of $1 billion.
Under normal market conditions, the Fund invests at least 65% of
its assets in securities with an average life of between three and
ten years, and expects that the dollar-weighted average life of
its portfolio will be between three and ten years. Average life
is the weighted average period over which the Adviser expects the
principal to be paid, and differs from stated maturity in that it
estimates the effect of expected principal prepayments and call
provisions. With respect to GNMA securities and
<PAGE> 16
other mortgage-backed securities, average life is likely to be
substantially less than the stated maturity of the mortgages in
the underlying pools. With respect to obligations with call
provisions, average life is typically the next call date on which
the obligation reasonably may be expected to be called. Securities
without prepayment or call provisions generally have an average life
equal to their stated maturity. During periods of rising interest
rates, the average life of mortgage-backed securities and callable
obligations may increase substantially because they are not likely
to be prepaid, which may result in greater net asset value
fluctuation.
The Fund also may invest in other debt securities (including those
convertible into or carrying warrants to purchase common stocks or
other equity interests, and privately placed debt securities),
preferred stocks, and marketable common stocks that the Adviser
considers likely to yield relatively high income in relation to
cost.
The Fund may invest up to 35% of its total assets in debt
securities that are rated below investment grade (with no minimum
permitted rating) and that, on balance, are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the possibility
of issuer default and bankruptcy. An economic downturn could
severely disrupt this market and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal
and interest. In addition, lower-quality bonds are less sensitive
to interest rate changes than higher-quality instruments (see Risks
and Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period
of rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the Fund's investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if the Fund were investing exclusively in investment grade debt
securities. Since the ratings of rating services (which evaluate
the safety of principal and interest payments, not market risks)
are used only as preliminary indicators of investment quality, the
Adviser employs its own credit research and analysis, from which
it has developed a credit rating system based upon comparative
credit analyses of issuers within the same industry.
<PAGE> 17
These analyses may take into consideration such quantitative factors as
an issuer's present and potential liquidity, profitability,
internal capability to generate funds, debt/equity ratio and debt
servicing capabilities, and such qualitative factors as an
assessment of management, industry characteristics, accounting
methodology, and foreign business exposure.
Debt securities that are rated below investment grade tend to be
less marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and the Fund may have greater
difficulty selling its portfolio securities. (See Net Asset
Value.) The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.
For the fiscal year ended June 30, 1995, the Fund's portfolio was
invested, on average, as follows: high-quality short-term
instruments, 4.1%; U.S. Government Securities, 39.3%; AAA, 6.3%;
AA, 7.2%; A, 13.3%; BBB, 21.2%; BB, 8.1%; and unrated, 0.5%. The
ratings are based on a dollar-weighted average, computed monthly,
and reflect the higher of S&P or Moody's ratings. The ratings do
not necessarily reflect the current or future composition of the
Fund.
INCOME FUND.
The investment objective of Income Fund is to provide a high level
of current income. Consistent with that investment objective,
capital preservation and capital appreciation are regarded as
secondary objectives.
Income Fund attempts to achieve its objective by investing
principally in medium-quality debt securities, which are
obligations of issuers that the Adviser believes possess adequate,
but not outstanding, capacities to service their debt securities,
such as securities rated A or Baa by Moody's or A or BBB by S&P.
The Adviser generally attributes to medium-quality securities the
same characteristics as do rating services.
Although the Income Fund will invest at least 60% of its assets in
medium- or higher-quality securities, it may also invest to a
lesser extent in securities of lower quality (in the case of rated
securities, having a rating by Moody's or S&P of not less than C).
Although the Fund can invest up to 40% of its assets in lower-
quality securities, it does not intend to invest more than 35% in
lower-quality securities. Lower-quality debt securities are
obligations of issuers that are
<PAGE> 18
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal, and are commonly referred to
as "junk bonds." The Income Fund may invest in lower-quality debt
securities; for example, if the Adviser believes the financial
condition of the issuers or the protection offered to the particular
obligations is stronger than is indicated by low ratings or otherwise.
The Income Fund may invest in higher-quality securities; for example,
under extraordinary economic or financial market conditions, or when
the spreads between the yields on medium- and high-quality securities
are relatively narrow.
Some issuers of debt securities choose not to have their
securities rated by a rating service, and the Income Fund may
invest in unrated securities that the Adviser believes are
suitable for investment.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely
disrupt this market and adversely affect the value of outstanding
bonds and the ability of the issuers to repay principal and
interest. In addition, lower-quality bonds are less sensitive to
interest rate changes than higher-quality instruments (see Risks
and Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of
rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the Income Fund's investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if the Fund were investing in higher-quality debt
securities. Since the ratings of rating services (which evaluate
the safety of principal and interest payments, not market risks)
are used only as preliminary indicators of investment quality, the
Adviser employs its own credit research and analysis, from which
it has developed a credit rating system based upon comparative
credit analyses of issuers within the same industry. These
analyses may take into consideration such quantitative factors as
an issuer's present and potential liquidity, profitability,
internal capability to generate funds, debt/equity ratio and debt
servicing capabilities, and such qualitative factors as an
assessment of management, industry characteristics, accounting
methodology, and foreign business exposure.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities
<PAGE> 19
because the market for them is less broad. The market
for unrated debt securities is even narrower. During periods
of thin trading in these markets, the spread between bid and asked
prices is likely to increase significantly, and the Income Fund may
have greater difficulty selling its portfolio securities. (See Net
Asset Value.) The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.
Under normal market conditions, the Income Fund will invest at
least 65% of the value of its total assets (taken at market value)
in convertible and non-convertible bonds and debentures. Such
securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by the Income Fund for a sufficient time to permit orderly
disposition thereof or to establish long-term holding periods for
federal income tax purposes.
The Income Fund may invest up to 35% of its total assets in other
debt securities, marketable preferred and common stocks, and
foreign and municipal securities that the Adviser considers likely
to yield relatively high income in relation to costs, and rights
to acquire such securities. (Municipal securities are securities
issued by or on behalf of state and local governments, the
interest on which is generally exempt from federal income tax.)
Any assets not otherwise invested may be invested in money market
instruments.
For the fiscal year ended June 30, 1995, the Income Fund's
portfolio was invested, on average, as follows: high-quality
short-term instruments, 3.9%; U.S. Government Securities, 12.6%;
AAA, 3.5%; AA, 2.6%; A, 11.0%; BBB, 37.5%; BB, 25.3%; B, 1.5%; and
unrated, 2.1%. The ratings are based on a dollar-weighted
average, computed monthly, and reflect the higher of S&P or
Moody's ratings. The ratings do not necessarily reflect the
current or future composition of the Income Fund.
PORTFOLIO INVESTMENTS AND STRATEGIES
U.S. GOVERNMENT SECURITIES.
U.S. Government Securities include: (i) bills, notes, bonds, and
other debt securities, differing as to maturity and rates of
interest, that are issued by and are direct obligations of the
U.S. Treasury; and (ii) other securities that are issued or
guaranteed as to principal and interest by the U.S. Government or
by its agencies or instrumentalities and that include, but are not
limited to, Government National
<PAGE> 20
Mortgage Association ("GNMA"), Federal Farm Credit Banks, Federal
Home Loan Banks, Farmers Home Administration, Federal Home Loan
Mortgage Corporation ("FHLMC"), and Federal National Mortgage Association
("FNMA"). U.S. Government Securities are generally viewed by the Adviser
as being among the safest of debt securities with respect to the timely
payment of principal and interest (but not with respect to any premium
paid on purchase), but generally bear a lower rate of interest than
corporate debt securities. However, they are subject to market risk
like other debt securities, and therefore the Fund's shares can be
expected to fluctuate in value.
DERIVATIVES.
Consistent with its objective, each Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded
options, futures contracts, futures options, securities
collateralized by underlying pools of mortgages or other
receivables, and other instruments, the value of which is
"derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a
currency ("Derivatives"). No Fund expects to invest more than 5%
of its net assets in any type of Derivative except: for each Fund,
options, futures contracts, and futures options; for each Fund
other than Income Fund, mortgage or other asset-backed securities;
and, for Limited Maturity Income Fund, floating rate instruments.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For additional
information on Derivatives, please refer to the Statement of
Additional Information.
MORTGAGE AND OTHER ASSET-BACKED DEBT SECURITIES. Limited
Maturity Income Fund, Government Income Fund, and
<PAGE> 21
Intermediate Bond Fund each may invest in securities secured by mortgages
or other assets such as automobile or home improvement loans and credit
card receivables. These instruments may be issued or guaranteed by the
U.S. Government or by its agencies or instrumentalities or by private
entities such as commercial, mortgage and investment banks and
financial companies or financial subsidiaries of industrial companies.
Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in a
pool of mortgages.
The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Treasury. FNMA guarantees full and timely payment of
interest and principal on FNMA securities. FHLMC guarantees
timely payment of interest and ultimate collection of principal on
FHLMC securities. FNMA and FHLMC securities are not backed by the
full faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining
interest rates, there is increased likelihood that mortgages will
be prepaid, with a resulting loss of the full-term benefit of any
premium paid by the Fund on purchase of such securities; in
addition, the proceeds of prepayment would likely be invested at
lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and
yield characteristics. Mortgage-backed securities involve the
risk of pre-payment of the underlying mortgages at a faster or
slower rate than the established schedule. Pre-payments generally
increase with falling interest rates and decrease with rising
rates, but they also are influenced by economic, social, and
<PAGE> 22
market factors. If mortgages are pre-paid during periods of declining
interest rates, there would be a resulting loss of the full-term
benefit of any premium paid by the Fund on purchase of the CMO,
and the proceeds of pre-payment would likely be invested at lower
interest rates. Each Fund tends to invest in CMOs of classes
known as planned amortization classes ("PACs") which have pre-
payment protection features tending to make them less susceptible
to price volatility.
Non-mortgage asset-backed securities usually have less pre-payment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
Asset-backed securities tend to experience greater price
volatility than straight debt securities.
FLOATING RATE INSTRUMENTS. Limited Maturity Income Fund may also
invest in floating rate instruments which provide for periodic
adjustments in coupon interest rates that are automatically reset
based on changes in amount and direction of specified market
interest rates. In addition, the adjusted duration of some of
these instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to
lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For example, if interest rates
decrease by 100 basis points, a market price of a security with an
adjusted duration of 2 would increase by approximately 2%.
FUTURES AND OPTIONS. Each Fund may purchase and write both call
options and put options on securities, indexes and foreign
currencies, and enter into interest rate, index and foreign
currency futures contracts. Each Fund may also write options on such
futures contracts and purchase other types of forward or investment
contracts linked to individual securities, indexes or other benchmarks
in order to, consistent with its investment objective, provide additional
revenue, or to hedge against changes in security prices, interest
rates, or currency fluctuations. Each Fund may write a call or put
option only if the option is covered. As the
<PAGE> 23
writer of a covered call option, the Fund foregoes, during the
option's life, the opportunity to profit from increases in market
value of the security covering the call option above the sum of the
premium and the exercise price of the call. There can be no assurance
that a liquid market will exist when a Fund seeks to close out a position.
Because of low margin deposits required, the use of futures
contracts involves a high degree of leverage, and may result in
losses in excess of the amount of the margin deposit. Foreign
currency futures and options are permitted only if a Fund is
permitted to invest in foreign securities.
FOREIGN SECURITIES.
Limited Maturity Income Fund, Intermediate Bond Fund, and
Income Fund each may invest in foreign securities. No Fund will invest
in a foreign security if, as a result of such investment, more
than 25% of its total assets would be invested in foreign
securities. For purposes of this restriction, foreign debt
securities do not include securities represented by American
Depositary Receipts ("ADRs"), foreign debt securities denominated
in U.S. dollars, or securities guaranteed by a U.S. person such as
a corporation domiciled in the United States that is a parent or
affiliate of the issuer of the securities being guaranteed. The
Funds may invest in sponsored or unsponsored ADRs. In addition
to, or in lieu of, such direct investment, a Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Funds may
contract to purchase an amount of foreign currency sufficient to
pay the purchase price of the securities at the settlement date.
At June 30, 1995, no portion of any Fund's assets was invested in
foreign securities as defined above, and no Fund intends to invest
more than 5% of its net assets in foreign securities. (See Risks
and Investment Considerations.)
LENDING OF PORTFOLIO SECURITIES.
Subject to certain restrictions, each Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral
<PAGE> 24
in cash or cash equivalents maintained on a current basis in an
amount at least equal to the market value of the securities loaned
by the Fund. The Fund would continue to receive the equivalent of
the interest or dividends paid by the issuer on the securities loaned,
and would also receive an additional return that may be in the form
of a fixed fee or a percentage of the collateral. The Fund would have
the right to call the loan and obtain the securities loaned at any
time on notice of not more than five business days. In the event of
bankruptcy or other default of the borrower, the Fund could experience
both delays in liquidating the loan collateral or recovering the loaned
securities and losses including (a) possible decline in the value of
the collateral or in the value of the securities loaned during the period
while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this
period; and (c) expenses of enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
Each Fund's assets may include securities purchased on a when-
issued or delayed-delivery basis. Although the payment and
interest terms of these securities are established at the time the
purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed. A Fund makes such commitments
only with the intention of actually acquiring the securities, but
may sell the securities before settlement date if the Adviser deems
it advisable for investment reasons. Securities purchased in this
manner involve a risk of loss if the value of the security purchased
declines before the settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that a Fund will sell
securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value the security repurchased
will be less than the security sold; and transaction costs
exceeding the return earned by the Fund on the sales proceeds of
the dollar roll.
Each Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to
<PAGE> 25
accept delivery of a security at the option of the other party
to the agreement.
PORTFOLIO TURNOVER.
In attempting to attain its objective, each Fund may sell
portfolio securities without regard to the period of time they
have been held. Further, the Adviser may purchase and sell
securities for the portfolios of Limited Maturity Income Fund,
Government Income Fund, and the Income Fund with a view to
maximizing current return, even if portfolio changes would cause
the realization of capital gains. Although the weighted average
effective maturity of the Limited Maturity Income Fund's portfolio
generally will not exceed three years and the average stated
maturity of the portfolios of Government Income Fund and the
Income Fund generally will exceed ten years, the Adviser may
adjust the average effective maturity of a Fund's portfolio from
time to time, depending on its assessment of the relative yields
available on securities of different maturities and its
expectations of future changes in interest rates. As a result,
the turnover rate of the Funds may vary from year to year. The
turnover rate for Limited Maturity Income Fund may exceed 100%,
but is not expected to exceed 200% under normal market conditions.
A high rate of portfolio turnover may result in increased
transaction expenses and the realization of capital gains (which
may be taxable) or losses. (See Financial Highlights and
Distributions and Income Taxes.)
RESTRICTIONS ON THE FUNDS' INVESTMENTS
No Fund may invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities; or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers
in the same industry, except that this restriction does not apply
to U.S. Government Securities. Notwithstanding these limitations,
each Fund may invest all of its assets in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund.
No Fund may make loans, except that, consistent with its
investment policies and restrictions, each Fund may: (1) invest up
to 100% of its net assets in publicly offered or privately placed
debt securities, (2) lend its portfolio securities under certain
conditions, and (3) enter into repurchase
<PAGE> 26
agreements. /1/ No Fund may borrow money, except as a temporary
measure for extraordinary or emergency purposes and then the aggregate
borrowings at any one time (including reverse repurchase agreements
and dollar rolls) may not exceed 33 1/3% of its assets (at market value).
Additional securities may not be purchased when borrowings, less
proceeds receivable from sales of portfolio securities, exceed 5% of
total assets.
The policies set forth in the first two paragraphs under
Restrictions on the Funds' Investments (but not the footnote) are
fundamental policies of each Fund. /2/ The Statement of
Additional Information contains all of the investment
restrictions.
RISKS AND INVESTMENT CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although each Fund
seeks to reduce risk by investing in a diversified portfolio, this
does not eliminate all risk. The risks inherent in each Fund
depend primarily upon the term and quality of the obligations in
that Fund's portfolio, as well as on market conditions.
A decline in prevailing levels of interest rates generally
increases the value of securities in a Fund's portfolio, while an
increase in rates usually reduces the value of those securities.
As a result, interest rate fluctuations will affect a Fund's net
asset value, but not the income received by the Fund from its
portfolio securities. (Because yields on debt securities
available for purchase by a Fund vary over time, no specific yield
on shares of a Fund can be assured.) In addition, if the bonds in
a Fund's portfolio contain call, prepayment or redemption
provisions, during a period of declining interest rates, these
securities are likely to be redeemed, and the Fund will probably
be unable to replace them with securities having as great a yield.
Limited Maturity Income Fund is appropriate for investors who seek
higher yields than are usually available from money market
instruments with stable prices and shorter maturities, but who
also want less net asset fluctuation than that of a longer-term
fund; unlike money market funds, however, the Fund does not seek
to maintain a stable net asset value and may not be able to return
dollar-for-dollar
- -----------------------
/1/ A repurchase agreement involves a sale of securities to a Fund
with the concurrent agreement of the seller (bank or securities
dealer) to repurchase the securities at the same price plus an
amount equal to an agreed-upon interest rate within a specified
time. In the event of a bankruptcy or other default of a seller
of a repurchase agreement, the Fund could experience both delays
in liquidating the underlying securities and losses. No Fund may
invest more than 15% of its net assets in repurchase agreements
maturing in more than seven days and other illiquid securities.
/2/ A fundamental policy may be changed only with the approval of
a "majority of the outstanding vote securities" of a Fund as
defined in the Investment Company Act.
- --------------------------------
<PAGE> 27
the money invested. Intermediate Bond Fund is
appropriate for investors who seek high income with less net asset
value fluctuation from interest rate changes than that of a
longer-term fund, and who can accept greater levels of credit and
other risks associated with securities that are rated below
investment grade. Government Income Fund is designed for
investors who seek high income with minimum risk other than the
risk of changes in net asset value caused by fluctuations in
prevailing levels of interest rates. Income Fund is designed
for investors who seek a higher level of income and who can accept
greater levels of credit and other risks associated with
securities of medium or lower quality.
Investments in foreign securities, including ADRs, represent both
risks and opportunities not typically associated with investments
in domestic issuers. Risks of foreign investing include currency
risk, less complete financial information on issuers, less market
liquidity, more market volatility, less well-developed and
regulated markets, and greater political instability. In
addition, various restrictions by foreign governments on
investments by non-residents may apply, including imposition of
exchange controls and withholding taxes on dividends, and seizure
or nationalization of investments owned by non-residents. Foreign
investments also tend to involve higher transaction and custody
costs.
Limited Maturity Income Fund, Intermediate Bond Fund, and
Income Fund each may enter into foreign currency forward contracts and
use options and futures contracts, as described elsewhere in this
prospectus, to limit or reduce foreign currency risk.
There can be no assurance that a Fund will achieve its objective,
nor can a Fund assure that payments of interest and principal on
portfolio securities will be made when due. If, after purchase by
a Fund, the rating of a portfolio security is lost or reduced, the
Fund would not be required to sell the security, but the Adviser
would consider such a change in deciding whether the Fund should
retain the security in its portfolio.
The investment objective of each Fund is not fundamental and may
be changed by the Board of Trustees without a vote of
shareholders. If there were a change in a Fund's investment
objective, such change may result in the Fund having an investment
objective different from the objective that the shareholder
considered appropriate at the time of investment in the Fund.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, each Fund may in the
future seek to achieve its
<PAGE> 28
investment objective by pooling its assets with assets of other
mutual funds managed by the Adviser for investment in another
investment company having the same investment objective and
substantially the same investment policies and restrictions as
the Fund. The purpose of such an arrangement is to achieve greater
operational efficiencies and reduce costs. It is expected that
any such investment company would be managed by the Adviser in
substantially the same manner as the Fund. There are no present
plans to convert any Fund to the Master Fund/Feeder Fund structure.
If a Fund were to convert to the Master Fund/Feeder Fund structure,
shareholders of that Fund would be given at least 30 days' prior
notice, although they would not be entitled to vote on the action.
Such investment would be made only if the Trustees determine it
to be in the best interests of a Fund and its shareholders.
HOW TO PURCHASE SHARES
You may purchase shares of any of the Funds by check, by wire, by
electronic transfer, or by exchange from your account with another
Stein Roe Fund. The initial purchase minimum per Fund account is
$2,500; the minimum for Uniform Gifts/Transfers to Minors Act
("UGMA") accounts is $1,000; the minimum for accounts established
under an automatic investment plan (i.e., Regular Investments,
Dividend Purchase Option, or the Automatic Exchange Plan) is
$1,000 for regular accounts and $500 for UGMA accounts; and the
minimum per account for Stein Roe IRAs is $500. The initial
purchase minimum is waived for shareholders who participate in
the Stein Roe Counselor [Service mark] or Stein Roe Counselor
Preferred [Service mark] Programs. Subsequent purchases must be
at least $100, or at least $50 if you purchase by electronic
transfer. If you wish to purchase shares to be held by a
tax-sheltered retirement plan sponsored by the Adviser, you
must obtain special forms for those plans. (See Shareholder
Services.)
BY CHECK.
To make an initial purchase of shares of a Fund, please complete
and sign the Application and mail it to P.O. Box 804058, Chicago,
Illinois 60680, together with a check made payable to Stein Roe
Funds.
You may make subsequent investments by submitting a check along
with either the stub from your Fund account confirmation statement
or a note indicating the amount of the purchase, your account
number, and the name in which your account is registered. Each
individual check submitted for purchase must be at least $100, and
the Trust generally will not
<PAGE> 29
accept cash, drafts, third party checks, or checks drawn on banks
outside of the United States. Should an order to purchase shares
of a Fund be cancelled because your check does not clear, you will
be responsible for any resulting loss incurred by that Fund.
BY WIRE.
You may also pay for shares by instructing your bank to wire
federal funds (monies of member banks within the Federal Reserve
System) to the Funds' custodian bank. Your bank may charge you a
fee for sending the wire. If you are opening a new account by
wire transfer, you must first telephone the Trust to request an
account number and furnish your social security or other tax
identification number. Neither the Funds nor the Trust will be
responsible for the consequences of delays, including delays in
the banking or Federal Reserve wire systems. Your bank must
include the full name(s) in which your account is registered and
your Fund account number, and should address its wire as follows:
State Street Bank and Trust Company
Boston, Massachusetts
ABA Routing No. 011000028
Attention: Custody
Fund No. ____; Stein Roe _______ Fund
Account of (exact name(s) in registration)
Shareholder Account No. ___________
Fund Numbers:
7116--Government Income Fund
7107--Intermediate Bond Fund
7118--Income Fund
7122--Limited Maturity Income Fund
BY ELECTRONIC TRANSFER.
You may also make subsequent investments by an electronic transfer
of funds from your bank checking account. Electronic transfer
allows you to make purchases at your request ("Special
Investments") by calling 800-338-2550 or at pre-scheduled
intervals ("Regular Investments"). (See Shareholder Services.)
Electronic transfer purchases are subject to a $50 minimum and a
$100,000 maximum. You may not open a new account through
electronic transfer. Should an order to purchase shares of a Fund
be cancelled because your electronic transfer does not clear, you
will be responsible for any resulting loss incurred by that Fund.
BY EXCHANGE.
You may purchase shares by exchange of shares from another Stein
Roe Fund account either by phone (if the Telephone Exchange
Privilege has been established on the account from which the
exchange is being made), by mail, in person, or
<PAGE> 30
automatically at regular intervals (if you have elected Automatic
Exchanges). Restrictions apply; please review the information under
How to Redeem Shares--By Exchange.
PURCHASE PRICE AND EFFECTIVE DATE.
Each purchase of a Fund's shares is made at that Fund's net asset
value (see Net Asset Value) next determined after receipt of
payment as follows:
A purchase by check or wire transfer is made at the net asset
value next determined after receipt by the Fund of the check or
wire transfer of funds in payment of the purchase.
A purchase by electronic transfer is made at the net asset value
next determined after the Fund receives the electronic transfer
from your bank. A Special Electronic Transfer Investment order
received by telephone on a business day before 2:00 p.m., Chicago
time, is effective on the next business day. Shares begin earning
dividends on the day following the day on which they are
purchased.
CONDITIONS OF PURCHASE.
Each purchase order for a Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of that Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of a Fund's shareholders. The Trust also
reserves the right to waive or lower its investment minimums for
any reason. The Trust does not issue certificates for shares.
PURCHASES THROUGH THIRD PARTIES.
You may purchase (or redeem) shares through investment dealers,
banks, or other financial institutions. These institutions may
charge for their services or place limitations on the extent to
which you may use the services offered by the Trust. There are no
charges or limitations imposed by the Trust (other than those
described in this prospectus) if shares are purchased (or
redeemed) directly from the Trust.
Some financial institutions which maintain nominee accounts with
the Funds for their clients who are Fund shareholders charge an
annual fee of up to 0.25% of the average net assets held in such
accounts for accounting, servicing, and distribution services they
provide with respect to the underlying Fund shares. Such fees are
paid by the Adviser.
HOW TO REDEEM SHARES
BY WRITTEN REQUEST.
You may redeem all or a portion of your shares
<PAGE> 31
of a Fund by submitting a written request in "good order" to the Trust
at P.O. Box 804058, Chicago, Illinois 60680. A redemption request will
be considered to have been received in good order if the following
conditions are satisfied:
(1) the request must be in writing, indicate the number of shares
or dollar amount to be redeemed, and identify the shareholder's
account number;
(2) the request must be signed by the shareholder(s) exactly as
the shares are registered;
(3) the request must be accompanied by any certificates for the
shares, either properly endorsed for transfer, or accompanied
by a stock assignment properly endorsed exactly as the shares
are registered;
(4) the signatures on either the written redemption request or
the certificates (or the accompanying stock power) must be
guaranteed (a signature guarantee is not a notarization, but is
a widely accepted way to protect you and the Funds by verifying
your signature);
(5) corporations and associations must submit with each request a
completed Certificate of Authorization included in this
prospectus (or a form of resolution acceptable to the Trust);
and
(6) other supporting legal documents may be required from
organizations, executors, administrators, trustees, or others
acting on accounts not registered in their names.
BY EXCHANGE.
You may redeem all or any portion of your Fund shares and use the
proceeds to purchase shares of any other Stein Roe Fund offered
for sale in your state if your signed, properly completed
Application is on file. AN EXCHANGE TRANSACTION IS A SALE AND
PURCHASE OF SHARES FOR FEDERAL INCOME TAX PURPOSES AND MAY RESULT
IN CAPITAL GAIN OR LOSS. Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. The
registration of the account to which you are making an exchange
must be exactly the same as that of the Fund account from which
the exchange is made and the amount you exchange must meet any
applicable minimum investment of the Stein Roe Fund being
purchased. Unless you have elected to receive your dividends in
cash, on an exchange of all shares, any accrued unpaid dividends
will be invested in the Stein Roe Fund to which you exchange on
the next business day. An exchange may be made by following the
redemption procedure described above under By Written Request and
indicating the
<PAGE> 32
Stein Roe Fund to be purchased, except that a
signature guarantee normally is not required. (See also the
discussion below of the Telephone Exchange Privilege and Automatic
Exchanges.)
SPECIAL REDEMPTION PRIVILEGES.
The Telephone Exchange Privilege and the Telephone Redemption by
Check Privilege will be established automatically for you when you
open your account unless you decline these Privileges on your
Application. Other Privileges must be specifically elected. If
you do not want the Telephone Exchange and Redemption Privileges,
check the box(es) under the section "Telephone Redemption Options"
when completing your Application. In addition, a signature
guarantee may be required to establish a Privilege after you open
your account.
You may not use any of the Special Redemption Privileges if you
hold certificates for any of your Fund shares. The Telephone
Redemption by Check Privilege and Special Electronic Transfer
Redemptions are not available to redeem shares held by a tax-
sheltered retirement plan sponsored by the Adviser. (See also
General Redemption Policies.)
Telephone Exchange Privilege. You may use the Telephone Exchange
Privilege to exchange an amount of $50 or more from your account
by calling 800-338-2550 or by sending a telegram; new accounts
opened by exchange are subject to the $2,500 initial purchase
minimum. GENERALLY, YOU WILL BE LIMITED TO FOUR TELEPHONE
EXCHANGE ROUND-TRIPS PER YEAR AND THE FUNDS MAY REFUSE REQUESTS
FOR TELEPHONE EXCHANGES IN EXCESS OF FOUR ROUND-TRIPS (A ROUND-
TRIP BEING THE EXCHANGE OUT OF A FUND INTO ANOTHER STEIN ROE FUND,
AND THEN BACK TO THAT FUND). Also, the Trust's general redemption
policies apply to redemptions of shares by Telephone Exchange.
(See General Redemption Policies.)
The Trust reserves the right at any time without prior notice to
suspend or terminate the use of the Telephone Exchange Privilege
by any person or class of persons. The Trust believes that use of
the Telephone Exchange Privilege by investors utilizing market-
timing strategies adversely affects the Funds. THEREFORE, THE
TRUST GENERALLY WILL NOT HONOR REQUESTS FOR TELEPHONE EXCHANGES BY
SHAREHOLDERS IDENTIFIED BY THE TRUST AS "MARKET-TIMERS."
Moreover, the Trust reserves the right at any time without prior
notice to suspend, limit, modify, or terminate the Telephone
Exchange Privilege in its entirety. Because such a step would be
taken only if the Board of Trustees believes it would be in the
best interests of the Funds, the
<PAGE> 33
Trust expects that it would provide shareholders with prior written
notice of any such action unless it appears that the resulting delay
in the suspension, limitation, modification, or termination of the
Telephone Exchange Privilege would adversely affect the Funds. IF
THE TRUST WERE TO SUSPEND, LIMIT, MODIFY, OR TERMINATE THE TELEPHONE
EXCHANGE PRIVILEGE, A SHAREHOLDER EXPECTING TO MAKE A TELEPHONE EXCHANGE
MIGHT FIND THAT AN EXCHANGE COULD NOT BE PROCESSED OR THAT THERE MIGHT
BE A DELAY IN THE IMPLEMENTATION OF THE EXCHANGE. (See How to Redeem
Shares--By Exchange.) During periods of volatile economic and market
conditions, you may have difficulty placing your exchange by telephone.
Automatic Exchanges. You may use the Automatic Exchange Privilege
to automatically redeem a fixed amount from your Fund account for
investment in another Stein Roe Fund account on a regular basis.
Telephone Redemption by Check Privilege. You may use the
Telephone Redemption by Check Privilege to redeem an amount of
$1,000 or more from your account by calling 800-338-2550. The
proceeds will be sent by check to your registered address.
The Telephone Redemption by Check Privilege is not available to
redeem shares held by a tax-sheltered retirement plan sponsored by the Adviser.
Electronic Transfer Privilege. You may redeem shares by calling
800-338-2550 and requesting an electronic transfer ("Special
Redemption") of the proceeds to a checking account previously
designated by you at a bank that is a member of the Automated
Clearing House or at scheduled intervals ("Automatic Redemptions"-
- -see Shareholder Services). Electronic transfers are subject to a
$50 minimum and a $100,000 maximum. A Special Redemption request
received by telephone after 2:00 p.m., Chicago time, is deemed
received on the next business day.
GENERAL REDEMPTION POLICIES.
You may not cancel or revoke your redemption order once
instructions have been received and accepted. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions. Please telephone
the Trust if you have any questions about requirements for a
redemption before submitting your request. If you wish to redeem
shares held by a tax-sheltered retirement plan sponsored by the
Adviser, special procedures of those plans apply to such
redemptions. (See Shareholder Services--Tax-Sheltered Retirement
Plans.) The Trust reserves the right to require a properly
<PAGE> 34
completed Application before making payment for shares redeemed.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon that Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares and may result
in a realized capital gain or loss.
The Trust will generally mail payment for shares redeemed within
seven days after proper instructions are received. If you attempt
to redeem shares within 15 days after they have been purchased by
check or electronic transfer, the Trust may delay payment of the
redemption proceeds to you until it can verify that payment for
the purchase of those shares has been (or will be) collected.
To reduce such delays, the Trust recommends that your purchase be
made by federal funds wire through your bank.
The Trust reserves the right at any time without prior notice to
suspend, limit, modify, or terminate any Privilege or its use in
any manner by any person or class.
Neither the Trust, its transfer agent, nor their respective
officers, trustees, directors, employees, or agents will be
responsible for the authenticity of instructions provided under
the Privileges, nor for any loss, liability, cost or expense for
acting upon instructions furnished thereunder if they reasonably
believe that such instructions are genuine. The Funds employ
procedures reasonably designed to confirm that instructions
communicated by telephone under any Special Redemption Privilege
or the Special Electronic Transfer Redemption Privilege are
genuine. Use of any Special Redemption Privilege or the Special
Electronic Transfer Redemption Privilege authorizes the Funds and
their transfer agent to tape-record all instructions to redeem.
In addition, callers are asked to identify the account number and
registration, and may be required to provide other forms of
identification. Written confirmations of transactions are mailed
promptly to the registered address; a legend on the confirmation
requests the shareholder to review the transactions and inform the
Fund immediately if there is a problem. If a Fund does not follow
reasonable procedures for protecting shareholders against loss on
telephone transactions, it may be liable for any losses due to
unauthorized or fraudulent instructions.
Generally, you may not use the Exchange Privilege or any Special
Redemption Privilege to redeem shares purchased by check (other
than certified or cashiers' checks) or
<PAGE> 35
electronic transfer until 15 days after their date of purchase.
The Trust reserves the right to redeem shares in any account and
send the proceeds to the owner if the shares in the account do not
have a value of at least $1,000. A shareholder would be notified
that his account is below the minimum and allowed 30 days to
increase the account before the redemption is processed.
Shares in any account you maintain with a Fund or any of the other
Stein Roe Funds may be redeemed to the extent necessary to
reimburse any Stein Roe Fund for any loss it sustains that is
caused by you (such as losses from uncollected checks and
electronic transfers or any Stein Roe Fund liability under the
Internal Revenue Code provisions on backup withholding).
SHAREHOLDER SERVICES
REPORTING TO SHAREHOLDERS.
You will receive a confirmation statement reflecting each of your
purchases and redemptions of shares of a Fund, as well as periodic
statements detailing distributions made by that Fund. Shares
purchased by reinvestment of dividends, by cross-reinvestment of
dividends from another Fund, or pursuant to an automatic
investment plan will be confirmed to you quarterly. In addition,
the Trust will send you semiannual and annual reports showing Fund
portfolio holdings and will provide you annually with tax
information.
FUNDS-ON-CALL [REGISTERED MARK] 24-HOUR INFORMATION SERVICE.
To access the Stein Roe Funds-on-Call [Registered mark] automated
telephone service, just call 800-338-2550 on any touch-tone
telephone and follow the recorded instructions. Funds-on-Call
[Registered mark] provides yields, prices, latest dividends,
account balances, last transaction, and other information 24 hours
a day, seven days a week.
FUNDS-ON-CALL [REGISTERED MARK] AUTOMATED TELEPHONE TRANSACTIONS.
If you have established the Funds-on-Call [Registered mark]
transaction privilege (Funds-on-Call [Registered mark] Application
will be required), you may initiate Special Investments and
Redemptions, Telephone Exchanges, and Telephone Redemptions by
Check 24 hours a day, seven days a week by calling 800-338-2550
on a touch-tone telephone. These transactions are subject to the
terms and conditions of the individual privileges. (See How to
Purchase Shares and How to Redeem Shares.)
STEIN ROE COUNSELOR [SERVICE MARK] PROGRAM.
The Adviser offers a Stein Roe Counselor [Service mark] and a
Stein Roe Counselor Preferred [Service mark] program. The
programs are designed to provide investment guidance in helping
<PAGE> 36
investors to select a portfolio of Stein Roe Mutual Funds. The
Stein Roe Counselor Preferred [Service mark] program, which
automatically adjusts client portfolios, has a fee of up to 1% of
assets.
RECORDKEEPING AND ADMINISTRATION SERVICES.
If you oversee or administer investments for a group of investors,
we offer a variety of services.
TAX-SHELTERED RETIREMENT PLANS.
Booklets describing the following programs and special forms
necessary for establishing them are available on request. You may
use all of the Stein Roe Funds, except those investing primarily
in tax-exempt securities, in these plans. Please read the
prospectus for each Fund in which you plan to invest before making
your investment.
Individual Retirement Accounts ("IRAs") for employed persons and
their non-employed spouses.
Prototype Money Purchase Pension and Profit-Sharing Plans for
self-employed individuals, partnerships, and corporations.
Simplified Employee Pension Plans permitting employers to provide
retirement benefits to their employees by utilizing IRAs while
minimizing administration and reporting requirements.
SPECIAL SERVICES.
The following special services are available to shareholders.
Please call 800-338-2550 or write the Trust for additional
information and forms.
Dividend Purchase Option--to diversify your Fund investments by
having distributions from one Fund account automatically invested
in another Stein Roe Fund account. Before establishing this
option, you should obtain and read carefully the prospectus of the
Stein Roe Fund into which you wish to have your distributions
invested. The account from which distributions are made must be
of sufficient size that each distribution will usually be at least
$25. The account into which distributions are to be invested may
be opened with an initial investment of only $1,000.
Automatic Dividend Deposit (electronic transfer)--to have income
dividends and capital gain distributions deposited directly into
your bank checking account.
Telephone Redemption by Check Privilege ($1,000 minimum) and
Telephone Exchange Privilege ($50 minimum)--established
automatically when you open your account unless you decline them
on your Application. (See How to Redeem Shares--Special
Redemption Privileges.)
Special Redemption Option (electronic transfer)--to redeem shares
at any time and have the proceeds deposited directly to your bank
checking account ($50 minimum; $100,000 maximum).
<PAGE> 37
Regular Investments (electronic transfer)--to purchase Fund shares
at regular intervals directly from your bank checking account ($50
minimum; $100,000 maximum).
Special Investments (electronic transfer)--to purchase Fund shares
by telephone and pay for them by electronic transfer of funds from
your checking account ($50 minimum; $100,000 maximum).
Automatic Exchange Plan--to automatically redeem a fixed dollar
amount from your Fund account and invest it in another Stein Roe
Fund account on a regular basis ($50 minimum; $100,000 maximum).
Automatic Redemptions (electronic transfer)--to have a fixed
dollar amount redeemed and sent at regular intervals directly to
your bank checking account ($50 minimum; $100,000 maximum).
Systematic Withdrawals--to have a fixed dollar amount, declining
balance, or fixed percentage of your account redeemed and sent at
regular intervals by check to you or another payee.
NET ASSET VALUE
The purchase and redemption price of each Fund's shares is its net
asset value per share. The net asset value of a share of each
Fund is determined as of the close of trading on the New York
Stock Exchange (currently 3:00 p.m., Chicago time) by dividing the
difference between the values of the Fund's assets and liabilities
by the number of shares outstanding. Net asset value will not be
determined on days when the Exchange is closed unless, in the
judgment of the Board of Trustees, the net asset value of a Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable securities.
Other assets and securities held by a Fund for which these
<PAGE> 38
valuation methods do not produce a fair value are valued by a
method that the Board believes will determine a fair value.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS.
Income dividends are declared each business day, paid monthly, and
confirmed at least quarterly. Each Fund intends to distribute by
the end of each calendar year at least 98% of any net capital
gains realized from the sale of securities during the twelve-month
period ended October 31 in that year. The Funds intend to
distribute any undistributed net investment income and net
realized capital gains in the following year.
All of your income dividends and capital gain distributions will
be reinvested in additional shares unless you elect to have
distributions either (1) paid by check; (2) deposited by
electronic transfer into your bank checking account; (3) applied
to purchase shares in your account with another Stein Roe Fund; or
(4) applied to purchase shares in a Stein Roe Fund account of
another person. (See Shareholder Services.) Reinvestment
normally occurs on the payable date. The Trust reserves the right
to reinvest the proceeds and future distributions in additional
Fund shares if checks mailed to you for distributions are returned
as undeliverable or are not presented for payment within six
months.
INCOME TAXES.
Your distributions will be taxable to you, under income tax law,
whether received in cash or reinvested in additional shares. For
federal income tax purposes, any distribution that is paid in
January but was declared in the prior calendar year is deemed paid
in the prior calendar year.
You will be subject to federal income tax at ordinary rates on
income dividends and distributions of net short-term capital gain.
Distributions of net long-term capital gain will be taxable to you
as long-term capital gain regardless of the length of time you
have held your shares.
You will be advised annually as to the source of distributions.
If you are not subject to tax on your income, you will not be
required to pay tax on these amounts.
If you redeem shares of a Fund held for six months or less, any
loss on the sale of those shares will be a long-term capital loss
to the extent of any distributions of long-term capital gain you
have received with respect to those shares.
For federal income tax purposes, each Fund is treated as a
separate taxable entity distinct from the other series of the
Trust.
<PAGE> 39
This section is not intended to be a full discussion of income tax
laws and their effect on shareholders. You may wish to consult
your own tax advisor.
BACKUP WITHHOLDING.
If (a) you fail to (i) furnish your properly certified social
security or other tax identification number or (ii) certify that
your tax identification number is correct or that you are not
subject to backup withholding due to the underreporting of certain
income, or (b) the Internal Revenue Service informs the Trust that
your tax identification number is incorrect, the Trust may be
required to withhold federal income tax ("backup withholding")
from certain payments (including redemption proceeds) to you.
These certifications are contained in the Application that you
should complete and return when you open an account. The Funds
must promptly pay to the IRS all amounts withheld. Therefore, it
is usually not possible for a Fund to reimburse you for amounts
withheld. However, you may claim the amount withheld as a credit
on your federal income tax return.
INVESTMENT RETURN
The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
The yield of a Fund is calculated by dividing its net investment
income per share (a hypothetical figure as defined in the SEC
rules) during a 30-day period by the net asset value per share on
the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income
is earned and reinvested at a constant rate and annualized at the
end of a six-month period.
Comparison of a Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. Yield figures are not based on
actual
<PAGE> 40
dividends paid. Past performance is not necessarily
indicative of future results. To obtain current yield or total
return information, you may call 800-338-2550 or write to the
address shown on the back cover.
MANAGEMENT OF THE FUNDS
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Funds. See Management in the
Statement of Additional Information for the names of and other
information about the trustees and officers.
The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolios and the business
affairs of the Funds and the Trust, subject to the direction of
the Board. The Adviser is registered as an investment adviser
under the Investment Advisers Act of 1940.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
In approving the use of a single combined prospectus, the Board
considered the possibility that one Fund might be liable for
misstatements in the prospectus regarding information concerning
another Fund.
PORTFOLIO MANAGERS.
Michael T. Kennedy has been portfolio manager of Government Income
Fund and Intermediate Bond Fund since 1988. He is a vice-
president of the Trust, a senior vice president of the Adviser,
and has been associated with the Adviser since 1987. From 1984 to
1987, he was employed by Homewood Federal Savings and Loan. A
chartered financial analyst and a chartered investment counselor,
he received his B.S. degree from Marquette University in 1984 and
his M.M. from Northwestern University in 1988. Mr. Kennedy is
secretary of the Adviser's Fixed Income Policy Committee and
managed $414 million in mutual fund assets for the Adviser as of
June 30, 1995. Mr. Kennedy is also associate portfolio manager of
Limited Maturity Income Fund.
Steven P. Luetger has been portfolio manager of Limited Maturity
Income Fund since February 1995 and is associate portfolio manager
of Government Income Fund and Intermediate Bond Fund. Mr. Luetger
joined the Adviser in 1978 and is a senior vice president. He
received his B.A. from Knox College in 1975 and M.B.A. from the
University of Chicago in 1980. As of June 30,
<PAGE> 41
1995, Mr. Luetger managed $28 million in mutual fund assets for
the Adviser.
Ann H. Benjamin, a vice-president of the Trust, became portfolio
manager of the Income Fund in January 1990. She is a senior vice
president of the Adviser and has been associated with the Adviser
since 1989. A chartered financial analyst, she received her
B.B.A. from Chatham College in 1980 and her M.A. from Carnegie
Mellon University in 1985. Ms. Benjamin managed $212 million in
mutual fund assets for the Adviser as of June 30, 1995, serves as
High-Yield Credit Research Manager for the Adviser, and is a
member of the Adviser's Fixed Income Credit Review Committee.
Stephen F. Lockman has been associate portfolio manager of Income
Fund since October 1995. Mr. Lockman is a vice president of the
Adviser and has been employed by the Adviser since January 1994.
A chartered financial analyst, Mr. Lockman received a B.S. degree
from the University of Illinois in 1983 and an M.B.A. from DePaul
University in 1986.
FEES AND EXPENSES.
In return for its investment advisory and administrative services,
the Adviser receives a monthly fee from each Fund based on its
average net assets, computed and accrued daily. The annualized
fee for Limited Maturity Income Fund is .60 of 1% of the first
$100 million of average net assets, .55 of 1% of the next $100
million, and .50 of 1% thereafter; that of Intermediate Bond Fund
is .50 of 1% of average net assets; that of Government Income Fund
is .60 of 1% of the first $100 million and .55 of 1% thereafter;
and that of Income Fund is .65 of 1% of the first $100 million and
.60 of 1% thereafter. For the fiscal year ended June 30, 1995,
pursuant to the expense undertaking described under Fee Table, the
Adviser reimbursed Limited Maturity Income Fund $234,580,
resulting in a net payment by the Adviser to the Fund of $62,279.
For the fiscal year ended June 30, 1995, the fees for Government
Income Fund, Intermediate Bond Fund and Income Fund, after each
Fund's expense limitation described under Fee Table, amounted to
.51%, .49% and .60% of average net assets, respectively.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Funds including
computation of each Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures
<PAGE> 42
contracts for the Funds. In doing so, the Adviser seeks to
obtain the best combination of price and execution, which involves
a number of judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned indirect subsidiary of Liberty
Mutual, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records.
DISTRIBUTOR.
The shares of each Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Funds or to their shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the
Funds. Foreign securities are maintained in the custody of
foreign banks and trust companies that are members of the Bank's
Global Custody Network or foreign depositories used by such
members. (See Custodian in the Statement of Additional
Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to
<PAGE> 43
the assets of the Trust or of the respective series for payment
under such credit, contract or claim, and that the shareholders,
trustees and officers of the Trust shall have no personal liability
therefor. The Declaration of Trust requires that notice of
such disclaimer of liability be given in each contract, instrument
or undertaking executed or made on behalf of the Trust. The
Declaration of Trust provides for indemnification of any shareholder
against any loss and expense arising from personal liability solely
by reason of being or having been a shareholder. Thus, the risk
of a shareholder incurring financial loss on account of shareholder
liability is believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the Trust
was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of the Trust is
also believed to be remote, because it would be limited to claims
to which the disclaimer did not apply and to circumstances in
which the other Fund was unable to meet its obligations.
<PAGE> 44
<PAGE> 45
CERTIFICATE OF AUTHORIZATION (FOR USE BY CORPORATIONS AND
ASSOCIATIONS ONLY)
A corporation or association must complete this Certificate and
submit it with the Fund Application, each written redemption,
transfer or exchange request, and each request to terminate or
change any of the Privileges or special service elections.
If the entity submitting the Certificate is an association, the
word "association" shall be deemed to appear each place the word
"corporation" appears. If the officer signing this Certificate is
named as an authorized person, another officer must countersign
the Certificate. If there is no other officer, the person signing
the Certificate must have his signature guaranteed. If you are
not sure whether you are required to complete this Certificate,
call the office of the Stein Roe Funds, 800-338-2550 toll-free.
The undersigned hereby certifies that he is the duly elected
Secretary of ____________________________ (the "Corporation")
(name of Corporation/Association)
and that the following individual(s):
Authorized Persons
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title
is (are) duly authorized by resolution or otherwise to act on
behalf of the Corporation in connection with the Corporation's
ownership of shares of any mutual fund managed by Stein Roe &
Farnham Incorporated (individually, the "Fund" and collectively,
the "Funds") including, without limitation, furnishing any such
Fund and its transfer agent with instructions to transfer or
redeem shares of that Fund payable to any person or in any manner,
or to redeem shares of that Fund and apply the proceeds of such
redemption to purchase shares of another Fund (an "exchange"), and
to execute any necessary forms in connection therewith.
Unless a lesser number is specified, all of the Authorized Persons
must sign written instructions. Number of signatures required:
________.
If the undersigned is the only person authorized to act on behalf
of the Corporation, the undersigned certifies that he is the sole
shareholder, director, and officer of the Corporation and that the
Corporation's Charter and Bylaws provide that he is the only
person authorized to so act.
Unless expressly declined on the Application (or other form
acceptable to the Funds), the undersigned further certifies that
the Corporation has authorized by resolution or otherwise the
establishment of the Telephone Exchange and Telephone Redemption
by Check Privileges for the Corporation's account with any Fund
offering any such Privilege. If elected on the Application (or
other form acceptable to the Funds), the undersigned also
certifies that the Corporation has similarly authorized
establishment of the Electronic Transfer, Telephone Redemption by
Wire, and Check-Writing Privileges for the Corporation's account
with any Fund offering said Privileges. The undersigned has
further authorized each Fund and its transfer agent to honor any
written, telephonic, or telegraphic instructions furnished
pursuant to any such Privilege by any person believed by the Fund
or its transfer agent or their agents, officers, directors,
trustees, or employees to be authorized to act on behalf of the
Corporation and agrees that neither the Fund nor its transfer
agent, their agents, officers, directors, trustees, or employees
will be liable for any loss, liability, cost, or expense for
acting upon any such instructions.
These authorizations shall continue in effect until five business
days after the Fund and its transfer agent receive written notice
from the Corporation of any change.
IN WITNESS WHEREOF, I have hereunto subscribed my name as
Secretary and affixed the seal of this Corporation this ____ day
of ___________________, 19___.
__________________________
Secretary
__________________________
Signature Guarantee*
*Only required if the person signing the Certificate is the only
person named as "Authorized Person."
Corporate
Seal
Here
<PAGE>
[STEIN ROE MUTUAL FUNDS LOGO]
The Stein Roe Funds
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Limited Maturity Income Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe Total Return Fund
Stein Roe Prime Equities
Stein Roe Stock Fund
Stein Roe Capital Opportunities Fund
Stein Roe Special Fund
Stein Roe International Fund
Stein Roe Young Investor Fund
Stein Roe Special Venture Fund
P.O. Box 804058
Chicago, Illinois 60680
800-338-2550
In Chicago, visit our Fund Center
at One South Wacker Drive
Liberty Securities Corporation, Distributor
02009
<PAGE>
STEIN ROE INCOME TRUST
STEIN ROE CASH RESERVES FUND
THE NOVEMBER 1, 1995 DATE OF THIS DEFINED CONTRIBUTION PLANS
PROSPECTUS IS NULL AND VOID. THE NEW DATE OF THIS PROSPECTUS IS
JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to the Fund was replaced with an administrative agreement
and a management agreement. The new fee schedule for the Fund,
which does not result in a fee increase, is stated below at an
annual rate as a percentage of average daily net assets:
MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- -------------- ------------------------ -------------------------
.250% .250% up to $500 million, .500% up to $500 million,
.200% next $500 million, .450% next $500 million,
.150% thereafter .400% thereafter
INTERFUND LENDING PROGRAM. On June 18, 1996, the Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Fund's Investments (page 5 of the Prospectus)
is revised to read as follows:
"The Fund may make not loans except that it may (1) purchase
money market securities and enter into repurchase agreements;
(2) acquire publicly-distributed or privately-placed debt
securities; and (3) participate in an interfund lending
program with other Stein Roe Funds. A Fund may not borrow
money, except for non-leveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither the Fund's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate
loans at any one time may exceed 33 1/3% of its total
assets."
ADDRESS CHANGE. The Statement of Additional Information and
the Fund's most recent financial statements may be obtained
without charge by writing to the Secretary of the Trust at P.O.
Box ___, Chicago, Illinois 60680, or by calling 800-338-2550.
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (pages 2-3 of the Prospectus) is updated by
adding the following unaudited financial information for the six
months ended December 31, 1995:
NET ASSET VALUE, BEGINNING OF PERIOD $1.000
------
Net investment income 0.027
Distributions from net investment income (0.027)
------
NET ASSET VALUE, END OF PERIOD $1.000
------
------
Ratio of net expenses to average net
assets *0.77%
Ratio of net investment income to average
net assets *5.20%
Total return **2.61%
Net assets, end of period (000 omitted ) $483,786
_____________________
*Annualized.
**Not annualized.
_____________________________
<PAGE>
[STEIN ROE MUTUAL FUNDS LOGO]
PROSPECTUS
DEFINED CONTRIBUTION PLANS
STEIN ROE CASH RESERVES FUND
The Fund seeks to obtain maximum current income consistent with
capital preservation and maintenance of liquidity. The Fund
invests solely in money market instruments maturing in thirteen
months or less from time of investment.
This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").
The Fund is a "no-load" money market fund and attempts to maintain
its net asset value at $1.00 per share. SHARES OF THE FUND ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. There are no sales or
redemption charges, and the Fund has no 12b-1 plan.
The Fund is a series of the STEIN ROE INCOME TRUST, an open-end
management investment company. This prospectus contains
information you should know before investing in the Fund. Please
read it carefully and retain it for future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at P.O. Box 804058, Chicago, IL 60680 or by calling
800-322-1130. The Statement of Additional Information contains
information relating to other series of the Stein Roe Income Trust
that may not be available as investment vehicles for your defined
contribution plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995
TABLE OF CONTENTS
Page
Fee Table ....................2
Financial Highlights..........2
The Fund......................3
How the Fund Invests..........4
Restrictions on the Fund's
Investments ................4
Risks and Investment
Considerations ..............5
How to Purchase Shares .......6
How to Redeem Shares .........6
Net Asset Value ..............7
Distributions and Income
Taxes........................7
Management of the Fund........8
Organization and Description
of Shares...................8
For More Information..........9
___________________________
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None*
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (as a percentage
of average net assets)
Management Fees 0.50%
12b-1 Fees None
Other Expenses 0.22%
-----
Total Fund Operating Expenses 0.72%
-----
-----
________________
*There is a $3.50 charge for wiring redemption proceeds to your
bank.
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$7 $23 $40 $89
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year, adjusted to
reflect the change in transfer agency services and fees. (Also
see Management of the Fund--Fees and Expenses.)
For purposes of the Example above, the figures assume that the
percentage amounts for the Fund listed under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the
Example are not necessarily indicative of past or future expenses,
and actual expenses may be greater or less than those shown.
Although information such as that shown in the Fee Table and
Example is useful in reviewing the Fund's expenses and in providing
a basis for comparison with other mutual funds, it should not be
used for comparison with other investments using different
assumptions or time periods. The example does not reflect any
charges or expenses related to your employer's plan.
__________________________
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the Fund on
a per-share basis and has been audited by Ernst & Young LLP,
independent auditors. The table should be read in conjunction
with the financial statements and notes thereto, which may be
obtained from the Trust without charge upon request.
<TABLE>
<CAPTION>
Six
Months
Ended
Years Ended December 31, June 30, Years Ended June 30,
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net investment income 0.075 0.061 0.060 0.032 0.081 0.079 0.068 0.044 0.028 0.028 0.048
Distributions from net
investment income (0.075) (0.061) (0.060) (0.032) (0.081) (0.079) (0.068) (0.044) (0.028) (0.028) (0.048)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE,
END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Ratio of expenses to
average net assets 0.72% 0.72% 0.72% *0.70% 0.75% 0.76% 0.78% 0.78% 0.79% 0.79% 0.76%
Ratio of net investment
income to average net
assets 7.55% 6.05% 6.02% *6.36% 8.13% 7.94% 6.81% 4.40% 2.81% 2.77% 4.83%
Total return 7.79% 6.25% 6.15% *6.43% 8.41% 8.20% 6.98% 4.49% 2.83% 2.81% 4.96%
Net assets, end of
period (000 omitted) $738,634 $814,544 $962,901 $930,074 $948,018 $949,803 $840,525 $711,087 $627,110 $554,713 $498,163
<FN>
*Annualized.
</TABLE>
___________________________
THE FUND
STEIN ROE CASH RESERVES FUND (the "Fund") is a no-load, diversified
"mutual fund." Mutual funds sell their own shares to investors
and use the money they receive to invest in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping. Because the Fund invests only in money market
instruments, it is called a "money market fund." No-load funds do
not impose commissions or charges when shares are purchased or
redeemed.
The Fund is a series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory and administrative services to the Fund. The
Adviser also manages several other no-load mutual funds with
different investment objectives, including equity funds,
international funds, money market funds, and taxable and tax-
exempt bond funds. To obtain prospectuses and other information
on opening a regular account in any of these mutual funds, please
call 800-338-2550.
Although there can be no assurance that it will always be able to
do so, the Fund follows procedures designed to stabilize its price
per share at $1.00. The Statement of Additional Information
describes these procedures.
Because the Fund strives to maintain a $1.00 per share value, its
return is usually quoted either as a current seven-day yield,
calculated by totaling the dividends on a Fund share for the
previous seven days and restating that yield as an annual rate, or
as an effective yield, calculated by adjusting the current yield
to assume daily compounding. The Fund's current and effective
yields for the seven-day period ended September 29, 1995, were
5.14% and 5.27%, respectively. To obtain current yield information,
you may call 800-338-2550.
From time to time, the Fund may also quote total return figures.
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Past performance is not necessarily indicative of future
results.
___________________________
HOW THE FUND INVESTS
The Fund seeks to obtain maximum current income consistent with
the preservation of capital and the maintenance of liquidity by
investing all of its assets in U.S. dollar-denominated money
market instruments maturing in thirteen months or less from time
of investment. Each security must be rated (or be issued by an
issuer that is rated with respect to its short-term debt) within
the highest rating category for short-term debt by at least two
nationally recognized statistical rating organizations ("NRSRO"),
or, if unrated, determined by or under the direction of the Board
of Trustees to be of comparable quality. These securities may
include:
(1) Securities issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities ("U.S. Government
Securities");
(2) Securities issued or guaranteed by the government of any
foreign country that are rated at time of purchase A or better
(or equivalent rating) by at least one NRSRO; /1/
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of $1 billion, or the equivalent in other currencies (as
of the date of the most recent available financial statements)
or of any branches, agencies or subsidiaries (U.S. or foreign)
of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term obligations.
__________________
/1/ For a description of certain NRSRO commercial paper, note, and
bond ratings, see the Appendix to the Statement of Additional
Information.
/2/ A sale of securities to the Fund in which the seller (a bank
or securities dealer that the Adviser believes to be
financially sound) agrees to repurchase the securities at a
higher price, which includes an amount representing interest on
the purchase price, within a specified time.
_____________________
In accordance with its investment objectives and policies, the
Fund may invest in variable and floating rate money market
instruments which provide for periodic or automatic adjustment in
coupon interest rates that are reset based on changes in amount
and directions of specified short-term interest rates.
Under normal market conditions, the Fund will invest at least 25%
of its total assets in securities of issuers in the financial
services industry (which includes, but is not limited to, banks,
personal credit and business credit institutions, and other
financial services institutions).
The Fund maintains a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining a stable net asset
value per share, and not in excess of 90 days. It is a
fundamental policy that the maturity of any instrument that grants
the holder an optional right to redeem at par plus interest and
without penalty will be deemed at any time to be the next date
provided for payment on exercise of such optional redemption
right.
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS
The Fund will not: (1) invest more than 10% of its net assets in
illiquid securities, including repurchase agreements maturing in
more than seven days (however, there is otherwise no limitation on
the percentage of the Fund's assets which may be invested in
repurchase agreements); or (2) with respect to 75% of its total
assets, invest more than 5% of its total assets in the securities
of any one issuer--this restriction does not apply to
U.S. Government Securities or repurchase agreements for such
securities. Notwithstanding the limitation on investments in a
single issuer, the Fund may invest all of its assets in another
registered investment company having the same investment objective
and substantially similar investment policies as the Fund.
The Fund may not make loans with the exception that it may invest in
money market securities and enter into repurchase agreements.
The Fund may not borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then the aggregate borrowings
at any one time may not exceed 33 1/3% of its assets (at market value).
The Fund may not purchase additional securities when its borrowings,
less proceeds receivable from sales of portfolio securities, exceed
5% of total assets.
The policies described in the preceding two paragraphs, which
summarize certain important investment restrictions of the Fund,
and the policy with respect to concentration of investment in the
financial services industry, can be changed only with the approval
of a "majority of the outstanding voting securities" of the Fund,
as defined in the Investment Company Act of 1940. All of the
investment restrictions are set forth in the Statement of
Additional Information.
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. There can be no
guarantee that the Fund will achieve its objective or be able at
all times to maintain its net asset value per share at $1.00.
In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and losses, including: (a)
possible decline in the value of the collateral during the period
in which the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
The Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.
The Fund's policy of investing at least 25% of its assets in
securities of issuers in the financial services industry may cause
the Fund to be more adversely affected by changes in market or
economic conditions and other circumstances affecting the
financial services industry. Because the Fund's investment policy
permits it to invest in: securities of foreign branches of U.S.
banks (Eurodollars), U.S. branches of foreign banks (Yankee
dollars), and foreign banks and their foreign branches, such as
negotiable certificates of deposit; securities of foreign
governments; and securities of foreign issuers, such as commercial
paper and corporate notes, bonds and debentures, investment in the
Fund might involve risks that are different in some respects from
an investment in a fund that invests only in debt obligations of
U.S. domestic issuers. Such risks may include future political
and economic developments; the possible imposition of foreign
withholding taxes on interest income payable on securities held in
the portfolio; possible seizure or nationalization of foreign
deposits; the possible establishment of exchange controls; or the
adoption of other foreign governmental restrictions that might
adversely affect the payment of principal and interest on
securities in the portfolio. Additionally, there may be less
public information available about foreign banks and their
branches. Foreign banks and foreign branches of foreign banks are
not regulated by U.S. banking authorities, and generally are not
bound by accounting, auditing, and financial reporting standards
comparable to U.S. banks.
The Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these
securities are established at the time the Fund enters into the
commitment, the securities may be delivered and paid for a month
or more after the date of purchase, when their value may have
changed and the yields then available in the market may be
greater. The Fund will make such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for
investment reasons.
The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in money market securities directly, the Fund
may in the future seek to achieve its investment objective by
pooling all of its assets with assets of other mutual funds
managed by the Adviser for investment in another registered
investment company having the same investment objective and
substantially the same investment policies and restrictions as the
Fund. It is expected that any such investment company would be
managed by the Adviser in substantially the same manner as the
Fund. The purpose of such an arrangement is to achieve greater
operational efficiencies and reduce costs. Shareholders of the
Fund will be given at least 30 days' prior notice of any such
investment, although they will not be entitled to vote on the
action. Such investment would be made only if the trustees
determine it to be in the best interests of the Fund and its
shareholders.
___________________________
HOW TO PURCHASE SHARES
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the
Fund's net asset value (see Net Asset Value) next determined after
receipt of payment by the Fund.
Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of the Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
HOW TO REDEEM SHARES
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of the
Fund through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.
EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other Stein Roe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. Contact your
plan administrator for instructions on how to exchange your shares
or to obtain prospectuses of other Stein Roe Funds available
through your plan. The Fund reserves the right to suspend, limit,
modify, or terminate the Exchange Privilege or its use in any
manner by any person or class; shareholders would be notified of
such a change.
GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is normally determined twice each day: at 11:00 a.m., Chicago
time, and as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., Chicago time). The net asset value
per share is computed by dividing the difference between the
values of the Fund's assets and liabilities by the number of
shares outstanding and rounding to the nearest cent. Net asset
value will not be determined on days when the Exchange is closed
unless, in the judgment of the Board of Trustees, the net asset
value of the Fund should be determined on any such day, in which
case the determination will be made at 3:00 p.m., Chicago time.
The Fund attempts to maintain its net asset value at $1.00 per
share. Portfolio securities are valued based on their amortized
cost, which does not take into account unrealized gains or losses.
Other assets and securities of the Fund for which this valuation
method does not produce a fair value are valued at a fair value
determined by the Board. The extent of any deviation between the
Fund's net asset value based upon market quotations or equivalents
and $1.00 per share based on amortized cost will be examined by
the Board of Trustees. If such deviation were to exceed 1/2 of
1%, the Board would consider what action, if any, should be taken,
including selling portfolio instruments, increasing, reducing or
suspending distributions, or redeeming shares in kind.
___________________________
DISTRIBUTIONS AND
INCOME TAXES
DISTRIBUTIONS.
A dividend from net income of the Fund is declared each business
day to shareholders of record immediately before 3:00 p.m.,
Chicago time. Dividends credited to your account are distributed
monthly. If the Fund's net asset value per share were to decline,
or were believed likely to decline, below $1.00 (rounded to the
nearest cent), the Board might temporarily reduce or suspend
dividends in an effort to maintain net asset value at $1.00 per
share.
The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.
INCOME TAXES.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements
that are necessary for it to be relieved of federal taxes on
income and gain it distributes. The Fund will distribute
substantially all of its ordinary income and net capital gains on
a current basis. Generally, Fund distributions are taxable as
ordinary income, except that any distributions of net long-term
capital gains will be taxed as such. However, distributions by
the Fund to employer-sponsored defined contribution plans that
qualify for tax-exempt treatment under federal income tax laws
will not be taxable. Special tax rules apply to investments
through such plans. You should consult your tax advisor to
determine the suitability of the Fund as an investment through
such a plan and the tax treatment of distributions (including
distributions of amounts attributable through an investment in the
Fund) from such a plan. This section is not intended to be a full
discussion of income tax laws and their effect on shareholders.
___________________________
MANAGEMENT OF THE FUND
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See the Statement of
Additional Information for the names of and other information
about the trustees and officers. The Fund's Adviser, Stein Roe &
Farnham Incorporated, One South Wacker Drive, Chicago, Illinois
60606, is responsible for managing the Fund's investment portfolio
and the business affairs of the Fund and the Trust, subject to the
direction of the Board. The Adviser is registered as an
investment adviser under the Investment Advisers Act.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
FEES AND EXPENSES.
In return for its services, the Adviser receives a monthly fee
from the Fund, computed and accrued daily, based on the Fund's
average net assets. Effective November 1, 1995, the annualized
fee is .50 of 1% on the first $500 million, .45 of 1% of the next
$500 million, and .40 of 1% on assets over $1 billion. Prior to
that date, the fee was .50 of 1% on the first $1 billion
.475 of 1% on the next $500 million, and .45 of 1% thereafter.
The annualized fee amounted to .50% of average net
assets for the year ended June 30, 1995.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of the
Fund's portfolio securities. In doing so, the Adviser seeks to
obtain the best combination of price and execution, which involves
a number of judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc., One South Wacker Drive, Chicago, Illinois
60606, a wholly owned indirect subsidiary of Liberty Mutual, is
the agent of the Trust for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.
DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the
Fund. Foreign securities are maintained in the custody of foreign
banks and trust companies that are members of the Bank's Global
Custody Network or foreign depositories used by such members.
(See Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of the Trust is
also believed to be remote, because it would be limited to claims
to which the disclaimer did not apply and to circumstances in
which the other series was unable to meet its obligations.
___________________________
FOR MORE INFORMATION
Contact a Stein Roe Retirement Plan Representative at 800-322-
1130 for more information about this Fund.
__________________
<PAGE>
STEIN ROE INCOME TRUST
STEIN ROE GOVERNMENT RESERVES FUND
THE NOVEMBER 1, 1995 DATE OF THIS DEFINED CONTRIBUTION PLANS
PROSPECTUS IS NULL AND VOID. THE NEW DATE OF THIS PROSPECTUS IS
JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to the Fund was replaced with an administrative agreement
and a management agreement. The new fee schedule for the Fund,
which does not result in a fee increase, is stated below at an
annual rate as a percentage of average daily net assets:
MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- -------------- ------------------------ -------------------------
.250% .250% up to $500 million, .500% up to $500 million,
.200% next $500 million, .450% next $500 million,
.150% thereafter .400% thereafter
INTERFUND LENDING PROGRAM. On June 18, 1996, the Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Fund's Investments (page 4-5 of the
Prospectus) is revised to read as follows:
"The Fund may make not loans except that it may (1) purchase
money market securities and enter into repurchase agreements;
(2) acquire publicly-distributed or privately-placed debt
securities; and (3) participate in an interfund lending
program with other Stein Roe Funds. A Fund may not borrow
money, except for non-leveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither the Fund's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate
loans at any one time may exceed 33 1/3% of its total
assets."
ADDRESS CHANGE. The Statement of Additional Information and
the Fund's most recent financial statements may be obtained
without charge by writing to the Secretary of the Trust at P.O.
Box ___, Chicago, Illinois 60680, or by calling 800-338-2550.
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (page 3 of the Prospectus) is updated by
adding the following unaudited financial information for the six
months ended December 31, 1995:
NET ASSET VALUE, BEGINNING OF PERIOD $1.000
------
Net investment income 0.027
Distributions from net investment income (0.027)
------
NET ASSET VALUE, END OF PERIOD $1.000
------
------
Ratio of net expenses to average net
assets (a) *0.70%
Ratio of net investment income to average
net assets (b) *5.16%
Total return (b) **2.60%
Net assets, end of period (000 omitted ) $89,019
_____________________
*Annualized.
**Not annualized.
(a) If the Fund had paid all of its expenses and there had been
no reimbursement of expenses by the Adviser, this ratio would
have been 0.81% for the period ended December 31, 1995.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
______________________________
<PAGE>
[STEIN ROE MUTUAL FUNDS LOGO]
PROSPECTUS
DEFINED CONTRIBUTION PLANS
STEIN ROE GOVERNMENT RESERVES FUND
The Fund seeks to obtain maximum current income consistent with
safety of capital and maintenance of liquidity. The Fund invests
in U.S. Government Securities maturing in thirteen months or less
from the date of purchase and repurchase agreements for U.S.
Government Securities regardless of the maturities of such
securities. U.S. Government Securities include securities issued
or guaranteed by the U.S. Government or by its agencies or
instrumentalities.
This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").
The Fund is a "no-load" money market fund and attempts to maintain
its net asset value at $1.00 per share. SHARES OF THE FUND ARE
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT AND THERE
CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE. There are no sales or
redemption charges, and the Fund has no 12b-1 plan. The Fund is a
series of the STEIN ROE INCOME TRUST, an open-end management
investment company. This prospectus contains information you
should know before investing in the Fund. Please read it
carefully and retain it for future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at P.O. Box 804058, Chicago, IL 60680 or by calling
800-322-1130. The Statement of Additional Information contains
information relating to other series of the Stein Roe Income Trust
that may not be available as investment vehicles for your defined
contribution plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995
TABLE OF CONTENTS
Page
Fee Table .............................2
Financial Highlights...................2
The Fund...............................3
How the Fund Invests...................4
Restrictions on the Fund's Investments 4
Risks and Investment Considerations... 5
How to Purchase Shares................ 6
How to Redeem Shares.................. 6
Net Asset Value .......................6
Distributions and Income Taxes.........7
Management of the Fund.................7
Organization and Description of Shares.8
For More Information...................8
___________________________
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None*
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (after expense
reimbursement; as a percentage of average net assets)
Management Fees (after expense reimbursement) 0.45%
12b-1 Fees None
Other Expenses 0.25%
-----
Total Fund Operating Expenses (after expense
reimbursement) 0.70%
-----
-----
___________________
*There is a $3.50 charge for wiring redemption proceeds to your
bank.
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
7 22 39 87
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year. (Also see
Management of the Fund--Fees and Expenses.) From time to time,
the Adviser may voluntarily absorb certain expenses of the Fund.
The Adviser has agreed to voluntarily absorb the Fund's expenses
to the extent that they exceed 0.70 of 1% of average net assets
through October 31, 1996, subject to earlier termination by the
Adviser on 30 days' notice. Any such absorption will temporarily
lower the Fund's overall expense ratio and increase its overall
return to investors. Absent such expense undertaking, Management
Fees and Total Fund Operating Expenses would have been 0.50% and
0.75%, respectively.
For purposes of the Example above, the figures assume that the
percentage amounts for the Fund listed under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the Example
are not necessarily indicative of past or future expenses, and actual
expenses may be greater or less than those shown. Although
information such as that shown in the Fee Table and Example is
useful in reviewing the Fund's expenses and in providing a basis
for comparison with other mutual funds, it should not be used for
comparison with other investments using different assumptions or
time periods. The example does not reflect any charges or expenses
related to your employer's plan.
___________________________
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the Fund on
a per-share basis and has been audited by Ernst & Young LLP,
independent auditors. The table should be read in conjunction
with the financial statements and notes thereto, which may be
obtained from the Trust without charge upon request.
<TABLE>
<CAPTION>
Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income 0.064 0.050 0.058 0.080 0.078 0.066 0.044 0.027 0.027 0.047
Distributions from net
investment income (0.064) (0.050) (0.058) (0.080) (0.078) (0.066) (0.044) (0.027) (0.027) (0.047)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of net expenses to
average net assets (a) 1.03% 1.03% 0.87% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net investment
income to average net
assets (b) 6.35% 4.97% 5.75% 8.02% 7.79% 6.41% 4.27% 2.75% 2.71% 4.65%
Total return (b) 6.57% 5.11% 5.90% 8.27% 8.05% 6.74% 4.45% 2.78% 2.74% 4.78%
Net assets, end of
period (000 omitted) $33,232 $34,799 $41,787 $50,185 $53,400 $102,860 $132,982 $104,220 $105,488 $93,318
<FN>
(a) If the Fund had paid all of its expenses and there
had been no reimbursement of expenses by the Adviser, this
ratio would have been 1.07%, 1.05%, 1.04%, 0.93%, 0.98%, 0.83%,
0.79%, 0.76%, 0.75% and 0.75% for the years ended June 30, 1985
and 1986, and 1988 through 1995, respectively.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
___________________________
THE FUND
STEIN ROE GOVERNMENT RESERVES FUND (the "Fund") is a no-load,
diversified "mutual fund." Mutual funds sell their own shares to
investors and use the money they receive to invest in a portfolio
of securities. A mutual fund allows you to pool your money with
that of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping. Because the Fund invests only in money market
instruments, it is called a "money market fund." No-load funds do
not impose commissions or charges when shares are purchased or
redeemed.
The Fund is a series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory and administrative services to the Fund. The
Adviser also manages several other no-load mutual funds with
different investment objectives, including equity funds,
international funds, money market funds, and taxable and tax-
exempt bond funds. To obtain prospectuses and other information on
opening a regular account in any of these mutual funds, please
call 800-338-2550.
Although there can be no assurance that it will always be able to
do so, the Fund follows procedures designed to stabilize its price
per share at $1.00. The Statement of Additional Information describes
these procedures.Because the Fund strives to maintain a $1.00 per
share value, its return is usually quoted either as a current seven-day
yield, calculated by totaling the dividends on a Fund share for the
previous seven days and restating that yield as an annual rate, or as
an effective yield, calculated by adjusting the current yield to
assume daily compounding. The Fund's current and effective yields
for the seven-day period ended September 29, 1995, were 5.19% and
5.32%, respectively. Absent the expense limitation referred to above,
current and effective yields for the seven-day period ended September
29, 1995, would have been 5.09% and 5.22%, respectively. To obtain
current yield information, you may call 800-338-2550.
From time to time, the Fund may also quote total return figures.
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Past performance is not necessarily indicative of future
results.
___________________________
HOW THE FUND INVESTS
The Fund seeks to obtain maximum current income consistent with
safety of capital and maintenance of liquidity by investment in
U.S. Government Securities maturing in thirteen months or less
from the date of purchase. These securities include:
(1) Securities issued by the U.S. Treasury;
(2) Securities issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government that are
backed by the full faith and credit guarantee of the U.S.
Government;
(3) Securities issued or guaranteed as to principal and interest by
agencies or instrumentalities of the U.S. Government that are
not backed by the full faith and credit guarantee of the U.S.
Government;
(4) Repurchase agreements /1/ for securities listed in (1), (2),
and (3) above, regardless of the maturities of such underlying
securities.
- -----------------
/1/ A sale of securities to the Fund in which the seller (a bank
or securities dealer which the Adviser believes to be financially
sound) agrees to repurchase the securities at a higher price,
which includes an amount representing interest on the purchase
price, within a specified time.
- ------------------
The U.S. Government Securities in which the Fund is permitted to
invest include: (i) bills, notes, bonds, and other debt
securities, differing as to maturity and rates of interest, that
are issued by and are direct obligations of the U.S. Treasury; and
(ii) other securities that are issued or guaranteed as to
principal and interest by agencies or instrumentalities of the
U.S. Government and that include, but are not limited to, Federal
Farm Credit Banks, Federal Home Loan Banks, Government National
Mortgage Association, Farmers Home Administration, Federal Home
Loan Mortgage Corporation, and Federal National Mortgage
Association.
In accordance with its investment objectives and policies, the
Fund may invest in variable and floating rate money market
instruments which provide for periodic or automatic adjustment in
coupon interest rates that are reset based on changes in amount
and directions of specified short-term interest rates.
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS
The Fund will not: (1) invest more than 10% of its net assets in
illiquid securities, including repurchase agreements maturing in
more than seven days (however, there is otherwise no limitation on
the percentage of the Fund's assets which may be invested in
repurchase agreements); or (2) with respect to 75% of its total
assets, invest more than 5% of its total assets in the securities
of any one issuer -- this restriction does not apply to
U.S. Government Securities or repurchase agreements for such
securities. Notwithstanding the limitation on investments in a
single issuer, the Fund may invest all of its assets in another
registered investment company having the same investment objective
and substantially similar investment policies as the Fund.
The Fund may not make loans with the exception that it may invest
in money market securities and enter into repurchase agreements.
The Fund may not borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then the aggregate
borrowings at any one time may not exceed 33 1/3% of its assets
(at market value). The Fund may not purchase additional securities
when its borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
The policies described in the preceding two paragraphs, which
summarize certain important investment restrictions of the Fund,
can be changed only with the approval of a "majority of the
outstanding voting securities" of the Fund, as defined in the
Investment Company Act of 1940. All of the investment
restrictions are set forth in the Statement of Additional
Information.
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. There can be no
guarantee that the Fund will achieve its objective or be able at
all times to maintain its net asset value per share at $1.00.
In the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and losses, including: (a)
possible decline in the value of the collateral during the period
in which the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.
The Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.
Because the Fund's investment policy permits it to invest in U.S.
Government Securities that are not backed by the full faith and
credit of the U.S. Treasury, investment in the Fund may involve
risks that are different in some respects from an investment in a
fund that invests only in securities that are backed by the full
faith and credit of the U.S. Treasury. Such risks may include a
greater risk of loss of principal and interest on the securities
in the Fund's portfolio that are supported only by the issuing or
guaranteeing U.S. Government agency or instrumentality, since the
Fund must look principally or solely to that entity for ultimate
repayment.
The Fund may invest in securities purchased on a when-issued or
delayed-delivery basis. Although the payment terms of these
securities are established at the time the Fund enters into the
commitment, the securities may be delivered and paid for a month
or more after the date of purchase, when their value may have
changed and the yields then available in the market may be
greater. The Fund will make such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for
investment reasons.
The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in money market securities directly, the Fund
may in the future seek to achieve its investment objective by
pooling all of its assets with assets of other mutual funds
managed by the Adviser for investment in another investment
company having the same investment objective and substantially the
same investment policies and restrictions as the Fund. It is
expected that any such investment company would be managed by the
Adviser in substantially the same manner as the Fund. The purpose
of such an arrangement is to achieve greater operational
efficiencies and reduce costs. Shareholders of the Fund will be
given at least 30 days' prior notice of any such investment,
although they will not be entitled to vote on the action. Such
investment would be made only if the trustees determine it to be
in the best interests of the Fund and its shareholders.
___________________________
HOW TO PURCHASE SHARES
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the
Fund's net asset value (see Net Asset Value) next determined after
receipt of payment by the Fund.
Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of the Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
HOW TO REDEEM SHARES
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of the
Fund through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.
EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other Stein Roe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. Contact your
plan administrator for instructions on how to exchange your shares
or to obtain prospectuses of other Stein Roe Funds available
through your plan. The Fund reserves the right to suspend, limit,
modify, or terminate the Exchange Privilege or its use in any
manner by any person or class; shareholders would be notified of
such a change.
GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is normally determined twice each day: at 11:00 a.m., Chicago
time, and as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., Chicago time). The net asset value
per share is computed by dividing the difference between the
values of the Fund's assets and liabilities by the number of
shares outstanding and rounding to the nearest cent. Net asset
value will not be determined on days when the Exchange is closed
unless, in the judgment of the Board of Trustees, the net asset
value of the Fund should be determined on any such day, in which
case the determination will be made at 3:00 p.m., Chicago time.
The Fund attempts to maintain its net asset value at $1.00 per
share. Portfolio securities are valued based on their amortized
cost, which does not take into account unrealized gains or losses.
Other assets and securities of the Fund for which this valuation
method does not produce a fair value are valued at a fair value
determined by the Board. The extent of any deviation between the
Fund's net asset value based upon market quotations or equivalents
and $1.00 per share based on amortized cost will be examined by
the Board of Trustees. If such deviation were to exceed 1/2 of
1%, the Board would consider what action, if any, should be taken,
including selling portfolio instruments, increasing, reducing or
suspending distributions, or redeeming shares in kind.
___________________________
DISTRIBUTIONS AND
INCOME TAXES
DISTRIBUTIONS.
A dividend from net income of the Fund is declared each business
day to shareholders of record immediately before 3:00 p.m.,
Chicago time. Dividends credited to your account are distributed
monthly. If the Fund's net asset value per share were to decline,
or were believed likely to decline, below $1.00 (rounded to the
nearest cent), the Board might temporarily reduce or suspend
dividends in an effort to maintain net asset value at $1.00 per
share.
The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.
INCOME TAXES.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements
that are necessary for it to be relieved of federal taxes on
income and gain it distributes. The Fund will distribute
substantially all of its ordinary income and net capital gains on
a current basis. Generally, Fund distributions are taxable as
ordinary income, except that any distributions of net long-term
capital gains will be taxed as such. However, distributions by
the Fund to employer-sponsored defined contribution plans that
qualify for tax-exempt treatment under federal income tax laws
will not be taxable. Special tax rules apply to investments
through such plans. You should consult your tax advisor to
determine the suitability of the Fund as an investment through
such a plan and the tax treatment of distributions (including
distributions of amounts attributable through an investment in the
Fund) from such a plan. This section is not intended to be a full
discussion of income tax laws and their effect on shareholders.
___________________________
MANAGEMENT OF THE FUND
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See the Statement of
Additional Information for the names of and other information
about the trustees and officers. The Fund's Adviser, Stein Roe &
Farnham Incorporated, One South Wacker Drive, Chicago, Illinois
60606, is responsible for managing the Fund's investment portfolio
and the business affairs of the Fund and the Trust, subject to the
direction of the Board. The Adviser is registered as an
investment adviser under the Investment Advisers Act.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
FEES AND EXPENSES.
In return for its services, the Adviser receives a monthly fee
from the Fund, computed and accrued daily, based on the Fund's
average net assets. Effective November 1, 1995, the annualized
fee is .50 of 1% on the first $500 million, .45 of 1% of the next
$500 million, and .40 of 1% on assets over $1 billion. Prior to
that date, the fee was .50 of 1% of average net assets. The
annualized fee, after the expense limitation described under Fee
Table, amounted to .45% of average net assets for the year ended
June 30, 1995.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of the
Fund's portfolio securities. In doing so, the Adviser seeks to
obtain the best combination of price and execution, which involves
a number of judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc., One South Wacker Drive, Chicago, Illinois
60606, a wholly owned indirect subsidiary of Liberty Mutual, is
the agent of the Trust for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.
DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02101, is the custodian for the Fund. (See
Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of the Trust is
also believed to be remote, because it would be limited to claims
to which the disclaimer did not apply and to circumstances in
which the other series was unable to meet its obligations.
___________________________
FOR MORE INFORMATION
Contact a Stein Roe Retirement Plan Representative at 800-322-
1130 for more information about this Fund.
_________________
<PAGE>
STEIN ROE INCOME TRUST
STEIN ROE LIMITED MATURITY INCOME FUND
THE NOVEMBER 1, 1995 DATE OF THIS DEFINED CONTRIBUTION PLANS
PROSPECTUS IS NULL AND VOID. THE NEW DATE OF THIS PROSPECTUS IS
JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to the Fund was replaced with an administrative agreement
and a management agreement. The new fee schedules, which do not
result in a fee increase, are stated below at annual rates as a
percentage of average daily net assets (dollar amounts are in
millions):
MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- ---------------- ------------------ -----------------
.450% up to $100, .150% up to $100, .600% up to $100,
.425% next $100, .125% next $100, .550% next $100,
.400% thereafter .100% thereafter .500% thereafter
INTERFUND LENDING PROGRAM. On June 18, 1996, the Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Fund's Investments (pages 7-8 of the
Prospectus) is revised to read as follows:
"The Fund may not make loans except that it may (1) purchase
money market securities and enter into repurchase agreements;
(2) acquire publicly-distributed or privately-placed debt
securities; (3) lend its portfolio securities under certain
conditions; and (4) participate in an interfund lending
program with other Stein Roe Funds. A Fund may not borrow
money, except for non-leveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither the Fund's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate
loans at any one time may exceed 33 1/3% of its total
assets."
ADDRESS CHANGE. The Statement of Additional Information and
the Fund's most recent financial statements may be obtained
without charge by writing to the Secretary of the Trust at P.O.
Box ___, Chicago, Illinois 60680, or by calling 800-338-2550.
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (page 3 of the Prospectus) is updated by
adding the following unaudited financial information for the six
months ended December 31, 1995:
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.70
------
Income from Investment Operations
Net investment income .31
Net realized and unrealized gains
(losses) on investments .06
------
Total from investment operations .37
Distributions from net investment income (.31)
------
NET ASSET VALUE, END OF PERIOD $ 9.76
------
------
Ratio of net expenses to average net
assets (a) *0.52%
Ratio of net investment income to average
net assets (b) *6.10%
Portfolio turnover rate **12%
Total return (b) **3.74%
Net assets, end of period (000 omitted) $36,670
_______________
*Annualized..
**Not annualized.
(a) If the Fund had paid all of its expenses and there had been
no reimbursement of expenses by the Adviser, for the period
ended December 31, 1995, this ratio would have been 1.23% .
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
________________________________
<PAGE>
[STEINROE MUTUAL FUNDS LOGO]
PROSPECTUS
DEFINED CONTRIBUTION PLANS
STEIN ROE LIMITED MATURITY INCOME FUND
The Fund seeks high current income by investing primarily in U.S.
Government and other high-quality debt securities. The dollar-
weighted average effective maturity will not exceed three years.
This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").
The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEIN ROE INCOME TRUST, an open-end management investment
company.
This prospectus contains information you should know before
investing in the Fund. Please read it carefully and retain it for
future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at P.O. Box 804058, Chicago, IL 60680 or by calling 800-
322-1130. The Statement of Additional Information contains
information relating to other series of the Stein Roe Income Trust
that may not be available as investment vehicles for your defined
contribution plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995
TABLE OF CONTENTS
Page
Fee Table .................................2
Financial Highlights.......................2
The Fund...................................3
How the Fund Invests.......................3
Portfolio Investments and Strategies.......4
Restrictions on the Fund's Investments ....7
Risks and Investment Considerations .......8
How to Purchase Shares ....................9
How to Redeem Shares ......................9
Net Asset Value ..........................10
Distributions and Income Taxes............10
Investment Return.........................10
Management of the Fund....................11
Organization and Description of Shares....12
For More Information......................12
___________________________
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (after expense
reimbursement; as a percentage of average
net assets)
Management Fees (after expense reimbursement) 0.00%
12b-1 Fees None
Other Expenses (after expense reimbursement) 0.65%
------
Total Fund Operating Expenses (after expense
reimbursement) 0.65%
------
------
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of each
time period:
1 year 3 years 5 years 10 years
------- -------- ------- --------
$7 $21 $36 $81
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year, adjusted for the
expense limitation in effect on November 1, 1995. From time to
time, the Adviser may voluntarily absorb certain expenses of the
Fund. The Adviser has agreed to voluntarily absorb the Fund's
expenses to the extent they exceed 0.65% of average net assets
through October 31, 1996, subject to earlier termination by the
Adviser on 30 days' notice. Any such absorption will temporarily
lower the Fund's overall expense ratio and increase its overall
return to investors. Prior to November 1, 1995, the Adviser
undertook to reimburse the Fund for expenses in excess of 0.45%.
Absent such expense undertaking, the Management Fees, Other
Expenses, and Total Fund Operating Expenses would have been 0.60%,
0.67%, and 1.27%, respectively. (Also see Management of the Fund--
Fees and Expenses.)
For purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the Example
are not necessarily indicative of past or future expenses, and actual
expenses may be greater or less than those shown. Although
information such as that shown in the Fee Table and Example is
useful in reviewing the Fund's expenses and in providing a basis
for comparison with other mutual funds, it should not be used for
comparison with other investments using different assumptions or
time periods. The example does not reflect any charges or expenses
related to your employer's plan.
________________________________
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the Fund on a
per-share basis and has been audited by Ernst & Young LLP,
independent auditors. The table should be read in conjunction with
the Fund's financial statements and notes thereto. The Fund's
annual report, which may be obtained from the Trust without charge
upon request, contains additional performance information.
Period
Ended
June 30, Years Ended June 30,
1993 (a) 1994 1995
-------- ------- ------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.01 $9.61
-------- ------- ------
Income from Investment Operation
Net investment income .12 .47 .56
Net realized and unrealized gains
on investments .01 (.40) .09
-------- ------- ------
Total from investment operations .13 .07 .65
Distributions from net investment
income (.12) (.47) (.56)
-------- ------- ------
NET ASSET VALUE, END OF PERIOD $10.01 $9.61 $9.70
-------- ------- ------
-------- ------- ------
Ratio of net expenses to average
net assets (b) *0.45% 0.45% 0.45%
Ratio of net investment income to
average net assets (c) *4.18% 4.81% 5.83%
Portfolio turnover rate **20% 122% 64%
Total return (c) **1.43% 0.66% 6.96%
Net assets, end of period
(000 omitted) $7,619 $35,383 $27,907
*Annualized.
**Not annualized.
(a) The Fund commenced operations on March 11, 1993.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, these ratios would
have been 3.63% for the period ended June 30, 1993 and 1.14%
and 1.27% for the years ended June 30, 1994 and 1995, respectively.
(c) Computed giving effect to the Adviser's expense limitation
undertaking.
___________________________
THE FUND
STEIN ROE LIMITED MATURITY INCOME FUND (the "Fund") is a no-load,
diversified "mutual fund." Mutual funds sell their own shares to
investors and invest the proceeds in a portfolio of securities. A
mutual fund allows you to pool your money with that of other
investors in order to obtain professional investment management and
economies of scale from the sharing of expenses. Mutual funds
generally make it possible for you to obtain greater
diversification of your investments and simplify your
recordkeeping. No-load funds do not impose commissions or charges
when shares are purchased or redeemed.
The Fund is a series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory and administrative services to the Fund. The
Adviser also manages several other no-load mutual funds with
different investment objectives, including equity funds,
international funds, other taxable bond funds, tax-exempt bond
funds, and money market funds. To obtain prospectuses and other
information on opening a regular account in any of these mutual
funds, please call 800-338-2550.
___________________________
HOW THE FUND INVESTS
The Fund's investment objective is to provide a high level of
current income, consistent with the preservation of capital. The
Fund attempts to achieve its objective by investing primarily in
securities issued or guaranteed as to principal and interest by the
U.S. Government or by its agencies or instrumentalities ("U.S.
Government Securities") and other high-quality fixed-income
securities. Depending on market conditions, the Fund may invest a
substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC. Further information on
portfolio investments and strategies may be found under Portfolio
Investments and Strategies in this prospectus and in the Statement
of Additional Information.
In addition, the Fund may invest in principal portions or coupon
portions of U.S. Government Securities that have been separated
(stripped) by banks, brokerage firms, or other entities. Stripped
securities are usually sold separately in the form of receipts or
certificates representing undivided interests in the stripped
portion and are not considered to be issued or guaranteed by the
U.S. Government. Stripped securities may be more volatile than
non-stripped securities. The staff of the Securities and Exchange
Commission believes that mortgage-backed stripped securities are
illiquid. The Fund has temporarily agreed to treat stripped
securities as subject to the Fund's restriction on investment
in illiquid securities.
The Fund may also invest in other types of debt securities;
however, under normal circumstances, at least 65% of the Fund's
total assets will be invested in U.S. Government Securities, non-
U.S. Government Securities that are rated at least AA by Standard &
Poor's Corporation ("S&P") or Aa by Moody's Investors Service, Inc.
("Moody's") and high-quality money market instruments. The Fund
may invest up to 35% of its assets in other debt securities that
are rated at least investment grade (BBB by S&P or Baa by Moody's).
Securities rated BBB by S&P or by Moody's are neither highly
protected nor poorly secured. Such securities have some
speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity
of the issuers of such securities to make principal and interest
payments than is the case for issuers of higher grade securities.
If the rating of a security held by the Fund is lost or reduced
below investment grade, the Fund is not required to dispose of the
security, but the Adviser will consider that fact in determining
whether the Fund should continue to hold the security.
Under normal circumstances, the dollar-weighted average maturity of
the portfolio is expected to be no more than ten years. The
average dollar-weighted maturity of the portfolio is the dollar-
weighted average of the stated maturities of all debt instruments
held in the portfolio. In addition, it is expected that under
normal circumstances, the Fund will invest at least 65% of its
total assets in securities with an effective maturity of three
years or less, and that the dollar-weighted average effective
maturity of the portfolio will not exceed three years. The
effective maturity of a debt instrument is the weighted average
period over which the Adviser expects the principal to be paid, and
differs from stated maturity in that it estimates the effect of
expected principal prepayments and call provisions. With respect
to GNMA securities and other mortgage-backed securities, the
effective maturity is likely to be substantially less than the
stated maturity of the mortgages in the underlying pools. With
respect to obligations with call provisions, the effective maturity
is typically the next call date on which the obligation reasonably
may be expected to be called. Securities without prepayment or
call provisions generally have an effective maturity equal to their
stated maturity. During periods of rising interest rates, the
effective maturity of mortgage-backed securities and callable
obligations may increase because they are less likely to be
prepaid, which may result in greater net asset value fluctuation.
___________________________
PORTFOLIO INVESTMENTS
AND STRATEGIES
U.S. GOVERNMENT SECURITIES.
U.S. Government Securities include: (i) bills, notes, bonds, and
other debt securities, differing as to maturity and rates of
interest, that are issued by and are direct obligations of the U.S.
Treasury; and (ii) other securities that are issued or guaranteed
as to principal and interest by the U.S. Government or by its
agencies or instrumentalities and that include, but are not limited
to, Government National Mortgage Association ("GNMA"), Federal Farm
Credit Banks, Federal Home Loan Banks, Farmers Home Administration,
Federal Home Loan Mortgage Corporation ("FHLMC"), and Federal
National Mortgage Association ("FNMA"). U.S. Government Securities
are generally viewed by the Adviser as being among the safest of
debt securities with respect to the timely payment of principal and
interest (but not with respect to any premium paid on purchase),
but generally bear a lower rate of interest than corporate debt
securities. However, they are subject to market risk like other
debt securities, and therefore the Fund's shares can be expected to
fluctuate in value.
DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad array
of financial instruments and securities, including conventional
exchange-traded and non-exchange traded options, futures contracts,
futures options, securities collateralized by underlying pools of
mortgages or other receivables, and other instruments, the value of
which is "derived" from the performance of an underlying asset or a
"benchmark" such as a security index, an interest rate, or a
currency ("Derivatives"). The Fund does not expect to invest more
than 5% of its net assets in any type of Derivative except for
options, futures contracts, futures options, mortgage or other
asset-backed securities, and floating rate instruments.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less marketable
than exchange-traded Derivatives. For additional information on
Derivatives, please refer to the Statement of Additional
Information.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES. The Fund may invest in
securities secured by mortgages or other assets such as automobile
or home improvement loans and credit card receivables. These
instruments may be issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities or by private entities such as
commercial, mortgage and investment banks and financial companies
or financial subsidiaries of industrial companies.
Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in a
pool of mortgages.
The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Treasury. FNMA guarantees full and timely payment of interest
and principal on FNMA securities. FHLMC guarantees timely payment
of interest and ultimate collection of principal on FHLMC
securities. FNMA and FHLMC securities are not backed by the full
faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining
interest rates, there is increased likelihood that mortgages will
be prepaid, with a resulting loss of the full-term benefit of any
premium paid by the Fund on purchase of such securities; in
addition, the proceeds of prepayment would likely be invested at
lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and yield
characteristics. Mortgage-backed securities involve the risk of
pre-payment on the underlying mortgages at a faster or slower rate
than the established schedule. Pre-payments generally increase
with falling interest rates and decrease with rising rates, but they
also are influenced by economic, social, and market factors. If
mortgages are pre-paid during periods of declining interest rates,
there would be a resulting loss of the full-term benefit of any
premium paid by the Fund on purchase of the CMO, and the proceeds
of pre-payment would likely be invested at lower interest rates.
The Fund tends to invest in CMOs of classes known as planned
amortization classes ("PACs") which have pre-payment protection
features tending to make them less susceptible to price volatility.
Non-mortgage asset-backed securities usually have less pre-payment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
Asset-backed securities tend to experience greater price volatility
than straight debt securities.
FLOATING RATE INSTRUMENTS. The Fund may also invest in floating
rate instruments which provide for periodic adjustments in coupon
interest rates that are automatically reset based on changes in
amount and direction of specified market interest rates. In
addition, the adjusted duration of some of these instruments may be
materially shorter than their stated maturities. To the extent
such instruments are subject to lifetime or periodic interest rate
caps or floors, such instruments may experience greater price
volatility than debt instruments without such features. Adjusted
duration is an inverse relationship between market price and
interest rates and refers to the approximate percentage change in
price for a 100 basis point change in yield. For example, if
interest rates decrease by 100 basis points, a market price of a
security with an adjusted duration of 2 would increase by
approximately 2%.
FUTURES AND OPTIONS. The Fund may purchase and write both call
options and put options on securities, indexes and foreign currencies,
and enter into interest rate, index and foreign currency futures
contracts. The Fund may also write options on such futures contracts
and purchase other types of forward or investment contracts linked to
individual securities, indexes or other benchmarks in order to,
consistent with its investment objective, provide additional revenue,
or to hedge against changes in security prices, interest rates, or
currency fluctuations. The Fund may write a call or put option only
if the option is covered. As the writer of a covered call option, the
Fund foregoes, during the option's life, the opportunity to profit from
increases in market value of the security covering the call option
above the sum of the premium and the exercise price of the call. There
can be no assurance that a liquid market will exist when the Fund seeks
to close out a position. Because of low margin deposits required, the
use of futures contracts involves a high degree of leverage, and may
result in losses in excess of the amount of the margin deposit.
FOREIGN SECURITIES.
Although the Fund may invest in foreign securities, it will not
invest in a foreign security if, as a result of such investment,
more than 25% of its total assets would be invested in foreign
securities. For purposes of this restriction, foreign securities
do not include securities represented by American Depositary
Receipts ("ADRs"), foreign debt securities denominated in U.S.
dollars, or securities guaranteed by a U.S. person such as a
corporation domiciled in the United States that is a parent or
affiliate of the issuer of the securities being guaranteed. The
Fund may invest in sponsored or unsponsored ADRs. In addition to,
or in lieu of, such direct investment, the Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Fund may
contract to purchase an amount of foreign currency sufficient to
pay the purchase price of the securities at the settlement date.
At June 30, 1995, no assets of the Fund were invested in foreign
securities as defined above, and the Fund does not intend to invest
more than 5% of its net assets in such securities. (See Risks and
Investment Considerations.)
LENDING OF PORTFOLIO SECURITIES.
Subject to certain restrictions, the Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Fund. The Fund would
continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and would also receive
an additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Fund would have the right to
call the loan and obtain the securities loaned at any time on
notice of not more than five business days. In the event of
bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible
decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to enforce
its rights thereto; (b) possible subnormal levels of income and
lack of access to income during this period; and (c) expenses of
enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
The Fund's assets may include securities purchased on a when-issued
or delayed-delivery basis. Although the payment and interest terms
of these securities are established at the time the purchaser
enters into the commitment, the securities may be delivered and
paid for a month or more after the date of purchase, when their
value may have changed. The Fund makes such commitments only with
the intention of actually acquiring the securities, but may sell
the securities before settlement date if the Adviser deems it
advisable for investment reasons. Securities purchased in this
manner involve a risk of loss if the value of the security
purchased declines before settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that the Fund will sell
securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar roll
transactions involve the risk of restrictions on the Fund's ability
to repurchase the security if the counterparty becomes insolvent;
an adverse change in the price of the security during the period of
the roll or that the value of the security repurchased will be less
than the security sold; and transaction costs exceeding the return
earned by the Fund on the sales proceeds of the dollar roll.
The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.
PORTFOLIO TURNOVER.
In attempting to attain its objective, the Fund may sell portfolio
securities without regard to the period of time they have been
held. Further, the Adviser may purchase and sell securities for
the Fund's portfolio with a view to maximizing current return, even
if portfolio changes would cause the realization of capital gains.
Although the weighted average effective maturity of the Fund's
portfolio generally will not exceed three years, the Adviser may
adjust the average effective maturity of the Fund's portfolio from
time to time, depending on its assessment of the relative yields
available on securities of different maturities and its
expectations of future changes in interest rates. As a result, the
turnover rate of the Fund may vary from year to year, and it may
exceed 100%, but is not expected to exceed 200% under normal market
conditions. A high rate of portfolio turnover may result in
increased transaction expenses and the realization of capital gains
(which may be taxable) or losses. (See Financial Highlights and
Distributions and Income Taxes.)
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS
The Fund may not invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities, or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers in
the same industry, except that this restriction does not apply to
U.S. Government Securities. Notwithstanding these limitations, the
Fund may invest all of its assets in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund.
The Fund may not make loans, except that, consistent with its
investment policies and restrictions, it may: (1) invest up to 100%
of its net assets in publicly offered or privately placed debt
securities, (2) lend its portfolio securities under certain
circumstances, and (3) enter into repurchase agreements./1/ The
Fund may not borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then the Fund's aggregate
borrowings at any one time (including reverse repurchase agreements
and dollar rolls) may not exceed 33 1/3% of its total assets (at
market value). Additional securities may not be purchased when
borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
The policies set forth in the first two paragraphs under
Restrictions on the Fund's Investments (but not the footnote) are
fundamental policies of the Fund. The Statement of Additional
Information contains all of the investment restrictions.
- -----------------
/1/ A repurchase agreement involves a sale of securities to the
Fund with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of a
seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses. The
Fund may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
- -----------------
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although the Fund seeks
to reduce risk by investing in a diversified portfolio, this does
not eliminate all risk. The risks inherent in the Fund depend
primarily upon the term and quality of the obligations in the
Fund's portfolio, as well as on market conditions.
A decline in prevailing levels of interest rates generally
increases the value of securities in the Fund's portfolio, while an
increase in rates usually reduces the value of those securities.
As a result, interest rate fluctuations will affect the Fund's net
asset value, but not the income received by the Fund from its
portfolio securities. (Because yields on debt securities available
for purchase by the Fund vary over time, no specific yield on
shares of the Fund can be assured.) In addition, if the bonds in
the Fund's portfolio contain call, prepayment or redemption
provisions, during a period of declining interest rates, these
securities are likely to be redeemed, and the Fund will probably be
unable to replace them with securities having as great a yield.
The Fund is appropriate for investors who seek higher yields than
are usually available from money market instruments with stable
prices and shorter maturities, but who also want less net asset
fluctuation than that of a longer-term fund. Unlike money market
funds, however, the Fund does not seek to maintain a stable net
asset value and may not be able to return dollar-for-dollar the
money invested.
Investments in foreign securities, including ADRs, represent both
risks and opportunities not typically associated with investments
in domestic issuers. Risks of foreign investing include currency
risk, less complete financial information on issuers, less market
liquidity, more market volatility, less well-developed and
regulated markets, and greater political instability. In addition,
various restrictions by foreign governments on investments by non-
residents may apply, including imposition of exchange controls and
withholding taxes on dividends, and seizure or nationalization of
investments owned by non-residents. Foreign investments also tend
to involve higher transaction and custody costs.
The Fund may enter into foreign currency forward contracts and use
options and futures contracts as described elsewhere in this
prospectus to limit or reduce foreign currency risk.
There can be no assurance that the Fund will achieve its objective,
nor can the Fund assure that payments of interest and principal on
portfolio securities will be made when due. If, after purchase by
the Fund, the rating of a portfolio security is lost or reduced,
the Fund would not be required to sell the security, but the
Adviser would consider such a change in deciding whether the Fund
should retain the security in its portfolio.
The Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, the Fund may in the
future seek to achieve its investment objective by pooling its
assets with assets of other mutual funds managed by the Adviser for
investment in another investment company having the same investment
objective and substantially the same investment policies and
restrictions as the Fund. The purpose of such arrangement is to
achieve greater operational efficiencies and reduce costs. It is
expected that any such investment company would be managed by the
Adviser in substantially the same manner as the Fund. Shareholders
of the Fund will be given at least 30 days' prior notice of any
such investment, although they will not be entitled to vote on the
action. Such investment would be made only if the trustees
determine it to be in the best interests of the Fund and its
shareholders.
___________________________
HOW TO PURCHASE SHARES
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer. Shares
are sold to eligible defined contribution plans at the Fund's net
asset value (see Net Asset Value) next determined after receipt of
payment by the Fund.
Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order has
been accepted, you may not cancel or revoke it; however, you may
redeem the shares. The Trust reserves the right not to accept any
purchase order that it determines not to be in the best interest of
the Trust or of the Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
HOW TO REDEEM SHARES
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is open.
For more information about how to redeem your shares of the Fund
through your employer's plan, including any charges that may be
imposed by the plan, please consult with your employer.
EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase shares
of any other Stein Roe Fund available through your employer's
defined contribution plan. (An exchange is commonly referred to as
a "transfer.") Before exercising the Exchange Privilege, you
should obtain the prospectus for the Stein Roe Fund in which you
wish to invest and read it carefully. Contact your plan
administrator for instructions on how to exchange your shares or to
obtain prospectuses of other Stein Roe Funds available through your
plan. The Fund reserves the right to suspend, limit, modify, or
terminate the Exchange Privilege or its use in any manner by any
person or class; shareholders would be notified of such a change.
GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is determined as of the close of trading on the New York State
Exchange (currently 3:00 p.m., Chicago time) by dividing the
difference between the values of the Fund's assets and liabilities
by the number of shares outstanding. Net asset value will not be
determined on days when the Exchange is closed unless, in the
judgment of the Board of Trustees, the net asset value of the Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
Securities for which market quotations are readily available at the
time of valuation are valued on that basis. Long-term straight-
debt securities for which market quotations are not readily
available are valued at a fair value based on valuations provided
by pricing services approved by the Board, which may employ
electronic data processing techniques, including a matrix system,
to determine valuations. Short-term debt securities with remaining
maturities of 60 days or less are valued at their amortized cost,
which does not take into account unrealized gains or losses. The
Board believes that the amortized cost represents a fair value for
such securities. Short-term debt securities with remaining
maturities of more than 60 days for which market quotations are not
readily available are valued by use of a matrix prepared by the
Adviser based on quotations for comparable securities. Other
assets and securities held by the Fund for which these valuation
methods do not produce a fair value are valued by a method that the
Board believes will determine a fair value.
___________________________
DISTRIBUTIONS AND
INCOME TAXES
DISTRIBUTIONS.
Income dividends are declared each business day and are paid
monthly. The Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized from
the sale of securities during the twelve-month period ended October
31 in that year. The Fund intends to distribute any undistributed
net investment income and net realized capital gains in the
following year.
The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.
INCOME TAXES.
The Fund intends to qualify as a "regulated investment company" for
federal income tax purposes and to meet all other requirements that
are necessary for it to be relieved of federal taxes on income and
gain it distributes. The Fund will distribute substantially all of
its ordinary income and net capital gains on a current basis.
Generally, Fund distributions are taxable as ordinary income,
except that any distributions of net long-term capital gains will
be taxed as such. However, distributions by the Fund to employer-
sponsored defined contribution plans that qualify for tax-exempt
treatment under federal income tax laws will not be taxable.
Special tax rules apply to investments through such plans. You
should consult your tax advisor to determine the suitability of the
Fund as an investment through such a plan and the tax treatment of
distributions (including distributions of amounts attributable
through an investment in the Fund) from such a plan. This section
is not intended to be a full discussion of income tax laws and
their effect on shareholders.
___________________________
INVESTMENT RETURN
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
The yield of the Fund is calculated by dividing its net investment
income per share (a hypothetical figure as defined in the SEC
rules) during a 30-day period by the net asset value per share on
the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income is
earned and reinvested at a constant rate and annualized at the end
of a six-month period.
Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does not
reflect any charges or expenses related to your employer's plan.
Yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results. To
obtain current yield or total return information, you may call
800-338-2550.
___________________________
MANAGEMENT OF THE FUND
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See the Statement of
Additional Information for the names of and other information about
the trustees and officers. The Fund's Adviser, Stein Roe & Farnham
Incorporated, One South Wacker Drive, Chicago, Illinois 60606, is
responsible for managing the Fund's investment portfolio and the
business affairs of the Fund and the Trust, subject to the
direction of the Board. The Adviser is registered as an investment
adviser under the Investment Advisers Act.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
PORTFOLIO MANAGER.
Steven P. Luetger has been portfolio manager of the Fund since
February 1995 and is a vice-president of the Fund. He is a senior
vice president of the Adviser and has been associated with the
Adviser since 1978. Mr. Luetger received his B.A. from Knox
College in 1975 and M.B.A. from the University of Chicago in 1980.
As of June 30, 1995, he was responsible for managing $28 million in
mutual fund assets. Mr. Luetger is assisted in managing the Fund
by Michael T. Kennedy. Mr. Kennedy is a vice-president of the
Trust, a senior vice president of the Adviser, and has been
associated with the Adviser since 1987. From 1984 to 1987, he was
employed by Homewood Federal Savings and Loan. A chartered
financial analyst and a chartered investment counselor, he received
his B.S. degree from Marquette University in 1984 and his M.M. from
Northwestern University in 1988.
FEES AND EXPENSES.
In return for its services, the Adviser receives a monthly fee from
the Fund based on the Fund's average net assets, computed and
accrued daily. The annualized fee that the Fund has agreed to pay
is 0.60 of 1% of the first $100 million of average net assets, 0.55
of 1% of the next $100 million, and 0.50 of 1% thereafter. For the
fiscal year ended June 30, 1995, pursuant to the expense
undertaking described under Fee Table, the Adviser reimbursed the
Fund $234,580, resulting in a net payment by the Adviser to the
Fund of $62,279.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Fund. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc., One South Wacker Drive, Chicago, Illinois
60606, a wholly owned indirect subsidiary of Liberty Mutual, is the
agent of the Trust for the transfer of shares, disbursement of
dividends, and maintenance of shareholder accounting records.
DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should be
mailed to the Trust at P.O. Box 804058, Chicago, Illinois 60680.
All distribution and promotional expenses are paid by the Adviser,
including payments to the Distributor for sales of Fund shares.
CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the Fund.
Foreign securities are maintained in the custody of foreign banks
and trust companies that are members of the Bank's Global Custody
Network or foreign depositories used by such members. (See
Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the Trust's
shareholders or its trustees. The Trust may issue an unlimited
number of shares, in one or more series as the Board may authorize.
Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or having
been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is believed to
be remote, because it would be limited to circumstances in which
the disclaimer was inoperative and the Trust was unable to meet its
obligations.
The risk of a particular series incurring financial loss on account
of unsatisfied liability of another series of the Trust is also
believed to be remote, because it would be limited to claims to
which the disclaimer did not apply and to circumstances in which
the other series was unable to meet its obligations.
___________________________
FOR MORE INFORMATION
Contact a Stein Roe Retirement Plan Representative at 800-322-
1130 for more information about this Fund.
_________________
<PAGE>
STEIN ROE INCOME TRUST
STEIN ROE GOVERNMENT INCOME FUND
THE NOVEMBER 1, 1995 DATE OF THIS DEFINED CONTRIBUTION PLANS
PROSPECTUS IS NULL AND VOID. THE NEW DATE OF THIS PROSPECTUS IS
JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to the Fund was replaced with an administrative agreement
and a management agreement. The new fee schedules, which do not
result in a fee increase, are stated below at annual rates as a
percentage of average daily net assets (dollar amounts are in
millions):
MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
---------------- ------------------ -----------------
.450% up to $100, .150% up to $100, .600% up to $100,
.425% thereafter .125% thereafter .550% thereafter
INTERFUND LENDING PROGRAM. On June 18, 1996, the Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Fund's Investments (page 7 of the Prospectus)
is revised to read as follows:
"The Fund may not make loans except that it may (1) purchase
money market securities and enter into repurchase agreements;
(2) acquire publicly-distributed or privately-placed debt
securities; (3) lend its portfolio securities under certain
conditions; and (4) participate in an interfund lending
program with other Stein Roe Funds. A Fund may not borrow
money, except for non-leveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither the Fund's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate
loans at any one time may exceed 33 1/3% of its total
assets."
ADDRESS CHANGE. The Statement of Additional Information and
the Fund's most recent financial statements may be obtained
without charge by writing to the Secretary of the Trust at P.O.
Box ___, Chicago, Illinois 60680, or by calling 800-338-2550.
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (page 3 of the Prospectus) is updated by
adding the following unaudited financial information for the six
months ended December 31, 1995:
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.85
------
Income from Investment Operations
Net investment income .32
Net realized and unrealized gains
(losses) on investments .32
------
Total from investment operations .64
Distributions from net investment income (.32)
------
NET ASSET VALUE, END OF PERIOD $10.17
------
------
Ratio of net expenses to average net
assets (a) *1.00%
Ratio of net investment income to
average net assets (b) *6.06%
Portfolio turnover rate **15%
Total return (b) **6.38%
Net assets, end of period (000 omitted) $36,756
_______________
*Annualized.
**Not annualized.
(a) If the Fund had paid all of its expenses and there had been
no reimbursement of expenses by the Adviser, for the period
ended December 31, 1995, this ratio would have been 1.12% .
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
______________________________________
<PAGE>
[STEINROE MUTUAL FUNDS LOGO]
PROSPECTUS
DEFINED CONTRIBUTION PLANS
STEIN ROE GOVERNMENT INCOME FUND
The Fund seeks high current income by investing primarily in
securities issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities.
This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").
The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEIN ROE INCOME TRUST, an open-end management investment
company.
This prospectus contains information you should know before
investing in the Fund. Please read it carefully and retain it for
future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at P.O. Box 804058, Chicago, IL 60680 or by calling
800-322-1130. The Statement of Additional Information contains
information relating to other series of the Stein Roe Income Trust
that may not be available as investment vehicles for your defined
contribution plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995
TABLE OF CONTENTS
Page
Fee Table .................................2
Financial Highlights.......................2
The Fund...................................3
How the Fund Invests.......................4
Portfolio Investments and Strategies.......4
Restrictions on the Fund's Investments ....7
Risks and Investment Considerations .......7
How to Purchase Shares ....................8
How to Redeem Shares ......................8
Net Asset Value ...........................9
Distributions and Income Taxes.............9
Investment Return.........................10
Management of the Fund....................10
Organization and Description of Shares....11
For More Information .....................12
___________________________
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (after expense
reimbursement; as a percentage of average
net assets)
Management Fees (after expense reimbursement) 0.51%
12b-1 Fees None
Other Expenses 0.49%
------
Total Fund Operating Expenses (after
expense reimbursement) 1.00%
------
------
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------- -------- ------- --------
$10 $32 $55 $122
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year. From time to
time, the Adviser may voluntarily absorb certain expenses of the
Fund. The Adviser has agreed to voluntarily absorb the Fund's
expenses to the extent they exceed 1% of average net assets
through October 31, 1996, subject to earlier termination by the
Adviser on 30 days' notice. Any such absorption will temporarily
lower the Fund's overall expense ratio and increase its overall
return to investors. Absent such expense undertaking, Management
Fees and Total Fund Operating Expenses would have been 0.60% and
1.09%, respectively. (Also see Management of the Fund--Fees
and Expenses.)
For purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the Example
are not necessarily indicative of past or future expenses, and
actual expenses may be greater or less than those shown.
Although information such as that shown in the Fee Table and Example
is useful in reviewing the Fund's expenses and in providing a
basis for comparison with other mutual funds, it should not be
used for comparison with other investments using different
assumptions or time periods. The example does not reflect any
charges or expenses related to your employer's plan.
__________________________
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the Fund on
a per-share basis. The information for the years beginning after
June 30, 1987, has been audited by Ernst & Young LLP, independent
auditors. All of the auditors' reports related to information for
these periods were unqualified. The table should be read in
conjunction with the Fund's financial statements and notes
thereto. The Fund's annual report, which may be obtained from the
Trust without charge upon request, contains additional performance
information.
</TABLE>
<TABLE>
<CAPTION>
Period
Ended
June 30, Years Ended June 30,
1986(a) 1987 1988 1989 1990 1991 1992 1993 1994 1995
-------- ---- ----- ------ ------ ----- ------ ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.00 $10.10 $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
Income from Investment
Operations
Net investment income .24 .72 .74 .78 .76 .75 .72 .64 .56 .62
Net realized and
unrealized gains
(losses) on investments .10 (.31) (.15) .18 (.11) .15 .59 .31 (.77) .37
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
Total from investment
operations .34 .41 .59 .96 .65 .90 1.31 .95 (.21) .99
Distributions
Net investment income (.24) (.72) (.74) (.78) (.76) (.75) (.72) (.64) (.56) (.62)
Net realized capital
gains -- -- (.05) -- -- -- -- (.25) (.01) --
In excess of realized
gains -- -- -- -- -- -- -- -- (.20) --
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
Total distributions (.24) (.72) (.79) (.78) (.76) (.75) (.72) (.89) (.77) (.62)
------ ---- ----- ------ ------ ----- ------ ------ ------- ------
NET ASSET VALUE,
END OF PERIOD $10.10 $ 9.79 $ 9.59 $ 9.77 $ 9.66 $ 9.81 $10.40 $10.46 $ 9.48 $ 9.85
------ ----- ----- ------ ------ ----- ------ ------ ------- ------
------ ----- ----- ------ ------ ----- ------ ------ ------- ------
Ratio of expenses to
average net assets (b) 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% 0.99% 0.95% 0.98% 1.00%
Ratio of net investment
income to average net
assets (c) *7.61% 7.13% 7.68% 8.19% 7.90% 7.65% 7.05% 6.25% 5.49% 6.56%
Portfolio turnover rate **91% 205% 237% 239% 181% 136% 139% 170% 167% 225%
Total return (c) **3.35% 4.01% 6.35% 10.61% 6.92% 9.61% 13.75% 9.60% (2.26%) 10.94%
Net assets, end of
period (000 omitted) $11,970 $22,656 $26,859 $32,011 $46,853 $49,952 $58,978 $61,591 $45,836 $37,280
<FN>
* Annualized.
** Not annualized.
(a) The Fund commenced operations on March 5, 1986.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, this ratio would have
been 3.33% for the period ended June 30, 1986; and 1.44%,
1.37%, 1.21%, and 1.07% for the years ended June 30, 1987 through
1990, respectively; and 1.09% for the year ended June 30, 1995.
(c) Computed giving effect to the Adviser's expense limitation
undertaking.
</TABLE>
___________________________
THE FUND
The mutual fund offered by this prospectus is STEIN ROE GOVERNMENT
INCOME FUND (the "Fund"). The Fund is a no-load, diversified
"mutual fund." No-load funds do not impose commissions or charges
when shares are purchased or redeemed. Mutual funds sell their
own shares to investors and invest the proceeds in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping.
The Fund is a series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") is investment
adviser to the Fund. The Adviser also manages several other no-
load mutual funds with different investment objectives, including
other bond funds, equity funds, international funds, tax-exempt
bond funds, and money market funds. To obtain prospectuses and
other information on opening a regular account in any of these
mutual funds, please call 800-338-2550.
___________________________
HOW THE FUND INVESTS
The Fund's investment objective is to provide a high level of
current income. It invests primarily in securities issued or
guaranteed as to principal and interest by the U.S. Government or
by its agencies or instrumentalities ("U.S. Government
Securities"). Depending on market conditions, the Fund may invest
a substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC. Further information
on portfolio investments and strategies may be found under
Portfolio Investments and Strategies in this prospectus and in the
Statement of Additional Information.
Because the Fund's investment policy permits it to invest in U.S.
Government Securities that are not backed by the full faith and
credit of the U.S. Treasury, investment in the Fund may involve
risks that are different in some respects from an investment in a
fund that invests only in securities that are backed by the full
faith and credit of the U.S. Treasury. Such risks may include a
greater risk of loss of principal and interest on the securities
in the Fund's portfolio that are supported only by the issuing or
guaranteeing U.S. Government agency or instrumentality, since the
Fund must look principally or solely to that entity for ultimate
repayment.
Under normal market conditions, the Fund will invest at least 80%
of its assets in U.S. Government Securities. The Fund may also
invest up to 20% of its assets in other types of debt securities,
including collateralized mortgage obligations ("CMOs") and
principal portions or coupon portions of U.S. Government
Securities that have been separated (stripped) by banks, brokerage
firms, or other entities. Stripped securities are usually sold
separately in the form of receipts or certificates representing
undivided interests in the stripped portion. CMOs are securities
collateralized by mortgages and mortgage-backed securities. CMOs
are not guaranteed by either the U.S. Government or by its
agencies or instrumentalities. Stripped securities may be more
volatile than non-stripped securities. The staff of the
Securities and Exchange Commission believes that stripped
securities are illiquid. The Fund has temporarily agreed to treat
stripped securities as subject to the Fund's restriction on
investment in illiquid securities. The Fund will invest in debt
securities rated at least investment grade or, if unrated, deemed
by the Adviser to be of comparable quality. Securities rated in
the fourth grade are neither highly protected nor poorly secured.
Such securities may have some speculative characteristics, and
changes in economic conditions or other circumstances are more
likely to lead to a weakened capacity of the issuers of such
securities to make principal and interest payments than is the
case for issuers of higher grade securities. If the rating of a
security held by the Fund is lost or reduced below investment
grade, the Fund is not required to dispose of the security, but
the Adviser will consider that fact in determining whether the
Fund should continue to hold the security.
___________________________
PORTFOLIO INVESTMENTS
AND STRATEGIES
U.S. GOVERNMENT SECURITIES.
U.S. Government Securities include: (i) bills, notes, bonds, and
other debt securities, differing as to maturity and rates of
interest, that are issued by and are direct obligations of the
U.S. Treasury; and (ii) other securities that are issued or
guaranteed as to principal and interest by the U.S. Government or
by its agencies or instrumentalities and that include, but are not
limited to, Government National Mortgage Association ("GNMA"),
Federal Farm Credit Banks, Federal Home Loan Banks, Farmers Home
Administration, Federal Home Loan Mortgage Corporation ("FHLMC"),
and Federal National Mortgage Association ("FNMA"). U.S.
Government Securities are generally viewed by the Adviser as being
among the safest of debt securities with respect to the timely
payment of principal and interest (but not with respect to any
premium paid on purchase), but generally bear a lower rate of
interest than corporate debt securities. However, they are
subject to market risk like other debt securities, and therefore
the Fund's shares can be expected to fluctuate in value.
DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments, the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index,
an interest rate, or a currency ("Derivatives"). In each case,
the value of the instrument or security is "derived" from the
performance of an underlying asset or a "benchmark" such as a
security index, an interest rate, or a currency. The Fund does
not expect to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, futures options,
and mortgage or other asset-backed securities.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For additional
information on Derivatives, please refer to the Statement of
Additional Information.
MORTGAGE-BACKED AND OTHER ASSET-BACKED SECURITIES. The Fund may
invest in securities secured by mortgages or other assets such as
automobile or home improvement loans and credit card receivables.
These instruments may be issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities or by private
entities such as commercial, mortgage and investment banks and
financial companies or financial subsidiaries of industrial
companies.
Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in a
pool of mortgages.
The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Treasury. FNMA guarantees full and timely payment of
interest and principal on FNMA securities. FHLMC guarantees
timely payment of interest and ultimate collection of principal on
FHLMC securities. FNMA and FHLMC securities are not backed by the
full faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining
interest rates, there is increased likelihood that mortgages will
be prepaid, with a resulting loss of the full-term benefit of any
premium paid by the Fund on purchase of such securities; in
addition, the proceeds of prepayment would likely be invested at
lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and
yield characteristics. Mortgage-backed securities involve the
risk of pre-payment on the underlying mortgages at a faster or
slower rate than the established schedule. Pre-payments generally
increase with falling interest rates and decrease with rising
rates, but they also are influenced by economic, social, and market
factors. If mortgages are pre-paid during periods of declining
interest rates, there would be a resulting loss of the full-term
benefit of any premium paid by the Fund on purchase of the CMO,
and the proceeds of pre-payment would likely be invested at lower
interest rates. The Fund tends to invest in CMOs of classes known
as planned amortization classes ("PACs") which have pre-payment
protection features tending to make them less susceptible to price
volatility.
Non-mortgage asset-backed securities usually have less pre-payment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
Asset-backed securities tend to experience greater price
volatility than straight debt securities.
FUTURES AND OPTIONS. The Fund may purchase and write both call
options and put options on securities and on indexes, and enter
into interest rate and index futures contracts and options on such
futures contracts, consistent with its investment objective, in
order to provide additional revenue, or to hedge against changes
in security prices or interest rates. The Fund may write a call
or put option only if the option is covered. As the writer of a
covered call option, the Fund foregoes, during the option's life,
the opportunity to profit from increases in market value of the
security covering the call option above the sum of the premium and
the exercise price of the call. There can be no assurance that a
liquid market will exist when the Fund seeks to close out a
position. Because of low margin deposits required, the use of
futures contracts involves a high degree of leverage, and may
result in losses in excess of the amount of the margin deposit.
LENDING OF PORTFOLIO SECURITIES.
Subject to certain restrictions, the Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Fund. The Fund would
continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and would also
receive an additional return that may be in the form of a fixed
fee or a percentage of the collateral. The Fund would have the
right to call the loan and obtain the securities loaned at any
time on notice of not more than five business days. In the event
of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible
decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to
enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c)
expenses of enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
The Fund's assets may include securities purchased on a when-
issued or delayed-delivery basis. Although the payment and
interest terms of these securities are established at the time the
purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed. The Fund makes such
commitments only with the intention of actually acquiring the
securities, but may sell the securities before settlement date if
the Adviser deems it advisable for investment reasons. Securities
purchased in this manner involve a risk of loss if the value of
the security purchased declines before the settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that the Fund will
sell securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value of the security
repurchased will be less than the security sold; and transaction
costs exceeding the return earned by the Fund on the sales
proceeds of the dollar roll.
The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.
PORTFOLIO TURNOVER.
In seeking to attain its objective, the Fund may sell portfolio
securities without regard to the period of time they have been
held. Further, the Adviser may purchase and sell securities for
the Fund's portfolio with a view to maximizing current return,
even if portfolio changes would cause the realization of capital
gains. Although the average stated maturity of the Fund's
portfolio generally will exceed ten years, the Adviser may adjust
the average maturity of the Fund's portfolio from time to time,
depending on its assessment of the relative yields available on
securities of different maturities and its expectations of future
changes in interest rates. As a result, the turnover rate of the
Fund may vary from year to year. A high rate of portfolio
turnover may result in increased transaction expenses and the
realization of capital gains (which may be taxable) or losses.
(See Financial Highlights and Distributions and Income Taxes.)
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS
The Fund may not invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities; or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers
in the same industry, except that this restriction does not apply
to U.S. Government Securities. Notwithstanding these limitations,
the Fund may invest all of its assets in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund.
The Fund may not make loans, except that, consistent with its
investment policies and restrictions, it may: (1) invest up to
100% of its net assets in publicly offered or privately placed
debt securities, (2) lend its portfolio securities under certain
circumstances, and (3) enter into repurchase agreements. /1/ The
Fund may not borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then the Fund's aggregate
borrowings at any one time (including reverse repurchase
agreements and dollar rolls) may not exceed 33 1/3% of its total
assets (at market value). Additional securities may not be
purchased when borrowings, less proceeds receivable from sales of
portfolio securities, exceed 5% of total assets.
- --------------
/1/ A repurchase agreement involves a sale of securities to the
Fund with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses. The
Fund may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
- --------------
The policies set forth in the first two paragraphs under
Restrictions on the Fund's Investments (but not the footnote) are
fundamental policies of the Fund. The Statement of Additional
Information contains all of the investment restrictions.
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although the Fund seeks
to reduce risk by investing in a diversified portfolio, this does
not eliminate all risk. The risks inherent in the Fund depend
primarily upon the term and quality of the obligations in the
Fund's portfolio, as well as on market conditions.
A decline in prevailing levels of interest rates generally
increases the value of securities in the Fund's portfolio, while
an increase in rates usually reduces the value of those
securities. As a result, interest rate fluctuations will affect
the Fund's net asset value, but not the income received by the
Fund from its portfolio securities. (Because yields on debt
securities available for purchase by the Fund vary over time, no
specific yield on shares of the Fund can be assured.) In
addition, if the bonds in the Fund's portfolio contain call,
prepayment or redemption provisions, during a period of declining
interest rates, these securities are likely to be redeemed, and
the Fund will probably be unable to replace them with securities
having as great a yield.
The Fund is designed for investors who seek high income with
minimum risk other than the risk of changes in net asset value
caused by fluctuations in prevailing levels of interest rates.
There can be no assurance that the Fund will achieve its
objective, nor can the Fund assure that payments of interest and
principal on portfolio securities will be made when due. If,
after purchase by the Fund, the rating of a portfolio security is
lost or reduced, the Fund would not be required to sell the
security, but the Adviser would consider such a change in deciding
whether the Fund should retain the security in its portfolio.
The Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, the Fund may in the
future seek to achieve its investment objective by pooling its
assets with assets of other mutual funds managed by the Adviser
for investment in another investment company having the same
investment objective and substantially the same investment
policies and restrictions as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. It is expected that any such investment company
would be managed by the Adviser in substantially the same manner
as the Fund. Shareholders of the Fund will be given at least 30
days' prior notice of any such investment, although they will not
be entitled to vote on the action. Such investment would be made
only if the trustees determine it to be in the best interests of
the Fund and its shareholders.
___________________________
HOW TO PURCHASE SHARES
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the
Fund's net asset value (see Net Asset Value) next determined after
receipt of payment by the Fund.
Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of the Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
HOW TO REDEEM SHARES
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of the
Fund through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.
EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other Stein Roe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. Contact your
plan administrator for instructions on how to exchange your shares
or to obtain prospectuses of other Stein Roe Funds available
through your plan. The Fund reserves the right to suspend, limit,
modify, or terminate the Exchange Privilege or its use in any
manner by any person or class; shareholders would be notified of
such a change.
GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is determined as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., Chicago time) by dividing the
difference between the values of the Fund's assets and liabilities
by the number of shares outstanding. Net asset value will not be
determined on days when the Exchange is closed unless, in the
judgment of the Board of Trustees, the net asset value of the Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by the Fund for
which these valuation methods do not produce a fair value are
valued by a method that the Board believes will determine a fair
value.
___________________________
DISTRIBUTIONS AND
INCOME TAXES
DISTRIBUTIONS.
Income dividends are declared each business day and are paid
monthly. The Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized from
the sale of securities during the twelve-month period ended
October 31 in that year. The Fund intends to distribute any
undistributed net investment income and net realized capital gains
in the following year.
The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.
INCOME TAXES.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements
that are necessary for it to be relieved of federal taxes on
income and gain it distributes. The Fund will distribute
substantially all of its ordinary income and net capital gains on
a current basis. Generally, Fund distributions are taxable as
ordinary income, except that any distributions of net long-term
capital gains will be taxed as such. However, distributions by
the Fund to employer-sponsored defined contribution plans that
qualify for tax-exempt treatment under federal income tax laws
will not be taxable. Special tax rules apply to investments
through such plans. You should consult your tax advisor to
determine the suitability of the Fund as an investment through
such a plan and the tax treatment of distributions (including
distributions of amounts attributable through an investment in the
Fund) from such a plan. This section is not intended to be a full
discussion of income tax laws and their effect on shareholders.
___________________________
INVESTMENT RETURN
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
The yield of the Fund is calculated by dividing its net investment
income per share (a hypothetical figure as defined in the SEC
rules) during a 30-day period by the net asset value per share on
the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income
is earned and reinvested at a constant rate and annualized at the
end of a six-month period.
Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results. To
obtain current yield or total return information, you may call
800-338-2550.
___________________________
MANAGEMENT OF THE FUND
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See Management in the
Statement of Additional Information for the names of and other
information about the trustees and officers. The Adviser, Stein
Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
Illinois 60606, is responsible for managing the investment
portfolio and the business affairs of the Fund and the Trust,
subject to the direction of the Board. The Adviser is registered
as an investment adviser under the Investment Advisers Act of
1940.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
PORTFOLIO MANAGER.
Michael T. Kennedy has been portfolio manager of the Fund since
1988. He is a vice-president of the Trust, a senior vice
president of the Adviser, and has been associated with the Adviser
since 1987. From 1984 to 1987, he was employed by Homewood
Federal Savings and Loan. A chartered financial analyst and a
chartered investment counselor, he received his B.S. degree from
Marquette University in 1984 and his M.M. from Northwestern
University in 1988. Mr. Kennedy is secretary of the Adviser's
Fixed Income Policy Committee and managed $414 million in mutual
fund assets for the Adviser as of June 30, 1995. Steven P.
Luetger is associate portfolio manager for the Fund. Mr. Luetger
joined the Adviser in 1978 and is a senior vice president. He
received his B.A. from Knox College in 1975 and M.B.A. from the
University of Chicago in 1980.
FEES AND EXPENSES.
In return for its investment advisory and administrative services,
the Adviser receives a monthly fee from the Fund based on its
average net assets, computed and accrued daily. The annualized
fee for the Fund is .60 of 1% of the first $100 million and .55 of
1% thereafter. For the fiscal year ended June 30, 1995, the fee
for the Fund amounted to .51% of average net assets after the
expense limitation described under Fee Table.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Fund. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned indirect subsidiary of Liberty
Mutual, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records.
DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02101, is the custodian for the Fund. (See
Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of the Trust is
also believed to be remote, because it would be limited to claims
to which the disclaimer did not apply and to circumstances in
which the other series was unable to meet its obligations.
___________________________
FOR MORE INFORMATION
Contact a Stein Roe Retirement Plan Representative at 800-322-
1130 for more information about this Fund.
_________________
<PAGE>
STEIN ROE INCOME TRUST
STEIN ROE INTERMEDIATE BOND FUND
THE NOVEMBER 1, 1995 DATE OF THIS DEFINED CONTRIBUTION PLANS
PROSPECTUS IS NULL AND VOID. THE NEW DATE OF THIS PROSPECTUS IS
JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to the Fund was replaced with an administrative agreement
and a management agreement. The new fee schedules, which do not
result in a fee increase, are stated below at annual rates as a
percentage of average daily net assets (dollar amounts are in
millions):
MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
- ---------------- ------------------ -----------------
.350% .150% .500%
INTERFUND LENDING PROGRAM. On June 18, 1996, the Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Fund's Investments (page 8 of the Prospectus)
is revised to read as follows:
"The Fund may not make loans except that it may (1) purchase
money market securities and enter into repurchase agreements;
(2) acquire publicly-distributed or privately-placed debt
securities; (3) lend its portfolio securities under certain
conditions; and (4) participate in an interfund lending
program with other Stein Roe Funds. A Fund may not borrow
money, except for non-leveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither the Fund's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate
loans at any one time may exceed 33 1/3% of its total
assets."
ADDRESS CHANGE. The Statement of Additional Information and
the Fund's most recent financial statements may be obtained
without charge by writing to the Secretary of the Trust at P.O.
Box ___, Chicago, Illinois 60680, or by calling 800-338-2550.
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (page 3 of the Prospectus) is updated by
adding the following unaudited financial information for the six
months ended December 31, 1995:
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.67
------
Income from Investment Operations
Net investment income .30
Net realized and unrealized gains
(losses) on investments .27
------
Total from investment operations .57
Distributions from net investment income (.30)
------
NET ASSET VALUE, END OF PERIOD $ 8.94
------
------
Ratio of net expenses to average net
assets (a) *0.70%
Ratio of net investment income to
average net assets (b) *6.57%
Portfolio turnover rate **107%
Total return (b) **6.54%
Net assets, end of period (000 omitted) $314,381
_______________
*Annualized.
**Not annualized.
(a) If the Fund had paid all of its expenses and there had been
no reimbursement of expenses by the Adviser, for the period
ended December 31, 1995, this ratio would have been 0.73% .
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
________________________________
<PAGE>
[STEINROE MUTUAL FUNDS LOGO]
PROSPECTUS
DEFINED CONTRIBUTION PLANS
STEIN ROE INTERMEDIATE BOND FUND
The Fund seeks high current income by investing primarily in
marketable debt securities. The dollar-weighted average life of
the Fund's portfolio is expected to be between three and ten
years.
This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").
The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEIN ROE INCOME TRUST, an open-end management investment
company.
This prospectus contains information you should know before
investing in the Fund. Please read it carefully and retain it for
future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at P.O. Box 804058, Chicago, IL 60680 or by calling
800-322-1130. The Statement of Additional Information contains
information relating to other series of the Stein Roe Income Trust
that may not be available as investment vehicles for your defined
contribution plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995
TABLE OF CONTENTS
Page
Fee Table .............................2
Financial Highlights...................2
The Fund...............................3
How the Fund Invests...................4
Portfolio Investments and Strategies...5
Restrictions on the Fund's Investments 7
Risks and Investment Considerations ...8
How to Purchase Shares ................9
How to Redeem Shares ..................9
Net Asset Value ......................10
Distributions and Income Taxes........10
Investment Return.....................10
Management of the Fund................11
Organization and Description of
Shares.............................12
For More Information..................13
___________________________
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (after expense
reimbursement); as a percentage of average
net assets)
Management Fees (after expense reimbursement) 0.49%
12b-1 Fees None
Other Expenses 0.21%
Total Fund Operating Expenses (after expense
reimbursement) 0.70%
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------- -------- ------- --------
$7 $22 $39 $87
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based upon
actual expenses incurred in the last fiscal year, adjusted for the
expense limitation in effect on May 1, 1995. From time to time,
the Adviser may voluntarily absorb certain expenses of the Fund.
Effective May 1, 1995, the Adviser has agreed to voluntarily
absorb the Fund's expenses to the extent that they exceed 0.70 of
1% of average net assets through October 31, 1996, subject to
earlier termination by the Adviser on 30 days' written notice.
Any such absorption will temporarily lower the Fund's overall
expense ratio and increase its overall return to investors.
Absent such undertaking, Management Fees and Total Fund Operating
Expenses would have been 0.50% and 0.71%, respectively. (Also
see Management--Fees and Expenses.)
For purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same during each of the periods and that all
income dividends and capital gain distributions are reinvested in
additional Fund shares. The figures in the Example are not
necessarily indicative of past or future expenses, and actual
expenses may be greater or less than those shown. Although
information such as that shown in the Fee Table and Example
is useful in reviewing the Fund's expenses and in providing a
basis for comparison with other mutual funds, it should not be
used for comparison with other investments using different
assumptions or time periods. The example does not reflect any
charges or expenses related to your employer's plan.
__________________________
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the Fund on
a per-share basis. The information for the years beginning after
June 30, 1987, has been audited by Ernst & Young LLP, independent
auditors. All of the auditors' reports related to information for
these periods were unqualified. The table should be read in
conjunction with the Fund's financial statements and notes
thereto. The Fund's annual report, which may be obtained from the
Trust without charge upon request, contains additional performance
information.
<TABLE>
<CAPTION>
Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $8.89 $9.92 $8.77 $8.51 $8.65 $8.38 $8.53 $8.99 $9.26 $8.44
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income from Investment
Operations
Net investment income .84 .74 .68 .74 .73 .69 .69 .65 .56 .58
Net realized and
unrealized gains
(losses) on investments 1.03 (.41) (.12) .14 (.28) .16 .46 .27 (.59) .23
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total from investment
operations 1.87 .33 .56 .88 .45 .85 1.15 .92 (.03) .81
Distributions
Net investment income (.84) (.74) (.68) (.74) (.72) (.70) (.69) (.65) (.56) (.58)
Net realized capital gains -- (.74) (.14) -- -- -- -- -- (.08) --
In excess of realized
gains -- -- -- -- -- -- -- -- (.15) --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total distributions (.84) (1.48) (.82) (.74) (.72) (.70) (.69) (.65) (.79) (.58)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE,
END OF PERIOD $9.92 $8.77 $8.51 $8.65 $8.38 $8.53 $8.99 $9.26 $8.44 $8.67
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Ratio of expenses to
average net assets (b) 0.69% 0.68% 0.73% 0.73% 0.74% 0.73% 0.70% 0.67% 0.70% 0.70%
Ratio of net investment
income to average net
assets (c) 9.03% 7.94% 7.97% 8.71% 8.60% 8.17% 7.87% 7.22% 6.20% 6.94%
Portfolio turnover rate 334% 230% 273% 197% 296% 239% 202% 214% 206% 162%
Total return (c) 21.90% 3.40% 6.92% 10.97% 5.33% 10.62% 14.02% 10.59% (0.47%) 10.11%
Net assets, end of
period (000 omitted) $183,440 $188,674 $162,225 $165,056 $161,439 $184,444 $242,948 $311,728 $302,507 $301,733
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, this ratio would have
been 0.71% for the year ended June 30, 1995.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
</TABLE>
___________________________
THE FUND
The mutual fund offered by this prospectus is STEIN ROE
INTERMEDIATE BOND FUND (the "Fund"). The Fund is a no-load,
diversified "mutual fund." No-load funds do not impose
commissions or charges when shares are purchased or redeemed.
Mutual funds sell their own shares to investors and invest the
proceeds in a portfolio of securities. A mutual fund allows you
to pool your money with that of other investors in order to obtain
professional investment management. Mutual funds generally make
it possible for you to obtain greater diversification of your
investments and simplify your recordkeeping.
The Fund is a series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") is investment
adviser to the Fund. The Adviser also manages several other no-
load mutual funds with different investment objectives, including
other bond funds, equity funds, international funds, tax-exempt
bond funds, and money market funds. To obtain prospectuses and
other information on opening a regular account in any of these
mutual funds, please call 800-338-2550.
___________________________
HOW THE FUND INVESTS
The Fund's investment objective is to provide a high level of
current income, consistent with the preservation of capital, by
investing primarily in marketable debt securities. Under normal
market conditions, the Fund will invest at least 65% of the value
of its total assets (taken at market value at the time of
investment) in convertible and non-convertible bonds and
debentures, and at least 60% of its assets will be invested in the
following:
(1) Marketable straight-debt securities of domestic issuers, and of
foreign issuers payable in U.S. dollars, rated at time of
purchase within the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's") or by Standard & Poor's
Corporation ("S&P");
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P at time
of purchase, or, if unrated, issued or guaranteed by a
corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements, of banks
having total assets in excess of $1 billion.
The Fund also may invest in mortgaged-backed and other debt
securities (including those convertible into or carrying warrants
to purchase common stocks or other equity interests, and privately
placed debt securities), preferred stocks, and marketable common
stocks that the Adviser considers likely to yield relatively high
income in relation to cost. Further information on portfolio
investments and strategies may be found under Portfolio
Investments and Strategies in this prospectus and in the Statement
of Additional Information.
Under normal market conditions, the Fund invests at least 65% of
its assets in securities with an average life of between three and
ten years, and expects that the dollar-weighted average life of
its portfolio will be between three and ten years. Average life
is the weighted average period over which the Adviser expects the
principal to be paid, and differs from stated maturity in that it
estimates the effect of expected principal prepayments and call
provisions. With respect to GNMA securities and other mortgage-
backed securities, average life is likely to be substantially less
than the stated maturity of the mortgages in the underlying pools.
With respect to obligations with call provisions, average life is
typically the next call date on which the obligation reasonably
may be expected to be called. Securities without prepayment or
call provisions generally have an average life equal to their
stated maturity. During periods of rising interest rates, the
average life of mortgage-backed securities and callable
obligations may increase substantially because they are not likely
to be prepaid, which may result in greater net asset value
fluctuation.
The Fund may invest up to 35% of its total assets in debt
securities that are rated below investment grade (with no
permitted rating) and that, on balance, are considered predominantly
speculative with respect to the issuer's capacity to pay interest
and repay principal according to the terms of the obligation and,
therefore, carry greater investment risk, including the possibility
of issuer default and bankruptcy. An economic downturn could
severely disrupt this market and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal
and interest. In addition, lower-quality bonds are less sensitive
to interest rate changes than higher-quality instruments (see Risks
and Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of
rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the Fund's investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if the Fund were investing exclusively in investment-grade debt
securities. Since the ratings of rating services (which evaluate
the safety of principal and interest payments, not market risks)
are used only as preliminary indicators of investment quality, the
Adviser employs its own credit research and analysis, from which
it has developed a credit rating system based upon comparative
credit analyses of issuers within the same industry. These
analyses may take into consideration such quantitative factors as
an issuer's present and potential liquidity, profitability,
internal capability to generate funds, debt/equity ratio and debt
servicing capabilities, and such qualitative factors as an
assessment of management, industry characteristics, accounting
methodology, and foreign business exposure.
Debt securities that are rated below investment grade tend to be
less marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and the Fund may have greater
difficulty selling its portfolio securities. (See Net Asset
Value.) The market value of these securities and their liquidity
may be affected by adverse publicity and investor perceptions.
For the fiscal year ended June 30, 1995, the Fund's portfolio was
invested, on average, as follows: high-quality short-term
instruments, 4.1%; U.S. Government Securities, 39.3%; AAA, 6.3%;
AA, 7.2%; A, 13.3%; BBB, 21.2%; BB, 8.1%; and unrated, 0.5%. The
ratings are based on a dollar-weighted average, computed monthly,
and reflect the higher of S&P or Moody's ratings. The ratings do
not necessarily reflect the current or future composition of the
Fund.
___________________________
PORTFOLIO INVESTMENTS
AND STRATEGIES
DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments, the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index,
an interest rate, or a currency ("Derivatives"). The Fund does
not expect to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, futures options,
and mortgage or other asset-backed securities.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For additional
information on Derivatives, please refer to the Statement of
Additional Information.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES. The Fund may invest
in securities secured by mortgages or other assets such as
automobile or home improvement loans and credit card receivables.
These instruments may be issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities or by private
entities such as commercial, mortgage and investment banks and
financial companies or financial subsidiaries of industrial
companies.
Securities issued by GNMA represent an interest in a pool of
mortgages insured by the Federal Housing Administration or the
Farmers Home Administration, or guaranteed by the Veterans
Administration. Securities issued by FNMA and FHLMC, U.S.
Government-sponsored corporations, also represent an interest in a
pool of mortgages.
The timely payment of principal and interest on GNMA securities is
guaranteed by GNMA and backed by the full faith and credit of the
U.S. Treasury. FNMA guarantees full and timely payment of
interest and principal on FNMA securities. FHLMC guarantees
timely payment of interest and ultimate collection of principal on
FHLMC securities. FNMA and FHLMC securities are not backed by the
full faith and credit of the U.S. Treasury.
Mortgage-backed debt securities, such as those issued by GNMA,
FNMA, and FHLMC, are of the "modified pass-through type," which
means the interest and principal payments on mortgages in the pool
are "passed through" to investors. During periods of declining
interest rates, there is increased likelihood that mortgages will
be prepaid, with a resulting loss of the full-term benefit of any
premium paid by the Fund on purchase of such securities; in
addition, the proceeds of prepayment would likely be invested at
lower interest rates.
Mortgage-backed securities provide either a pro rata interest in
underlying mortgages or an interest in collateralized mortgage
obligations ("CMOs"), which represent a right to interest and/or
principal payments from an underlying mortgage pool. CMOs are not
guaranteed by either the U.S. Government or by its agencies or
instrumentalities and are usually issued in multiple classes, each
of which has different payment rights, pre-payment risks, and
yield characteristics. Mortgage-backed securities involve the
risk of pre-payment on the underlying mortgages at a faster or
slower rate than the established schedule. Pre-payments generally
increase with falling interest rates and decrease with rising
rates, but they also are influenced by economic, social, and market
factors. If mortgages are pre-paid during periods of declining
interest rates, there would be a resulting loss of the full-term
benefit of any premium paid by the Fund on purchase of the CMO,
and the proceeds of pre-payment would likely be invested at lower
interest rates. The Fund tends to invest in CMOs of classes known
as planned amortization classes ("PACs") which have pre-payment
protection features tending to make them less susceptible to price
volatility.
Non-mortgage asset-backed securities usually have less pre-payment
risk than mortgage-backed securities, but have the risk that the
collateral will not be available to support payments on the
underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
Asset-backed securities tend to experience greater price
volatility than straight debt securities.
FUTURES AND OPTIONS. The Fund may purchase and write both call
options and put options on securities, indexes and foreign
currencies, and enter into interest rate, index and foreign
currency futures contracts. The Fund may also write and options
on such futures contracts and purchase other types of forward or
investment contracts linked to individual securities, indexes or
other benchmarks in order to, consistent with its investment objective,
provide additional revenue, or to hedge against changes in security
prices, interest rates, or currency fluctuations. The Fund may write
a call or put option only if the option is covered. As the writer of
a covered call option, the Fund foregoes, during the option's life, the
opportunity to profit from increases in market value of the security
covering the call option above the sum of the premium and the exercise
price of the call. There can be no assurance that a liquid market will
exist when the Fund seeks to close out a position. Because of low margin
deposits required, the use of futures contracts involves a high degree of
leverage, and may result in losses in excess of the amount of the margin
deposit.
FOREIGN SECURITIES.
Although the Fund may invest in foreign securities, it will not
invest in a foreign security if, as a result of such investment,
more than 10% of its total assets would be invested in foreign
securities. For purposes of this restriction, foreign securities
do not include securities represented by American Depositary
Receipts ("ADRs"), foreign debt securities denominated in U.S.
dollars, or securities guaranteed by a U.S. person such as a
corporation domiciled in the United States that is a parent or
affiliate of the issuer of the securities being guaranteed. The
Fund may invest in sponsored or unsponsored ADRs. In addition to,
or in lieu of, such direct investment, the Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Fund may
contract to purchase an amount of foreign currency sufficient to
pay the purchase price of the securities at the settlement date.
Foreign securities may involve a greater degree of risk (including
risk related to exchange rate fluctuations, tax provisions, or
expropriation of assets) than do securities of domestic issuers.
At June 30, 1995, no assets of the Fund were invested in foreign
securities as defined above, and the Fund does not currently
intend to invest more than 5% of its net assets in such
securities. (See Risks and Investment Considerations.)
LENDING OF PORTFOLIO SECURITIES.
Subject to certain restrictions, the Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Fund. The Fund would
continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and would also
receive an additional return that may be in the form of a fixed
fee or a percentage of the collateral. The Fund would have the
right to call the loan and obtain the securities loaned at any
time on notice of not more than five business days. In the event
of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible
decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to
enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c)
expenses of enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
The Fund's assets may include securities purchased on a when-
issued or delayed-delivery basis. Although the payment and
interest terms of these securities are established at the time the
purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed. The Fund makes such
commitments only with the intention of actually acquiring the
securities, but may sell the securities before settlement date if
the Adviser deems it advisable for investment reasons. Securities
purchased in this manner involve a risk of loss if the value of
the security purchased declines before the settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that the Fund will
sell securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value the security repurchased
will be less than the security sold; and transaction costs
exceeding the return earned by the Fund on the sales proceeds of
the dollar roll.
The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.
PORTFOLIO TURNOVER.
In seeking to attain its objective, the Fund may sell portfolio
securities without regard to the period of time they have been
held. The turnover rate of the Fund may vary from year to year.
A high rate of portfolio turnover may result in increased
transaction expenses and the realization of capital gains (which
may be taxable) or losses. (See Financial Highlights and
Distributions and Income Taxes.)
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS
The Fund may not invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities, or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers
in the same industry, except that this restriction does not apply
to U.S. Government Securities. Notwithstanding these limitations,
the Fund may invest all of its assets in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund.
The Fund may not make loans, except that, consistent with its
investment policies and restrictions, it may: (1) invest up to
100% of its net assets in publicly offered or privately placed
debt securities, (2) lend its portfolio securities under certain
circumstances, and (3) enter into repurchase agreements./1/ The
Fund may not borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then the Fund's aggregate
borrowings at any one time (including reverse repurchase
agreements and dollar rolls) may not exceed 33 1/3% of its total
assets (at market value). Additional securities may not be
purchased when borrowings, less proceeds receivable from sales of
portfolio securities, exceed 5% of total assets.
The policies set forth in the first two paragraphs under
Restrictions on the Fund's Investments (but not the footnote) are
fundamental policies of the Fund. The Statement of Additional
Information contains all of the investment restrictions.
- -------------------
/1/A repurchase agreement involves a sale of securities to the
Fund with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses. The
Fund may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
- --------------------
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although the Fund seeks
to reduce risk by investing in a diversified portfolio, this does
not eliminate all risk. The risks inherent in the Fund depend
primarily upon the term and quality of the obligations in the
Fund's portfolio, as well as on market conditions.
A decline in prevailing levels of interest rates generally
increases the value of securities in the Fund's portfolio, while
an increase in rates usually reduces the value of those
securities. As a result, interest rate fluctuations will affect
the Fund's net asset value, but not the income received by the
Fund from its portfolio securities. (Because yields on debt
securities available for purchase by the Fund vary over time, no
specific yield on shares of the Fund can be assured.) In
addition, if the bonds in the Fund's portfolio contain call,
prepayment or redemption provisions, during a period of declining
interest rates, these securities are likely to be redeemed, and
the Fund will probably be unable to replace them with securities
having as great a yield.
The Fund is appropriate for investors who seek high income with
less net asset value fluctuation from interest rate changes than
that of a longer-term fund, and who can accept greater levels of
credit and other risks associated with securities that are rated
below investment grade.
Investments in foreign securities, including ADRs, represent both
risks and opportunities not typically associated with investments
in domestic issuers. Risks of foreign investing include currency
risk, less complete financial information on issuers, less market
liquidity, more market volatility, less well-developed and
regulated markets, and greater political instability. In
addition, various restrictions by foreign governments on
investments by non-residents may apply, including imposition of
exchange controls and withholding taxes on dividends, and seizure
or nationalization of investments owned by non-residents. Foreign
investments also tend to involve higher transaction and custody
costs.
The Fund may enter into foreign currency forward contracts and use
options and futures contracts as described elsewhere in this
prospectus to limit or reduce foreign currency risk.
There can be no assurance that the Fund will achieve its
objective, nor can the Fund assure that payments of interest and
principal on portfolio securities will be made when due. If,
after purchase by the Fund, the rating of a portfolio security is
lost or reduced, the Fund would not be required to sell the
security, but the Adviser would consider such a change in deciding
whether the Fund should retain the security in its portfolio.
The Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, the Fund may in the
future seek to achieve its investment objective by pooling its
assets with assets of other mutual funds managed by the Adviser
for investment in another investment company having the same
investment objective and substantially the same investment
policies and restrictions as the Fund. The purpose of such
arrangement is to achieve greater operational efficiencies and
reduce costs. It is expected that any such investment company
would be managed by the Adviser in substantially the same manner
as the Fund. Shareholders of the Fund will be given at least 30
days' prior notice of any such investment, although they will not
be entitled to vote on the action. Such investment would be made
only if the trustees determine it to be in the best interests of
the Fund and its shareholders.
___________________________
HOW TO PURCHASE SHARES
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the
Fund's net asset value (see Net Asset Value) next determined after
receipt of payment by the Fund.
Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of the Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
HOW TO REDEEM SHARES
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of the
Fund through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.
EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other Stein Roe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. Contact your
plan administrator for instructions on how to exchange your shares
or to obtain prospectuses of other Stein Roe Funds available
through your plan. The Fund reserves the right to suspend, limit,
modify, or terminate the Exchange Privilege or its use in any
manner by any person or class; shareholders would be notified of
such a change.
GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is determined as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., Chicago time) by dividing the
difference between the values of the Fund's assets and liabilities
by the number of shares outstanding. Net asset value will not be
determined on days when the Exchange is closed unless, in the
judgment of the Board of Trustees, the net asset value of the Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by the Fund for
which these valuation methods do not produce a fair value are
valued by a method that the Board believes will determine a fair
value.
___________________________
DISTRIBUTIONS AND
INCOME TAXES
DISTRIBUTIONS.
Income dividends are declared each business day and are paid
monthly. The Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized from
the sale of securities during the twelve-month period ended
October 31 in that year. The Fund intends to distribute any
undistributed net investment income and net realized capital gains
in the following year.
The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.
INCOME TAXES.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements
that are necessary for it to be relieved of federal taxes on
income and gain it distributes. The Fund will distribute
substantially all of its ordinary income and net capital gains on
a current basis. Generally, Fund distributions are taxable as
ordinary income, except that any distributions of net long-term
capital gains will be taxed as such. However, distributions by
the Fund to employer-sponsored defined contribution plans that
qualify for tax-exempt treatment under federal income tax laws
will not be taxable. Special tax rules apply to investments
through such plans. You should consult your tax advisor to
determine the suitability of the Fund as an investment through
such a plan and the tax treatment of distributions (including
distributions of amounts attributable through an investment in the
Fund) from such a plan. This section is not intended to be a full
discussion of income tax laws and their effect on shareholders.
___________________________
INVESTMENT RETURN
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
The yield of the Fund is calculated by dividing its net investment
income per share (a hypothetical figure as defined in the SEC
rules) during a 30-day period by the net asset value per share on
the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income
is earned and reinvested at a constant rate and annualized at the
end of a six-month period.
Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results. To
obtain current yield or total return information, you may call
800-338-2550.
___________________________
MANAGEMENT OF THE FUND
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust and has overall management
responsibility for the Trust and the Fund. See Management in the
Statement of Additional Information for the names of and other
information about the trustees and officers. The Adviser, Stein
Roe & Farnham Incorporated, One South Wacker Drive, Chicago,
Illinois 60606, is responsible for managing the investment
portfolio and the business affairs of the Fund and the Trust,
subject to the direction of the Board. The Adviser is registered
as an investment adviser under the Investment Advisers Act of
1940.
The Adviser was organized in 1986 to succeed to the business of
Stein Roe & Farnham, a partnership that had advised and managed
mutual funds since 1949. The Adviser is a wholly owned indirect
subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual").
PORTFOLIO MANAGER.
Michael T. Kennedy has been portfolio manager of the Fund since
1988. He is a vice-president of the Trust, a senior vice
president of the Adviser, and has been associated with the Adviser
since 1987. From 1984 to 1987, he was employed by Homewood
Federal Savings and Loan. A chartered financial analyst and a
chartered investment counselor, he received his B.S. degree from
Marquette University in 1984 and his M.M. from Northwestern
University in 1988. Mr. Kennedy is secretary of the Adviser's
Fixed Income Policy Committee and managed $414 million in mutual
fund assets for the Adviser as of June 30, 1995. Steven P.
Luetger is associate portfolio manager for the Fund. Mr. Luetger
joined the Adviser in 1978 and is a senior vice president. He
received his B.A. from Knox College in 1975 and M.B.A. from the
University of Chicago in 1980.
FEES AND EXPENSES.
In return for its investment advisory and administrative services,
the Adviser receives a monthly fee from the Fund based on its
average net assets, computed and accrued daily. The annualized
fee is .50 of 1% of average net assets. For the fiscal year ended
June 30, 1995, the fee amounted to .49% of average net assets,
after the expense limitation described under Fee Table.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Fund. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned indirect subsidiary of Liberty
Mutual, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records.
DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the
Fund. Foreign securities are maintained in the custody of foreign
banks and trust companies that are members of the Bank's Global
Custody Network or foreign depositories used by such members.
(See Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular series shall look only to the assets of the Trust or of
the respective series for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of the Trust is
also believed to be remote, because it would be limited to claims
to which the disclaimer did not apply and to circumstances in
which the other series was unable to meet its obligations.
___________________________
FOR MORE INFORMATION
Contact a Stein Roe Retirement Plan Representative at 800-322-
1130 for more information about this Fund.
_________________
<PAGE>
STEIN ROE INCOME TRUST
STEIN ROE INCOME FUND
THE NOVEMBER 1, 1995 DATE OF THIS DEFINED CONTRIBUTION PLANS
PROSPECTUS IS NULL AND VOID. THE NEW DATE OF THIS PROSPECTUS IS
JULY 1, 1996
SUPPLEMENT
NEW AGREEMENTS. On July 1, 1996, the investment advisory
agreement with Stein Roe & Farnham Incorporated (the "Adviser")
relating to the Fund was replaced with an administrative agreement
and a management agreement. The new fee schedules, which do not
result in a fee increase, are stated below at annual rates as a
percentage of average daily net assets (dollar amounts are in
millions):
MANAGEMENT FEE ADMINISTRATIVE FEE TOTAL FEES
---------------- ------------------ -----------------
.500% up to $100, .150% up to $100, .650% up to $100,
.475% thereafter .125% thereafter .600% thereafter
INTERFUND LENDING PROGRAM. On June 18, 1996, the Fund's
shareholders approved changes in the Fund's investment
restrictions regarding borrowing and lending to permit the Fund to
participate in an interfund lending program with other mutual
funds managed by the Adviser. The second paragraph under
Restrictions on the Fund's Investments (page 7 of the Prospectus)
is revised to read as follows:
"The Fund may not make loans except that it may (1) purchase
money market securities and enter into repurchase agreements;
(2) acquire publicly-distributed or privately-placed debt
securities; (3) lend its portfolio securities under certain
conditions; and (4) participate in an interfund lending
program with other Stein Roe Funds. A Fund may not borrow
money, except for non-leveraging, temporary, or emergency
purposes or in connection with participation in the interfund
lending program. Neither the Fund's aggregate borrowings
(including reverse repurchase agreements) nor its aggregate
loans at any one time may exceed 33 1/3% of its total
assets."
ADDRESS CHANGE. The Statement of Additional Information and
the Fund's most recent financial statements may be obtained
without charge by writing to the Secretary of the Trust at P.O.
Box ___, Chicago, Illinois 60680, or by calling 800-338-2550.
FINANCIAL HIGHLIGHTS. The per share data (for a share
outstanding throughout the period) contained in the section
Financial Highlights (page 3 of the Prospectus) is updated by
adding the following unaudited financial information for the six
months ended December 31, 1995:
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.79
------
Income from Investment Operations
Net investment income .37
Net realized and unrealized gains
(losses) on investments .29
------
Total from investment operations .66
Distributions from net investment income (.37)
------
NET ASSET VALUE, END OF PERIOD $10.08
------
------
Ratio of net expenses to average net
assets (a) *0.82%
Ratio of net investment income to
average net assets (b) *7.24%
Portfolio turnover rate **45%
Total return (b) **6.74%
Net assets, end of period (000 omitted) $208,398
___________________
*Annualized.
**Not annualized.
(a) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, for the period ended
December 31, 1995, this ratio would have been 0.88% .
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
_________________________________
<PAGE>
[STEINROE MUTUAL FUNDS LOGO]
PROSPECTUS
DEFINED CONTRIBUTION PLANS
STEIN ROE INCOME FUND
The Fund seeks high current income by investing principally in
medium-quality debt securities and, to a lesser extent, in lower-
quality securities which may involve greater risk. (See How the
Fund Invests.)
This prospectus relates only to shares of the Fund purchased
through eligible employer-sponsored defined contribution plans
("defined contribution plans").
The Fund is a "no-load" fund. There are no sales or redemption
charges, and the Fund has no 12b-1 plan. The Fund is a series of
the STEIN ROE INCOME TRUST, an open-end management investment
company. This prospectus contains information you should know
before investing in the Fund. Please read it carefully and retain
it for future reference.
A Statement of Additional Information dated November 1, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at P.O. Box 804058, Chicago, IL 60680 or by calling
800-322-1130. The Statement of Additional Information contains
information relating to other series of the Stein Roe Income Trust
that may not be available as investment vehicles for your defined
contribution plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 1, 1995
TABLE OF CONTENTS
Page
Fee Table ...............................2
Financial Highlights.....................2
The Fund.................................3
How the Fund Invests.....................4
Portfolio Investments and Strategies.....5
Restrictions on the Fund's Investments ..7
Risks and Investment Considerations .....7
How to Purchase Shares ..................8
How to Redeem Shares ....................9
Net Asset Value .........................9
Distributions and Income Taxes..........10
Investment Return.......................10
Management of the Fund..................10
Organization and Description of Shares..12
For More Information....................12
___________________________
FEE TABLE
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fees None
ANNUAL FUND OPERATING EXPENSES (after expense
reimbursement; as a percentage of average net
assets)
Management Fees (after expense reimbursement) 0.60%
12b-1 Fees None
Other Expenses 0.22%
-----
Total Fund Operating Expenses (after expense
reimbursement) 0.82%
-----
-----
EXAMPLE.
You would pay the following expenses on a $1,000 investment
assuming (1) 5% annual return and (2) redemption at the end of
each time period:
1 year 3 years 5 years 10 years
------- -------- ------- --------
$8 $26 $46 $101
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in the Fund. The table is based on
actual expenses incurred in the last fiscal year. The Adviser has
undertaken to reimburse the Fund for expenses in excess of 0.82%
of average net assets through October 31, 1998. Any such
reimbursement will temporarily lower the Fund's overall expense
ratio and increase its overall return to investors. Absent such
undertaking, the estimated Management Fees and Total Fund Operating
Expenses would have been 0.63% and 0.85%, respectively. (Also
see Management of the Fund--Fees and Expenses.)
For purposes of the Example above, the figures assume that the
percentage amounts listed for the Fund under Annual Fund Operating
Expenses remain the same during each of the periods, that all
income dividends and capital gain distributions are reinvested in
additional Fund shares, and that, for purposes of management fee
breakpoints, the Fund's net assets remain at the same level as in
the most recently completed fiscal year. The figures in the Example
are not necessarily indicative of past or future expenses, and actual
expenses may be greater or less than those shown. Although
information such as that shown in the Fee Table and Example is
useful in reviewing the Fund's expenses and in providing a basis
for comparison with other mutual funds, it should not be
used for comparison with other investments using different
assumptions or time periods. The example does not reflect any
charges or expenses related to your employer's plan.
__________________________
FINANCIAL HIGHLIGHTS
The table below reflects the results of operations of the Fund on
a per-share basis and has been audited by Ernst & Young LLP,
independent auditors. The table should be read in conjunction
with the Fund's financial statements and notes thereto. The
Fund's annual report, which may be obtained from the Trust without
charge upon request, contains additional performance information.
<TABLE>
<CAPTION>
Period
Ended
June 30, Years Ended June 30,
1986(a) 1987 1988 1989 1990 1991 1992 1993 1994 1995
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.00 $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income .30 .98 .95 .95 .92 .80 .76 .75 .69 .71
Net realized and
unrealized gains (losses)
on investments (.06) (.23) (.11) .05 (.70) -- .56 .59 (.74) .43
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .24 .75 .84 1.00 .22 .80 1.32 1.34 (.05) 1.14
Distributions from net
investment income (.30) (.98) (.95) (.95) (.92) (.80) (.76) (.75) (.69) (.71)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95 $ 9.51 $10.10 $ 9.36 $ 9.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of expenses to
average net assets (b) *1.00% 0.96% 0.91% 0.90% 0.93% 0.95% 0.90% 0.82% 0.82% 0.82%
Ratio of net investment
income to average net
assets (c) *10.07% 9.90% 10.08% 9.97% 10.02% 8.98% 8.20% 7.62% 6.94% 7.55%
Portfolio turnover rate **84% 153% 158% 94% 90% 77% 76% 39% 53% 64%
Total return (c) **2.42% 7.70% 9.38% 11.06% 2.48% 9.30% 15.30% 14.64% (0.69%) 12.79%
Net assets, end of
period (000 omitted) $32,034 $91,916 $96,611 $110,376 $89,023 $93,952 $112,706 $151,594 $158,886 $174,327
<FN>
*Annualized.
**Not annualized.
(a) The Fund commenced operations on March 5, 1986.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement of expenses by the Adviser, this ratio would have
been 2.01% for the period ended June 30, 1986 and 0.83% and
0.85% for the years ended June 30, 1994 and 1995, respectively.
(c) Computed giving effect to the Adviser's expense limitation
undertaking.
</TABLE>
___________________________
THE FUND
The mutual fund offered by this prospectus is STEIN ROE INCOME
FUND (the "Fund"). The Fund is a no-load, diversified "mutual
fund." No-load funds do not impose commissions or charges when
shares are purchased or redeemed. Mutual funds sell their own
shares to investors and invest the proceeds in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping.
The Fund is a series of the Stein Roe Income Trust (the "Trust"),
an open-end management investment company, which is authorized to
issue shares of beneficial interest in separate series. Each
series represents interests in a separate portfolio of securities
and other assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") is investment
adviser to the Fund. The Adviser also manages several other no-
load mutual funds with different investment objectives, including
other bond funds, equity funds, international funds, tax-exempt
bond funds, and money market funds. To obtain prospectuses and
other information on opening a regular account in any of these
mutual funds, please call 800-338-2550.
___________________________
HOW THE FUND INVESTS
The investment objective of the Fund is to provide a high level of
current income. Consistent with this investment objective,
capital preservation and capital appreciation are regarded as
secondary objectives. The Fund attempts to achieve its objective
by investing principally in medium-quality debt securities, which
are obligations of issuers that the Adviser believes possess
adequate, but not outstanding, capacities to service their debt
securities, such as securities rated A or Baa by Moody's or A or
BBB by S&P. The Adviser generally attributes to medium-quality
securities the same characteristics as do rating services.
Further information on portfolio investments and strategies may be
found under Portfolio Investments and Strategies in this
prospectus and in the Statement of Additional Information.
Although the Fund will invest at least 60% of its assets in
medium- or higher-quality securities, it may also invest to a
lesser extent in securities of lower quality (in the case of rated
securities, having a rating by Moody's or S&P of not less than C).
Although the Fund can invest up to 40% of its assets in lower-
quality securities, it does not intend to invest more than 35% in
lower-quality securities. Lower-quality debt securities are
obligations of issuers that are predominantly speculative with
respect to the issuer's capacity to pay interest and repay
principal, and are commonly referred to as "junk bonds." The Fund
may invest in lower-quality debt securities; for example, if the
Adviser believes the financial condition of the issuers or the
protection offered to the particular obligations is stronger than
is indicated by low ratings or otherwise. The Fund may invest in
higher-quality securities; for example, under extraordinary
economic or financial market conditions, or when the spreads
between the yields on medium- and high-quality securities are
relatively narrow.
Some issuers of debt securities choose not to have their
securities rated by a rating service, and the Fund may invest in
unrated securities that the Adviser believes are suitable for
investment.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely
disrupt this market and adversely affect the value of outstanding
bonds and the ability of the issuers to repay principal and
interest. In addition, lower-quality bonds are less sensitive to
interest rate changes than higher-quality instruments (see Risks
and Investment Considerations) and generally are more sensitive to
adverse economic changes or individual corporate developments.
During a period of adverse economic changes, including a period of
rising interest rates, issuers of such bonds may experience
difficulty in servicing their principal and interest payment
obligations.
Achievement of the Fund's investment objective will be more
dependent on the Adviser's credit analysis than would be the case
if the Fund were investing in higher-quality debt securities.
Since the ratings of rating services (which evaluate the safety of
principal and interest payments, not market risks) are used only
as preliminary indicators of investment quality, the Adviser
employs its own credit research and analysis, from which it has
developed a credit rating system based upon comparative credit
analyses of issuers within the same industry. These analyses may
take into consideration such quantitative factors as an issuer's
present and potential liquidity, profitability, internal
capability to generate funds, debt/equity ratio and debt servicing
capabilities, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology, and
foreign business exposure.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and the Fund may have greater difficulty selling
its portfolio securities. (See Net Asset Value.) The market
value of these securities and their liquidity may be affected by
adverse publicity and investor perceptions.
Under normal market conditions, the Fund will invest at least 65%
of the value of its total assets (taken at market value) in
convertible and non-convertible bonds and debentures. Such
securities may be accompanied by the right to acquire equity
securities evidenced by warrants attached to the security or
acquired as part of a unit with the security. Equity securities
acquired by conversion or exercise of such a right may be retained
by the Fund for a sufficient time to permit orderly disposition
thereof or to establish long-term holding periods for federal
income tax purposes.
The Fund may invest up to 35% of its total assets in other debt
securities, marketable preferred and common stocks, and foreign
and municipal securities that the Adviser considers likely to
yield relatively high income in relation to costs, and rights to
acquire such securities. (Municipal securities are securities
issued by or on behalf of state and local governments, the
interest on which is generally exempt from federal income tax.)
Any assets not otherwise invested may be invested in money market
instruments.
For the fiscal year ended June 30, 1995, the Fund's portfolio was
invested, on average, as follows: high-quality short-term
instruments, 3.9%; U.S. Government Securities, 12.6%; AAA, 3.5%;
AA, 2.6%; A, 11.0%; BBB, 37.5%; BB, 25.3%; B, 1.5%; and unrated,
2.1%. The ratings are based on a dollar-weighted average,
computed monthly, and reflect the higher of S&P or Moody's
ratings. The ratings do not necessarily reflect the current or
future composition of the Income Fund.
___________________________
PORTFOLIO INVESTMENTS
AND STRATEGIES
DERIVATIVES.
Consistent with its objective, the Fund may invest in a broad
array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments, the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security index,
an interest rate, or a currency ("Derivatives"). The Fund does
not expect to invest more than 5% of its net assets in any type of
Derivative except for options, futures contracts, or futures
options.
Derivatives are most often used to manage investment risk or to
create an investment position indirectly because it is more
efficient or less costly than direct investment. They also may be
used in an effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's ability
to correctly predict changes in the levels and directions of
movements in security prices, interest rates and other market
factors affecting the Derivative itself or the value of the
underlying asset or benchmark. In addition, correlations in the
performance of an underlying asset to a Derivative may not be well
established. Finally, privately negotiated and over-the-counter
Derivatives may not be as well regulated and may be less
marketable than exchange-traded Derivatives. For additional
information on Derivatives, please refer to the Statement of
Additional Information.
FUTURES AND OPTIONS. The Fund may purchase and write both call
options and put options on securities, indexes and foreign
currencies, and enter into interest rate, index and foreign
currency futures contracts. The fund may also write options on
such futures contracts and purchase other types of forward or investment
contracts linked to individual securities, indexes or other benchmarks
in order to, consistent with its investment objective, provide
additional revenue, or to hedge against changes in security prices,
interest rates, or currency fluctuations. The Fund may write a call
or put option only if the option is covered. As the writer of a covered
call option, the Fund foregoes, during the option's life, the opportunity
to profit from increases in market value of the security covering the
call option above the sum of the premium and the exercise price of the
call. There can be no assurance that a liquid market will exist when
the Fund seeks to close out a position. Because of low margin deposits
required, the use of futures contracts involves a high degree of leverage,
and may result in losses in excess of the amount of the margin deposit.
FOREIGN SECURITIES.
Although the Fund may invest in foreign securities, it will not
invest in a foreign security if, as a result of such investment,
more than 25% of its total assets would be invested in foreign
securities. For purposes of this restriction, foreign securities
do not include securities represented by American Depositary
Receipts ("ADRs"), foreign debt securities denominated in U.S.
dollars, or securities guaranteed by a U.S. person such as a
corporation domiciled in the United States that is a parent or
affiliate of the issuer of the securities being guaranteed. The
Fund may invest in sponsored or unsponsored ADRs. In addition to,
or in lieu of, such direct investment, the Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars; and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a different
currency on a future date and at a specified rate of exchange.
Because of the availability of a variety of highly liquid U.S.
dollar debt instruments, a synthetic foreign position utilizing
such U.S. dollar instruments may offer greater liquidity than
direct investment in foreign currency debt instruments. In
connection with the purchase of foreign securities, the Fund may
contract to purchase an amount of foreign currency sufficient to
pay the purchase price of the securities at the settlement date.
Foreign securities may involve a greater degree of risk (including
risk related to exchange rate fluctuations, tax provisions, or
expropriation of assets) than do securities of domestic issuers.
At June 30, 1995, no assets of the Fund were invested in foreign
securities as defined above, and the Fund does not currently
intend to invest more than 5% of its net assets in such
securities. (See Risks and Investment Considerations.)
LENDING OF PORTFOLIO SECURITIES.
Subject to certain restrictions, the Fund may lend its portfolio
securities to broker-dealers and banks. Any such loan must be
continuously secured by collateral in cash or cash equivalents
maintained on a current basis in an amount at least equal to the
market value of the securities loaned by the Fund. The Fund would
continue to receive the equivalent of the interest or dividends
paid by the issuer on the securities loaned, and would also
receive an additional return that may be in the form of a fixed
fee or a percentage of the collateral. The Fund would have the
right to call the loan and obtain the securities loaned at any
time on notice of not more than five business days. In the event
of bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a) possible
decline in the value of the collateral or in the value of the
securities loaned during the period while the Fund seeks to
enforce its rights thereto; (b) possible subnormal levels of
income and lack of access to income during this period; and (c)
expenses of enforcing its rights.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; STANDBY COMMITMENTS.
The Fund's assets may include securities purchased on a when-
issued or delayed-delivery basis. Although the payment and
interest terms of these securities are established at the time the
purchaser enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed. The Fund makes such
commitments only with the intention of actually acquiring the
securities, but may sell the securities before settlement date if
the Adviser deems it advisable for investment reasons. Securities
purchased in this manner involve a risk of loss if the value of
the security purchased declines before settlement date.
When-issued or delayed-delivery securities may sometimes be
purchased on a "dollar roll" basis, meaning that the Fund will
sell securities with a commitment to purchase similar, but not
identical, securities at a future date. Generally, the securities
are repurchased at a price lower than the sales price. Dollar
roll transactions involve the risk of restrictions on the Fund's
ability to repurchase the security if the counterparty becomes
insolvent; an adverse change in the price of the security during
the period of the roll or that the value the security repurchased
will be less than the security sold; and transaction costs
exceeding the return earned by the Fund on the sales proceeds of
the dollar roll.
The Fund may also invest in securities purchased on a standby
commitment basis, which is a delayed-delivery agreement in which
the Fund binds itself to accept delivery of a security at the
option of the other party to the agreement.
PORTFOLIO TURNOVER.
In seeking to attain its objective, the Fund may sell portfolio
securities without regard to the period of time they have been
held. Further, the Adviser may purchase and sell securities for
the portfolio of the Fund with a view to maximizing current
return, even if portfolio changes would cause the realization of
capital gains. Although the average stated maturity of the Fund's
portfolio generally will exceed ten years, the Adviser may adjust
the average maturity of the Fund's portfolio from time to time,
depending on its assessment of the relative yields available on
securities of different maturities and its expectations of future
changes in interest rates. As a result, the turnover rate of the
Fund may vary from year to year. A high rate of portfolio
turnover may result in increased transaction expenses and the
realization of capital gains (which may be taxable) or losses.
(See Financial Highlights and Distributions and Income Taxes.)
___________________________
RESTRICTIONS ON THE
FUND'S INVESTMENTS
The Fund may not invest in a security if, as a result of such
investment: (1) with respect to 75% of its assets, more than 5% of
its total assets would be invested in the securities of any one
issuer, except for U.S. Government Securities or repurchase
agreements for such securities; or (2) 25% or more of its total
assets would be invested in the securities of a group of issuers
in the same industry, except that this restriction does not apply
to U.S. Government Securities. Notwithstanding these limitations,
the Fund may invest all or substantially all of its assets in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund.
The Fund may not make loans, except that, consistent with its
investment policies and restrictions, it may: (1) invest up to
100% of its net assets in publicly offered or privately placed
debt securities, (2) lend its portfolio securities under certain
circumstances, and (3) enter into repurchase agreements./1/ The
Fund may not borrow money, except as a temporary measure for
extraordinary or emergency purposes, and then the Fund's aggregate
borrowings at any one time (including reverse repurchase
agreements and dollar rolls) may not exceed 33 1/3% of its total
assets (at market value). Additional securities may not be
purchased when borrowings, less proceeds receivable from sales of
portfolio securities, exceed 5% of total assets.
- -----------------
/1/ A repurchase agreement involves a sale of securities to the
Fund with the concurrent agreement of the seller (bank or
securities dealer) to repurchase the securities at the same price
plus an amount equal to an agreed-upon interest rate within a
specified time. In the event of a bankruptcy or other default of
a seller of a repurchase agreement, the Fund could experience both
delays in liquidating the underlying securities and losses. The
Fund may not invest more than 10% of its net assets in repurchase
agreements maturing in more than seven days and other illiquid
securities.
- -----------------
The policies set forth in the first two paragraphs under
Restrictions on the Fund's Investments (but not the footnote) are
fundamental policies of the Fund. The Statement of Additional
Information contains all of the investment restrictions.
___________________________
RISKS AND INVESTMENT
CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although the Fund seeks
to reduce risk by investing in a diversified portfolio, this does
not eliminate all risk. The risks inherent in the Fund depend
primarily upon the term and quality of the obligations in the
Fund's portfolio, as well as on market conditions.
A decline in prevailing levels of interest rates generally
increases the value of securities in the Fund's portfolio, while
an increase in rates usually reduces the value of those
securities. As a result, interest rate fluctuations will affect
the Fund's net asset value, but not the income received by the
Fund from its portfolio securities. (Because yields on debt
securities available for purchase by the Fund vary over time, no
specific yield on shares of the Fund can be assured.) In
addition, if the bonds in the Fund's portfolio contain call,
prepayment or redemption provisions, during a period of declining
interest rates, these securities are likely to be redeemed, and
the Fund will probably be unable to replace them with securities
having as great a yield.
The Fund is designed for investors who seek a higher level of
income and who can accept greater levels of credit and other risks
associated with securities of medium or lower quality.
Investments in foreign securities, including ADRs, represent both
risks and opportunities not typically associated with investments
in domestic issuers. Risks of foreign investing include currency
risk, less complete financial information on issuers, less market
liquidity, more market volatility, less well-developed and
regulated markets, and greater political instability. In
addition, various restrictions by foreign governments on
investments by non-residents may apply, including imposition of
exchange controls and withholding taxes on dividends, and seizure
or nationalization of investments owned by non-residents. Foreign
investments also tend to involve higher transaction and custody
costs.
The Fund may enter into foreign currency forward contracts and use
options and futures contracts as described elsewhere in this
prospectus to limit or reduce foreign currency risk.
There can be no assurance that the Fund will achieve its
objective, nor can the Fund assure that payments of interest and
principal on portfolio securities will be made when due. If,
after purchase by the Fund, the rating of a portfolio security is
lost or reduced, the Fund would not be required to sell the
security, but the Adviser would consider such a change in deciding
whether the Fund should retain the security in its portfolio.
The Fund's investment objective is not fundamental and may be
changed by the Board of Trustees without a vote of shareholders.
If there is a change in the Fund's investment objective,
shareholders should consider whether the Fund remains an
appropriate investment in light of their then-current financial
position and needs.
MASTER FUND/FEEDER FUND OPTION.
Rather than invest in securities directly, the Fund may in the
future seek to achieve its investment objective by pooling its
assets with assets of other mutual funds managed by the Adviser
for investment in another investment company having the same
investment objective and substantially the same investment
policies and restrictions as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. It is expected that any such investment company
would be managed by the Adviser in substantially the same manner
as the Fund. Shareholders of the Fund will be given at least 30
days' prior notice of any such investment, although they will not
be entitled to vote on the action. Such investment would be made
only if the trustees determine it to be in the best interests of
the Fund and its shareholders.
___________________________
HOW TO PURCHASE SHARES
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of the Fund through your employer or limitations on the
amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the
Fund's net asset value (see Net Asset Value) next determined after
receipt of payment by the Fund.
Each purchase order for the Fund must be accepted by an authorized
officer of the Trust in Chicago and is not binding until accepted
and entered on the books of the Fund. Once your purchase order
has been accepted, you may not cancel or revoke it; however, you
may redeem the shares. The Trust reserves the right not to accept
any purchase order that it determines not to be in the best
interest of the Trust or of the Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
HOW TO REDEEM SHARES
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of the
Fund through your employer's plan, including any charges that may
be imposed by the plan, please consult with your employer.
EXCHANGE PRIVILEGE.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other Stein Roe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the Stein Roe Fund
in which you wish to invest and read it carefully. Contact your
plan administrator for instructions on how to exchange your shares
or to obtain prospectuses of other Stein Roe Funds available
through your plan. The Fund reserves the right to suspend, limit,
modify, or terminate the Exchange Privilege or its use in any
manner by any person or class; shareholders would be notified of
such a change.
GENERAL REDEMPTION POLICIES.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by the Trust. The Trust cannot
accept a redemption request that specifies a particular date or
price for redemption or any special conditions.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares.
___________________________
NET ASSET VALUE
The purchase and redemption price of the Fund's shares is its net
asset value per share. The net asset value of a share of the Fund
is determined as of the close of trading on the New York Stock
Exchange (currently 3:00 p.m., Chicago time) by dividing the
difference between the values of the Fund's assets and liabilities
by the number of shares outstanding. Net asset value will not be
determined on days when the Exchange is closed unless, in the
judgment of the Board of Trustees, the net asset value of the Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
Securities for which market quotations are readily available at
the time of valuation are valued on that basis. Long-term
straight-debt securities for which market quotations are not
readily available are valued at a fair value based on valuations
provided by pricing services approved by the Board, which may
employ electronic data processing techniques, including a matrix
system, to determine valuations. Short-term debt securities with
remaining maturities of 60 days or less are valued at their
amortized cost, which does not take into account unrealized gains
or losses. The Board believes that the amortized cost represents
a fair value for such securities. Short-term debt securities with
remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix
prepared by the Adviser based on quotations for comparable
securities. Other assets and securities held by the Fund for
which these valuation methods do not produce a fair value are
valued by a method that the Board believes will determine a fair
value.
___________________________
DISTRIBUTIONS AND
INCOME TAXES
DISTRIBUTIONS.
Income dividends are declared each business day and are paid
monthly. The Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized from
the sale of securities during the twelve-month period ended
October 31 in that year. The Fund intends to distribute any
undistributed net investment income and net realized capital gains
in the following year.
The terms of your plan will govern how you may receive
distributions from the Fund. Generally, dividend and capital gain
distributions will be reinvested in additional shares of the Fund.
INCOME TAXES.
The Fund intends to qualify as a "regulated investment company"
for federal income tax purposes and to meet all other requirements
that are necessary for it to be relieved of federal taxes on
income and gain it distributes. The Fund will distribute
substantially all of its ordinary income and net capital gains on
a current basis. Generally, Fund distributions are taxable as
ordinary income, except that any distributions of net long-term
capital gains will be taxed as such. However, distributions by
the Fund to employer-sponsored defined contribution plans that
qualify for tax-exempt treatment under federal income tax laws
will not be taxable. Special tax rules apply to investments
through such plans. You should consult your tax advisor to
determine the suitability of the Fund as an investment through
such a plan and the tax treatment of distributions (including
distributions of amounts attributable through an investment in the
Fund) from such a plan. This section is not intended to be a full
discussion of income tax laws and their effect on shareholders.
___________________________
INVESTMENT RETURN
The total return from an investment in the Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
The yield of the Fund is calculated by dividing its net investment
income per share (a hypothetical figure as defined in the SEC
rules) during a 30-day period by the net asset value per share on
the last day of the period. The yield formula provides for
semiannual compounding, which assumes that net investment income
is earned and reinvested at a constant rate and annualized at the
end of a six-month period.
Comparison of the Fund's yield or total return with those of
alternative investments should consider differences between the
Fund and the alternative investments, the periods and methods used
in calculation of the return being compared, and the impact of
taxes on alternative investments. The Fund's total return does
not reflect any charges or expenses related to your employer's
plan. Yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results. To
obtain current yield or total return information, you may call
800-338-2550.
___________________________
MANAGEMENT OF THE FUND
TRUSTEES AND INVESTMENT ADVISER.
The Board of Trustees of the Trust has overall management
responsibility for the Trust and the Fund. See Management in the
Statement of Additional Information for the names of and other
information about the trustees and officers.
The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolio and the business affairs of the Fund and the
Trust, subject to the direction of the Board. The Adviser is
registered as an investment adviser under the Investment Advisers
Act of 1940. The Adviser was organized in 1986 to succeed to the
business of Stein Roe & Farnham, a partnership that had advised
and managed mutual funds since 1949. The Adviser is a wholly
owned indirect subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual").
PORTFOLIO MANAGER.
Ann H. Benjamin, a vice-president of the Trust, became portfolio
manager of the Fund in January 1990. She is a senior vice
president of the Adviser and has been associated with it since
1989. A chartered financial analyst, she received her B.B.A. from
Chatham College in 1980 and her M.A. from Carnegie Mellon
University in 1985. Ms. Benjamin managed $212 million in mutual
fund assets for the Adviser as of June 30, 1995, serves as High-
Yield Credit Research Manager for the Adviser, and is a member of
the Adviser's Fixed-Income Credit Review Committee. Ms. Benjamin
is assisted in managing the portfolio by Stephen F. Lockman. Mr.
Lockman is a vice president of the Adviser and has been employed by
the Adviser since January 1994. A chartered financial analyst, Mr.
Lockman received a B.S. degree from the University of Illinois in
1983 and an M.B.A. from DePaul University in 1986.
FEES AND EXPENSES.
In return for its investment advisory and administrative services,
the Adviser receives a monthly fee from the Fund based on its
average net assets, computed and accrued daily. The annualized
fee for the Fund is .65 of 1% of the first $100 million and .60 of
1% thereafter. For the fiscal year ended June 30, 1995, the fee
amounted to 0.60% of average net assets, after the expense
limitation described under Fee Table.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Fund, including
computation of the Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
PORTFOLIO TRANSACTIONS.
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Fund. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
TRANSFER AGENT.
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned indirect subsidiary of Liberty
Mutual, is the agent of the Trust for the transfer of shares,
disbursement of dividends, and maintenance of shareholder
accounting records.
DISTRIBUTOR.
The shares of the Fund are offered for sale through Liberty
Securities Corporation ("Distributor") without any sales
commissions or charges to the Fund or to its shareholders. The
Distributor is a wholly owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to the Trust at P.O. Box 804058, Chicago, Illinois
60680. All distribution and promotional expenses are paid by the
Adviser, including payments to the Distributor for sales of Fund
shares.
CUSTODIAN.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for the
Fund. Foreign securities are maintained in the custody of foreign
banks and trust companies that are members of the Bank's Global
Custody Network or foreign depositories used by such members.
(See Custodian in the Statement of Additional Information.)
___________________________
ORGANIZATION AND
DESCRIPTION OF SHARES
The Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
January 3, 1986, which provides that each shareholder shall be
deemed to have agreed to be bound by the terms thereof. The
Declaration of Trust may be amended by a vote of either the
Trust's shareholders or its trustees. The Trust may issue an
unlimited number of shares, in one or more series as the Board may
authorize. Currently, six series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as the Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular Fund shall look only to the assets of the Trust or of
the respective Fund for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and the
Trust was unable to meet its obligations.
The risk of a particular Fund incurring financial loss on account
of unsatisfied liability of another Fund of the Trust is also
believed to be remote, because it would be limited to claims to
which the disclaimer did not apply and to circumstances in which
the other Fund was unable to meet its obligations.
___________________________
FOR MORE INFORMATION
Contact a Stein Roe Retirement Plan Representative at 800-322-
1130 for more information about this Fund.
_________________
<PAGE> 1
Statement of Additional Information Dated July 1, 1996
STEIN ROE INCOME TRUST
MONEY MARKET FUNDS
STEIN ROE CASH RESERVES FUND
STEIN ROE GOVERNMENT RESERVES FUND
P.O. Box ____, Chicago, Illinois 60680
800-338-2550
The Funds listed above are series of the Stein Roe Income
Trust (the "Trust"). Each series of the Trust represents shares
of beneficial interest in a separate portfolio of securities and
other assets, with its own objectives and policies.
This Statement of Additional Information is not a
prospectus but provides additional information that should be
read in conjunction with the Funds' Prospectus dated July 1,
1996 and any supplements thereto. The Prospectus may be
obtained at no charge by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History..........................2
Investment Policies......................................3
Cash Reserves.......................................3
Government Reserves.................................5
Portfolio Investments and Strategies.....................7
Investment Restrictions..................................8
Additional Investment Considerations....................11
Purchases and Redemptions...............................11
Management..............................................13
Financial Statements....................................16
Principal Shareholders..................................16
Investment Advisory Services............................17
Distributor.............................................19
Transfer Agent..........................................20
Custodian...............................................20
Independent Auditors....................................21
Portfolio Transactions..................................21
Additional Income Tax Considerations....................22
Additional Information on the Determination of
Net Asset Value.....................................23
Investment Performance..................................24
Appendix--Ratings.......................................29
<PAGE> 2
GENERAL INFORMATION AND HISTORY
Stein Roe & Farnham Incorporated (the "Adviser") is
investment adviser and provides administrative and accounting
and recordkeeping services to the Funds.
As used herein, "Cash Reserves" and "Government Reserves"
refer to the series of Stein Roe Income Trust designated Stein
Roe Cash Reserves Fund and Stein Roe Government Reserves Fund,
respectively. Currently, six series are authorized and
outstanding. The name of the Trust was changed on November 1,
1995, from SteinRoe Income Trust to Stein Roe Income Trust.
Prior to November 1, 1995, Cash Reserves and Government Reserves
were named SteinRoe Cash Reserves and SteinRoe Government
Reserves.
Each share of a series is entitled to participate pro rata
in any dividends and other distributions declared by the Board
on shares of that series, and all shares of a series have equal
rights in the event of liquidation of that series.
Each whole share (or fractional share) outstanding on the
record date established in accordance with the By-Laws shall be
entitled to a number of votes on any matter on which it is
entitled to vote equal to the net asset value of the share (or
fractional share) in United States dollars determined at the
close of business on the record date (for example, a share
having a net asset value of $10.50 would be entitled to 10.5
votes). As a business trust, the Trust is not required to hold
annual shareholder meetings. However, special meetings may be
called for purposes such as electing or removing trustees,
changing fundamental policies, or approving an investment
advisory contract. If requested to do so by the holders of at
least 10% of the Trust's outstanding shares, the Trust will call
a special meeting for the purpose of voting upon the question of
removal of a trustee or trustees and will assist in the
communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940. All shares of the
Trust are voted together in the election of trustees. On any
other matter submitted to a vote of shareholders, shares are
voted by individual series and not in the aggregate, except that
shares are voted in the aggregate when required by the
Investment Company Act of 1940 or other applicable law. When
the Board of Trustees determines that the matter affects only
the interests of one or more series, shareholders of the
unaffected series are not entitled to vote on such matters.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND
STRUCTURE
Each Fund may in the future seek to achieve its objective
by pooling its assets with assets of other mutual funds managed
by the Adviser for investment in another mutual fund having the
same investment objective and substantially the same investment
policies and restrictions as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. The Adviser is expected to manage any such mutual
fund in which a Fund would invest. Such investment would be
subject to determination by the Trustees that it was in the best
interests of the Fund and its shareholders, and shareholders
would receive advance notice of any such change.
<PAGE> 3
INVESTMENT POLICIES
The following information supplements the discussion of the
Funds' respective investment objectives and policies described
in the Prospectus. In pursuing its objective, each Fund will
invest as described below and may employ the investment
techniques described in the Prospectus and elsewhere in this
Statement of Additional Information. Common investments and
strategies are described under Portfolio Investments and
Strategies. Each Fund's investment objective is not fundamental
and may be changed by the Board of Trustees without the approval
of a "majority of the outstanding voting securities" /1/ of that
Fund.
CASH RESERVES
This Fund seeks to obtain maximum current income consistent
with the preservation of capital and the maintenance of
liquidity by investing all of its assets in U.S. dollar-
denominated money market instruments maturing in thirteen months
or less from time of investment. Each security must be rated
(or be issued by an issuer that is rated with respect to its
short-term debt) within the highest rating category for short-
term debt by at least two nationally recognized statistical
rating organizations ("NRSRO"), or, if unrated, determined by or
under the direction of the Board of Trustees to be of comparable
quality. These securities may include:
(1) Securities issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities ("U.S. Government
Securities");
(2) Securities issued or guaranteed by the government of any
foreign country that are rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of $1 billion, or the equivalent in other currencies
(as of the date of the most recent available financial
statements) or of any branches, agencies or subsidiaries
(U.S. or foreign) of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term debt obligations.
- ---------------------
/1/ A fundamental policy is one that cannot be changed without a
vote of a majority of the outstanding voting securities of the
Fund. A "majority of the outstanding voting securities" means
the approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (ii)
more than 50% of the outstanding shares of the Fund.
/2/ A repurchase agreement involves the sale of securities to
the Fund, with the concurrent agreement of the seller to
repurchase the securities at the same price plus an amount equal
to an agreed-upon interest rate, within a specified time. In
the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and losses.
- -----------------
<PAGE> 4
The Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable
net asset value per share and not in excess of 90 days. It is a
fundamental policy which may not be changed without the approval
of a majority of the outstanding voting securities, that the
maturity of any instrument that grants the holder the right to
redeem at par plus interest and without penalty will be deemed
at any time to be the next date provided for payment on exercise
of such optional redemption right.
It is the Fund's intention, as a general policy, to hold
securities to maturity. However, the Fund may attempt, from
time to time, to increase its yield by trading to take advantage
of variations in the markets for short-term money market
instruments. In addition, redemptions of the Fund's shares
could necessitate the sale of portfolio securities and these
sales may occur when such sales would not otherwise be
desirable. While the Fund seeks to invest in high-quality money
market instruments, these investments are not entirely without
risk. An increase in interest rates will generally reduce the
market value of the Fund's portfolio investments and a decline
in interest rates will generally increase the market value of
the Fund's portfolio investments. Investments in instruments
other than U.S. Government Securities are also subject to
default by the issuer.
Because the Fund's investment policy permits it to invest
in: securities of foreign branches of U.S. banks (Eurodollars),
U.S. branches of foreign banks (Yankee dollars), and foreign
banks and their foreign branches, such as negotiable
certificates of deposit; securities of foreign governments; and
securities of foreign issuers, such as commercial paper and
corporate notes, bonds and debentures, investment in that Fund
might involve risks that are different in some respects from an
investment in a fund that invests only in debt obligations of
U.S. domestic issuers. Such risks may include future political
and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on securities held
in the portfolio, possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls, or
the adoption of other foreign governmental restrictions that
might adversely affect the payment of principal and interest on
securities in the portfolio. Additionally, there may be less
public information available about foreign banks and their
branches. Foreign banks and foreign branches of foreign banks
are not regulated by U.S. banking authorities, and generally are
not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
The Fund may invest in notes and bonds that bear floating
or variable rates of interest, and that ordinarily have stated
maturities in excess of thirteen months, but permit the holder
to demand earlier payment of principal and accrued interest,
upon not more than 30 days' advance notice, at any time or after
stated intervals not exceeding thirteen months. Such
instruments are commonly referred to as "demand" obligations.
Variable rate demand notes include master demand notes, which
are obligations that permit the Fund to invest fluctuating
amounts, which may change daily without penalty, pursuant to
direct arrangements between the Fund, as lender, and the
borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations normally has a right,
after a given period, to prepay the outstanding principal amount
of the obligations plus accrued interest upon a
<PAGE> 5
specified number of days' notice to the holders of such
obligations. The interest rate on a floating rate demand
obligation is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time the rate
changes. The interest rate on a variable rate obligation is
adjusted automatically at the end of specified intervals.
Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because
these obligations are direct lending arrangements between the
lender and borrower, it is not contemplated that such
instruments will generally be traded, and there generally is no
established secondary market for these obligations, although
they are redeemable at face value. Accordingly, where these
obligations are not secured by letters of credit or other credit
support arrangements, the Fund's right to redeem is dependent on
the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit
rating agencies and the Fund may invest in obligations that are
not so rated only if the Board of Trustees determines that the
obligations are of comparable quality to the other obligations
in which the Fund may invest.
The Fund may purchase from financial institutions
participation interests in securities. A participation interest
gives the Fund an undivided interest in the security in the
proportion that the Fund's participation interest bears to the
total principal amount of the security. The Fund may also
purchase certificates of participation, such as participations
in a pool of mortgages or credit card receivables.
Participation interests and certificates of participation both
may have fixed, floating or variable rates of interest with
remaining maturities of one year or less. If these instruments
are unrated, or have been given a rating below that which is
permissible for purchase by the Fund, they will be backed by an
irrevocable letter of credit or guarantee of a bank, or the
payment obligation otherwise will be collateralized by U.S.
Government Securities, or, in the case of unrated participation
interests, the Board of Trustees must have determined that the
instrument is of comparable quality to those instruments in
which the Fund may invest.
Under normal market conditions, the Fund will invest at
least 25% of its assets in securities of issuers in the
financial services industry. This policy may cause the Fund to
be more adversely affected by changes in market or economic
conditions and other circumstances affecting the financial
services industry. The financial services industry includes
issuers that, according to the Directory of Companies Required
to File Annual Reports with the Securities and Exchange
Commission, are in the following categories: State banks;
national banks; savings and loan holding companies; personal
credit institutions; business credit institutions; mortgage-
backed securities; finance services; security and commodity
brokers, dealers and services; life, accident and health
insurance carriers; fire, marine, casualty and surety insurance
carriers; insurance agents, brokers and services.
GOVERNMENT RESERVES
This Fund seeks to obtain maximum current income consistent
with safety of capital and maintenance of liquidity by
investment in U.S. Government Securities maturing in thirteen
months or less from the date of purchase. These securities
include:
<PAGE> 6
(1) Securities issued by the U.S. Treasury;
(2) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are backed by the full faith and credit guarantee of the U.S.
Government;
(3) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are not backed by the full faith and credit guarantee of the
U.S. Government;
(4) Repurchase agreements for securities listed in (1), (2), and
(3) above, regardless of the maturities of such underlying
securities.
U.S. Government Securities include: (i) bills, notes,
bonds, and other debt securities, differing as to maturity and
rates of interest, that are issued by and are direct obligations
of the U.S. Treasury; and (ii) other securities that are issued
or guaranteed as to principal and interest by agencies or
instrumentalities of the U.S. Government and that include, but
are not limited to, Federal Farm Credit Banks, Federal Home Loan
Banks, Government National Mortgage Association, Farmers Home
Administration, Federal Home Loan Mortgage Corporation, and
Federal National Mortgage Association.
Because the Fund's investment policy permits it to invest
in U.S. Government Securities that are not backed by the full
faith and credit of the U.S. Treasury, investment in the Fund
may involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and
interest on the securities in the Fund's portfolio that are
supported only by the issuing or guaranteeing agency or
instrumentality and, accordingly, the Fund must look principally
or solely to that entity for ultimate repayment.
The Fund will not enter into a repurchase agreement
maturing in more than seven days if as a result thereof more
than 10% of its net assets (taken at market value at the time of
the investment) would be invested in illiquid securities,
including repurchase agreements maturing in more than seven
days; however, there is otherwise no limitation on the
percentage of the Fund's assets that may be invested in
repurchase agreements. The Fund will enter into repurchase
agreements only where (i) the underlying securities are U.S.
Government Securities and (ii) the seller agrees that the value
of the underlying U.S. Government Securities, including accrued
interest (if purchased), will at all times be equal to or exceed
the value of the repurchase agreement.
The Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable
net asset value per share, and, in any case, not in excess of 90
days.
It is the Fund's intention, in general, to hold securities
to maturity. However, the Fund may attempt, from time to time,
to increase its yield by trading to take advantage of variations
in the markets for U.S. Government Securities. In addition,
redemptions of the Fund's shares could necessitate the sale of
portfolio securities, and such sales may occur at times when
sales would not otherwise be desirable. An increase in
prevailing interest rates will generally reduce the value of the
Fund's
<PAGE> 7
portfolio investments, and a decline in prevailing interest
rates will generally increase the market value of the Fund's
portfolio investments.
PORTFOLIO INVESTMENTS AND STRATEGIES
VARIABLE AND FLOATING RATE SECURITIES
In accordance with its investment objective and policies,
each Fund may invest in variable and floating rate money market
instruments which provide for periodic or automatic adjustments
in coupon interest rates that are reset based on changes in
amount and direction of specified short-term interest rates.
Neither Fund will invest in a variable or floating rate
instrument unless the Adviser determines that as of any reset
date the market value of the instrument can reasonably be
expected to approximate its par value.
LINE OF CREDIT
Subject to restriction (8) under Investment Restrictions,
each Fund may establish and maintain a line of credit with a
major bank in order to permit borrowing on a temporary basis to
meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of
portfolio securities.
RATED SECURITIES
For a description of the ratings applied by Moody's
Investors Service and Standard & Poor's (two of the approved
NRSROs) to debt securities, please refer to the Appendix. The
rated debt securities described under Investment Policies above
for each Fund include securities given a rating conditionally by
a NRSRO. If the rating of a security held by a Fund is lost or
reduced, the Fund is not required to sell the security, but the
Adviser will consider such fact in determining whether that Fund
should continue to hold the security. To the extent that the
ratings accorded by a NRSRO for debt securities may change as a
result of changes in such organizations, or changes in their
rating systems, each Fund will attempt to use comparable ratings
as standards for its investments in debt securities in
accordance with its investment policies.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES AND STANDBY
COMMITMENTS
The Funds may purchase instruments on a when-issued or
delayed-delivery basis. Although the payment terms are
established at the time the Fund enters into the commitment, the
instruments may be delivered and paid for some time after the
date of purchase, when their value may have changed and the
yields available in the market may be greater. The Funds will
make such commitments only with the intention of actually
acquiring the instruments, but may sell them before settlement
date if it is deemed advisable for investment reasons.
Securities purchased in this manner involve risk of loss if the
value of the security purchased declines before settlement date.
<PAGE> 8
The Funds may also invest on a standby commitment basis,
which is a delayed-delivery agreement in which the Fund binds
itself to accept delivery of and to pay for an instrument within
a specified period at the option of the other party to the
agreement.
At the time a Fund enters into a binding obligation to
purchase securities on a when-issued basis or enters into a
standby commitment, liquid assets (cash, U.S. Government or
other "high grade" debt obligations) of the Fund having a value
at least as great as the purchase price of the securities to be
purchased will be segregated on the books of the Fund and held
by the custodian throughout the period of the obligation.
SHORT SALES
Each Fund may make short sales "against the box." In a
short sale, the Fund sells a borrowed security and is required
to return the identical security to the lender. A short sale
"against the box" involves the sale of a security with respect
to which the Fund already owns an equivalent security in kind
and amount. A short sale "against the box" enables a Fund to
obtain the current market price of a security which it desires
to sell but is unavailable for settlement.
INVESTMENT RESTRICTIONS
Each Fund operates under the following investment
restrictions. A Fund may not:
(1) invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market
value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that
this restriction does not apply to (i) U.S. Government
Securities, (ii) repurchase agreements, or (iii) [Cash Reserves
only] securities of issuers in the financial services industry,
[both Funds] and that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund;
(2) invest in a security if, with respect to 75% of the
Fund's assets, as a result of such investment, more than 5% of
its total assets (taken at market value at the time of such
investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities and except that all or substantially all of the
assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund;
(3) invest in a security if, as a result of such
investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one
issuer, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund;
<PAGE> 9
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate or
interests therein);
(5) purchase or sell commodities or commodity contracts or
oil, gas, or mineral programs;
(6) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities;
(7) make loans, although it may (a) participate in an
interfund lending program with other Stein Roe Funds provided
that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33 1/3% of the value of its total
assets; (b) purchase money market instruments and enter into
repurchase agreements; and (c) acquire publicly-distributed or
privately-placed debt securities;
(8) borrow except that it may (a) borrow for non-
leveraging, temporary or emergency purposes and (b) engage in
reverse repurchase agreements and make other borrowings,
provided that the combination of (a) and (b) shall not exceed 33
1/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law; it may borrow from banks, other
Stein Roe Funds, and other persons to the extent permitted by
applicable law;
(9) act as an underwriter of securities, except insofar as
it may be deemed to be an "underwriter" for purposes of the
Securities Act of 1933 on disposition of securities acquired
subject to legal or contractual restrictions on resale, except
that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund; or
(10) issue any senior security except to the extent
permitted under the Investment Company Act of 1940.
For each Fund, the above restrictions are fundamental
policies and may not be changed without the approval of a
"majority of the outstanding voting securities" of the Fund, as
previously defined herein. Each Fund is also subject to the
following restrictions and policies that may be changed by the
Board of Trustees. Unless otherwise indicated, a Fund may not:
/3/
(A) invest for the purpose of exercising control or
management;
(B) purchase more than 3% of the stock of another
investment company or purchase stock of other investment
companies equal to more than 5% of the Fund's total assets
(valued at time of purchase) in the case of any one other
investment company and 10% of such assets (valued at time of
purchase) in the case of all other investment companies in the
aggregate; any such purchases are to be made in the open market
where no profit to a sponsor or dealer results from the
purchase, other than the
- -----------------
/3/ None of the following restrictions shall prevent a Fund from
investing all or substantially all of its assets in another
investment company having the same investment objective and
substantially similar investment policies as the Fund.
- -----------------
<PAGE> 10
customary broker's commission, except for securities acquired as
part of a merger, consolidation or acquisition of assets; /4/
(C) mortgage, pledge, hypothecate or in any manner
transfer, as security for indebtedness, any securities owned or
held by it, except as may be necessary in connection with
borrowings permitted in (8) above;
(D) purchase or retain securities of any issuer if 5% of
the securities of such issuer are owned by those officers and
trustees or directors of the Trust or of its investment adviser
who each own beneficially more than l/2 of 1% of its securities;
(E) purchase portfolio securities for the Fund from, or
sell portfolio securities to, any of the officers and directors
or trustees of the Trust or of its investment adviser;
(F) sell securities short unless (i) the Fund owns or has
the right to obtain securities equivalent in kind and amount to
those sold short at no added cost or (ii) the securities sold
are "when issued" or "when distributed" securities which the
Fund expects to receive in a recapitalization, reorganization,
or other exchange for securities the Fund contemporaneously owns
or has the right to obtain;
(G) invest more than 5% of its total assets (taken at
market value at the time of a particular investment) in
securities of issuers (other than issuers of federal agency
obligations or securities issued or guaranteed by any foreign
country or asset-backed securities) that, together with any
predecessors or unconditional guarantors, have been in
continuous operation for less than three years ("unseasoned
issuers");
(H) invest more than 15% of its total assets (taken at
market value at the time of a particular investment) in
restricted securities /5/ and securities of unseasoned issuers;
(I) invest more than 10% of its net assets (taken at
market value at the time of a particular investment) in illiquid
securities, /6/ including repurchase agreements maturing in more
than seven days.
Each Fund may not, so long as it publicly offers its shares
for sale in certain states: (i) purchase shares of other open-
end investment companies, except in connection with a merger,
consolidation, acquisition, or reorganization; or (ii) invest
more than 5% of its net assets (valued at time of investment) in
warrants, nor more than 2% of its net assets in warrants which
are not listed on the New York or American stock exchange.
- --------------------------
/4/ The Funds have been informed that the staff of the
Securities and Exchange Commission takes the position that the
issuers of certain CMOs and certain other collateralized assets
are investment companies and that subsidiaries of foreign banks
may be investment companies for purposes of Section 12(d)(1) of
the Investment Company Act of 1940, which limits the ability of
one investment company to invest in another investment company.
Accordingly, the Funds intend to operate within the applicable
limitations under Section 12(d)(1)(A) of that Act.
/5/ As long as it is required to do so by the Ohio Division of
Securities, the Trust will consider a security eligible for
resale pursuant to Rule 144A under the Securities Act of 1933 to
be a restricted security.
/6/ In the judgment of the Adviser, Private Placement Notes,
which are issued pursuant to Section 4(2) of the Securities Act
of 1933, generally are readily marketable even though they are
subject to certain legal restrictions on resale. As such, they
are not treated as being subject to the limitation on illiquid
securities.
- --------------------------
<PAGE> 11
ADDITIONAL INVESTMENT CONSIDERATIONS
The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. It has worked
to build wealth for generations by being guided by three primary
objectives which it believes are the foundation of a successful
investment program. These objectives are preservation of
capital, limited volatility through managed risk, and consistent
above-average returns.
Because every investor's needs are different, Stein Roe
mutual funds are designed to accommodate different investment
objectives, risk tolerance levels, and time horizons. In
selecting a mutual fund, investors should ask the following
questions:
What are my investment goals?
It is important to a choose a fund that has investment
objectives compatible with your investment goal.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share
price, such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If
you have a longer investment time frame, you may seek to
maximize your investment returns by investing in a mutual fund
that offers greater yield or appreciation potential in exchange
for greater investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks
which will vary depending on investment objective and security
type. However, mutual funds seek to reduce risk through
professional investment management and portfolio
diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values
than bond or money market mutual funds. Although there is no
guarantee that they will be able to maintain a stable net asset
value of $1.00 per share, money market funds emphasize safety
of principal and liquidity, but tend to offer lower income
potential than bond funds. Bond funds tend to offer higher
income potential than money market funds but tend to have
greater risk of principal and yield volatility.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
Net Asset Value, and Shareholder Services, and that information
is incorporated herein by reference. The Prospectus discloses
that you may purchase (or redeem) shares through investment
dealers, banks, or other institutions. It is the responsibility
of any such institution to establish procedures insuring the
prompt transmission to the Trust of any such purchase order.
The
<PAGE> 12
state of Texas has asked that the Trust disclose in its
Statement of Additional Information, as a reminder to any such
bank or institution, that it must be registered as a dealer in
Texas.
Each Fund's net asset value is determined on days on which
the New York Stock Exchange (the "NYSE") is open for trading.
The NYSE is regularly closed on Saturdays and Sundays and on New
Year's Day, the third Monday in February, Good Friday, the last
Monday in May, Independence Day, Labor Day, Thanksgiving, and
Christmas. If one of these holidays falls on a Saturday or
Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively. Net asset value will not be
determined on days when the NYSE is closed unless, in the
judgment of the Board of Trustees, net asset value of a Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
The Trust reserves the right to suspend or postpone
redemptions of shares of any Fund during any period when: (a)
trading on the NYSE is restricted, as determined by the
Securities and Exchange Commission, or the NYSE is closed for
other than customary weekend and holiday closings; (b) the
Securities and Exchange Commission has by order permitted such
suspension; or (c) an emergency, as determined by the Securities
and Exchange Commission, exists, making disposal of portfolio
securities or valuation of net assets of such Fund not
reasonably practicable.
Although neither Cash Reserves nor Government Reserves
currently charges a fee to its shareholders for the use of the
special Check-Writing Redemption Privilege offered by those
Funds, as described under How to Redeem Shares in the
Prospectus, each Fund pays for the cost of printing and mailing
checks to its shareholders and pays charges of the custodian for
payment of each check. The Trust reserves the right to
establish a direct charge to shareholders for use of the
Privilege and both the Trust and the custodian reserve the right
to terminate this service.
The Trust intends to pay all redemptions in cash and is
obligated to redeem shares of a Fund solely in cash up to the
lesser of $250,000 or one percent of the net assets of that Fund
during any 90-day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly
by a distribution in kind of securities. If redemptions were
made in kind, the redeeming shareholders might incur transaction
costs in selling the securities received in the redemptions.
Due to the relatively high cost of maintaining smaller
accounts, the Trust reserves the right to redeem shares in any
account for their then-current value (which will be promptly
paid to the investor) if at any time the shares in the account
do not have a value of at least $1,000. An investor will be
notified that the value of his account is less than the minimum
and allowed at least 30 days to bring the value of the account
up to at least $1,000 before the redemption is processed. The
Agreement and Declaration of Trust also authorizes the Trust to
redeem shares under certain other circumstances as may be
specified by the Board of Trustees.
<PAGE> 13
MANAGEMENT
The following table sets forth certain information with
respect to the trustees and officers of the Trust:
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AGE WITH THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
Gary A. Anetsberger 39 Senior Vice-President Controller of the Mutual Funds division of Stein Roe & Farnham
Incorporated (the "Adviser"); senior vice president of the Adviser
since April, 1996; vice president of the Adviser, January, 1991 to
April, 1996
Timothy K. Armour 47 President; Trustee President of the Mutual Funds division of the Adviser and director
(1) (2) of the Adviser since June, 1992; senior vice president and director
of marketing of Citibank Illinois prior thereto
Jilaine Hummel Bauer 40 Executive Vice-President; General counsel and secretary of the Adviser since November 1995;
Secretary senior vice president of the Adviser since April, 1992; vice
president of the Adviser prior thereto
Ann H. Benjamin 38 Vice-President Senior vice president of the Adviser since July, 1994; vice
president of the Adviser from January, 1992 to July, 1994; associate
of the Adviser prior thereto
Kenneth L. Block (3) 76 Trustee Chairman Emeritus of A. T. Kearney, Inc. (international management
consultants)
William W. Boyd (3) 69 Trustee Chairman and director of Sterling Plumbing Group, Inc. (manufacturer
of plumbing products) since 1992; chairman, president, and chief
executive officer of Sterling Plumbing Group, Inc. prior thereto
Thomas W. Butch 39 Vice-President Senior vice president of the Adviser since September, 1994; first
vice president, corporate communications, of Mellon Bank Corporation
prior thereto
N. Bruce Callow 50 Executive Vice-President President of the Investment Counsel division of the Adviser since
June, 1994; senior vice president of trust and financial services
for The Northern Trust prior thereto
Lindsay Cook (1) 44 Trustee Senior vice president of Liberty Financial Companies, Inc. (the
indirect parent of the Adviser)
Douglas A. Hacker 40 Trustee Senior vice president and chief financial officer, United Airlines,
since July, 1994; senior vice president--Finance, United Airlines,
February, 1993 to July, 1994; vice president--corporate & fleet
planning, American Airlines, 1991 to February, 1993
<PAGE> 14
Philip D. Hausken 38 Vice-President Vice president of the Adviser since November, 1995; corporate
counsel for the Adviser since July, 1994; assistant regional
director, midwest regional office of the Securities and Exchange
Commission prior thereto
Michael T. Kennedy 34 Vice-President Senior vice president of the Adviser since October, 1994; vice
president of the Adviser from January, 1992 to October, 1994;
associate of the Adviser prior thereto
Stephen P. Lautz 39 Vice-President Vice president of the Adviser since May, 1994; associate of the
Adviser prior thereto
Steven P. Luetger 42 Vice-President Senior vice president of the Adviser
Lynn C. Maddox 55 Vice-President Senior vice president of the Adviser
Anne E. Marcel 38 Vice-President Vice president of the Adviser since April, 1996; manager, Mutual
Fund Sales & Services of the Adviser since October, 1994; supervisor
of the Counselor Department of the Adviser from October, 1992 to
October, 1994; vice president of Selected Financial Services from
May, 1990 to March, 1992
Francis W. Morley 76 Trustee Chairman of Employer Plan Administrators and Consultants Co.
(2) (3) (designer, administrator, and communicator of employee benefit
plans)
Jane M. Naeseth 46 Vice-President Senior vice president of the Adviser since January, 1991; vice
president of the Adviser prior thereto
Charles R. Nelson (3) 53 Trustee Van Voorhis Professor of Political Economy of the University of
Washington
Nicolette D. Parrish 46 Vice-President; Senior compliance administrator and assistant secretary of the
Assistant Secretary Adviser since November 1995; senior legal assistant for the Adviser
prior thereto
Sharon R. Robertson 34 Controller Accounting manager for the Adviser's Mutual Funds division
Janet B. Rysz 40 Assistant Secretary Senior compliance administrator and assistant secretary of the
Adviser
Thomas P. Sorbo 35 Vice-President Senior vice president of the Adviser since January, 1994; vice
president of the Adviser from September, 1992 to December, 1993;
associate of Travelers Insurance Company prior thereto
Thomas C. Theobald 58 Trustee Managing partner, William Blair Capital Partners (private equity
fund) since 1994; chief executive officer and chairman of the Board
of Directors of Continental Bank Corporation, 1987-1994
Gordon R. Worley (3) 76 Trustee Private investor
<PAGE> 15
Hans P. Ziegler 55 Executive Vice-President Chief executive officer of the Adviser since May, 1994; president of
the Investment Counsel division of the Adviser from July, 1993 to
June, 1994; president and chief executive officer, Pitcairn
Financial Management Group prior thereto
Margaret O. Zwick 29 Treasurer Compliance manager for the Adviser's Mutual Funds division since
August 1995; compliance accountant, January 1995 to July 1995;
section manager, January 1994 to January 1995; supervisor, February
1990 to December 1993
<FN>
___________________________
(1) Trustee who is an "interested person" of the Trust and of
the Adviser, as defined in the Investment Company Act of
1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope
and results of the audit.
</TABLE>
Certain of the trustees and officers of Municipal Trust and
of Base Trust are trustees or officers of other investment
companies managed by the Adviser. Ms. Bauer and Mr. Cook are
also vice presidents of the Funds' distributor, Liberty
Securities Corporation. The address of Mr. Block is 11 Woodley
Road, Winnetka, Illinois 60093; that of Mr. Boyd is 2900 Golf
Road, Rolling Meadows, Illinois 60008; that of Mr. Cook is 600
Atlantic Avenue, Boston, MA 02210; that of Mr. Hacker is P.O.
Box 66100, Chicago, IL 60666; that of Mr. Morley is 20 North
Wacker Drive, Suite 2275, Chicago, Illinois 60606; that of Mr.
Nelson is Department of Economics, University of Washington,
Seattle, Washington 98195; that of Mr. Theobald is Suite 3300,
222 West Adams Street, Chicago, IL 60606; that of Mr. Worley is
1407 Clinton Place, River Forest, Illinois 60305; and that of
the officers is One South Wacker Drive, Chicago, Illinois 60606.
Associated with the Adviser since 1977, Ms. Naeseth has
been portfolio manager of Cash Reserves since 1980 and of
Government Reserves since its inception in 1982. From 1973 to
1977, she was with the First Trust Company of Ohio. She
received her B.A. degree from the University of Illinois in
1972. As of June 30, 1995, she was responsible for managing
$658 million in mutual fund assets.
Officers and trustees affiliated with the Adviser serve
without any compensation from the Trust. In compensation for
their services to the Trust, trustees who are not "interested
persons" of the Trust or the Adviser are paid an annual retainer
of $8,000 (divided equally among the Funds of the Trust) plus an
attendance fee from each Fund for each meeting of the Board or
committee thereof attended at which business for that Fund is
conducted. The attendance fees (other than for a Nominating
Committee meeting) are based on each Fund's net assets as of the
preceding December 31. For a Fund with net assets of less than
$251 million, the fee is $200 per meeting; with $251 million to
$500 million, $350; with $501 million to $750 million, $500;
with $750 million to $1 billion, $650; and with over $1 billion
in net assets, $800. Each non-interested trustee also receives
an aggregate of $500 for attending each meeting of the
Nominating Committee. The Trust has no retirement or pension
<PAGE> 16
plans. The following table sets forth compensation paid by the
Trust during the fiscal year ended June 30, 1995 to each of the
trustees:
Aggregate Total Compensation Paid to
Compensation Trustees from the Trust and
Name of Trustee from the Trust the Stein Roe Fund Complex*
- --------------- -------------- ---------------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Kenneth L. Block $23,350 $74,850
William W. Boyd 15,900 48,200
Francis W. Morley 23,350 76,400
Charles R. Nelson 23,350 77,200
Gordon R. Worley 23,350 74,850
_______________
* During this period, the Stein Roe Fund Complex consisted of
the six series of the Trust, four series of Stein Roe Municipal
Trust, eight series of SteinRoe Investment Trust, and one
series of SR&F Base Trust. Messrs. Hacker and Theobald were
elected trustees on June 18,1996.
FINANCIAL STATEMENTS
Please refer to the Funds' 6/30/95 Financial Statements
(balance sheets and schedules of investments as of 6/30/95 and
the statements of operations, changes in net assets, and notes
thereto) and the report of independent auditors contained in the
6/30/95 Annual Report of the Funds and to the Funds' 12/31/95
Financial Statements (unaudited balance sheets and schedules of
investments as of 12/31/95 and the statements of operations,
changes in net assets, and notes thereto) contained in the
12/31/95 Semiannual Report of the Funds. The Financial
Statements and the report of independent auditors (but no other
material from the Annual Report or the Semiannual Report) are
incorporated herein by reference. The Annual Report and the
Semiannual Report may be obtained at no charge by telephoning
800-338-2550.
PRINCIPAL SHAREHOLDERS
As of August 1, 1995, the only persons known by the Trust
to own of record or "beneficially" 5% or more of outstanding
shares of any Fund within the definition of that term as
contained in Rule 13d-3 under the Securities Exchange Act of
1934 were as follows:
APPROXIMATE
PERCENTAGE OF
OUTSTANDING
NAME AND ADDRESS FUND SHARESHELD
- ------------------------ ------------------ ------------
First Bank National Cash Reserves 14.3%
Association* Government Reserves 13.3
410 N. Michigan Avenue
Chicago, IL 60611
Federated Department Store Government Reserves 15.4
U/CSA/W LMIC
Attn VP Risk Management
7 West 7th Street
Cincinnati OH 45202
____________________
*Shares held of record, but not beneficially, as custodian under
various retirement plans.
<PAGE> 17
The following table shows shares of the Funds held by the
categories of persons indicated, and in each case the
approximate percentage of outstanding shares represented:
CLIENTS OF THE
ADVISER IN THEIR TRUSTEEES AND
CLIENT ACCOUNTS OFFICERS AS OF
AS OF 7/31/95* 7/31/95
-------------------- --------------------
Shares Held Percent Shares Held Percent
----------- ------- ----------- -------
Cash Reserves 86,496,375 17.5% 1,452,919 **
Government Reserves 13,925,340 13.6 465,785 **
_____________________________
* The Adviser may have discretionary authority over such shares
and, accordingly, they could be deemed to be owned
"beneficially" by the Adviser under Rule 13d-3. However, the
Adviser disclaims actual beneficial ownership of such shares.
**Represents less than 1% of the outstanding shares.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated, investment adviser to the
Funds, is a wholly owned subsidiary of SteinRoe Services Inc.
("SSI"), the Funds' transfer agent, which is a wholly owned
subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority-owned subsidiary of Liberty
Mutual Equity Corporation, which is a wholly owned subsidiary of
Liberty Mutual Insurance Company. Liberty Mutual Insurance
Company is a mutual insurance company, principally in the
property/casualty insurance field, organized under the laws of
Massachusetts in 1912.
The directors of the Adviser are Kenneth R. Leibler, C.
Allen Merritt, Jr., Timothy K. Armour, N. Bruce Callow, and Hans
P. Ziegler. Mr. Leibler is President and Chief Executive
Officer of Liberty Financial; Mr. Merritt is Senior Vice
President and Treasurer of Liberty Financial; Mr. Armour is
President of the Adviser's Mutual Funds division; Mr. Callow is
President of the Adviser's Investment Counsel division; and Mr.
Ziegler is Chief Executive Officer of the Adviser. The business
address of Messrs. Leibler and Merritt is Federal Reserve Plaza,
Boston, Massachusetts 02210; and that of Messrs. Armour, Callow,
and Ziegler is One South Wacker Drive, Chicago, Illinois 60606.
The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of June 30, 1995, the Adviser
managed over $22.4 billion in assets: over $4.9 billion in
equities and over $17.5 billion in fixed-income securities
(including $2.3 billion in municipal securities). The $22.4
billion in managed assets included over $5.5 billion held by
open-end mutual funds managed by the Adviser (approximately 21%
of the mutual fund assets were held by clients of the Adviser).
These mutual funds were owned by over 148,000 shareholders. The
$5.5 billion in mutual fund assets included over $550 million in
over 33,000 IRA accounts. In managing those assets, the Adviser
utilizes a proprietary computer-based information system that
maintains and regularly updates information for approximately
6,500 companies. The Adviser also monitors over 1,400 issues
via a proprietary credit
<PAGE> 18
analysis system. At June 30, 1995, the Adviser employed
approximately 17 research analysts and 34 account managers. The
average investment-related experience of these individuals was
19 years.
Stein Roe Counselor [service mark] and Stein Roe Counselor
Preferred [service mark] are professional investment advisory
services offered by the Adviser to Fund shareholders. Each is
designed to help shareholders construct Fund investment
portfolios to suit their individual needs. Based on information
shareholders provide about their financial goals and objectives
in response to a questionnaire, the Adviser's investment
professionals create customized portfolio recommendations.
Shareholders participating in Stein Roe Counselor [service mark]
are free to self direct their investments while considering the
Adviser's recommendations; shareholders participating in Stein
Roe Counselor Preferred [service mark] enjoy the added benefit
of having the Adviser implement portfolio recommendations
automatically for a fee of 1% or less, depending on the size of
their portfolios. In addition to reviewing shareholders' goals
and objectives periodically and updating portfolio
recommendations to reflect any changes, the Adviser provides
shareholders participating in these programs with a dedicated
Counselor [service mark] representative. Other distinctive
services include specially designed account statements with
portfolio performance and transaction data, newsletters, and
regular investment, economic, and market updates. A $50,000
minimum investment is required to participate in either program.
Please refer to the description of the Adviser, each Fund's
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management of
the Funds and Fee Table in the Prospectus, which is incorporated
herein by reference. Each Fund's advisory agreement was
replaced on July 1, 1996 with separate management and
administrative agreements. The table below shows gross advisory
fees paid by the Funds and any expense reimbursements by the
Adviser to them, which are described in the Prospectus.
YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
FUND PAYMENT 6/30/95 6/30/94 6/30/93
- -------------- ------------ ---------- ---------- ----------
Cash Reserves Advisory fee $2,648,885 $3,071,640 $3,338,199
Government
Reserves Advisory fee 513,808 537,413 593,300
Reimbursement 50,557 48,548 70,947
The Adviser provides office space and executive and other
personnel to the Funds and bears any sales or promotional
expenses. Each Fund pays all expenses other than those paid by
the Adviser, including but not limited to printing and postage
charges and securities registration and custodian fees and
expenses incidental to its organization.
Each Fund's administrative agreement provides that the
Adviser shall reimburse the Fund to the extent that total annual
expenses of the Fund (including fees paid to the Adviser, but
excluding taxes, interest, brokers' commissions and other normal
charges incident to the purchase and sale of portfolio
securities, and expenses of litigation to the extent permitted
under applicable state law) exceed the applicable limits
prescribed by any state in which shares of such Fund are being
offered for sale to the public; however, such reimbursement for
any fiscal year will not exceed the
<PAGE> 19
amount of the fees paid by the Fund under that agreement for
such year. The Trust believes that currently the most
restrictive state limit on expenses is that of California, which
limit currently is 2 1/2% of the first $30 million of average
net assets, 2% of the next $70 million, and 1 1/2% thereafter.
In addition, in the interest of further limiting the expenses of
Government Reserves, the Adviser may voluntarily waive its
management fee and/or absorb certain expenses for the Fund, as
described in the Prospectus. Any such reimbursement will
enhance the yield of Government Reserves.
The management agreement of each Fund also provides that
neither the Adviser nor any of its directors, officers,
stockholders (or partners of stockholders), agents, or employees
shall have any liability to the Trust or any shareholder of the
Fund for any error of judgment, mistake of law or any loss
arising out of any investment, or for any other act or omission
in the performance by the Adviser of its duties under the
agreement, except for liability resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part
in the performance of its duties or from reckless disregard by
the Adviser of the Adviser's obligations and duties under that
agreement.
Any expenses that are attributable solely to the
organization, operation, or business of a Fund shall be paid
solely out of that Fund's assets. Any expenses incurred by the
Trust that are not solely attributable to a particular Fund are
apportioned in such manner as the Adviser determines is fair and
appropriate, unless otherwise specified by the Board of
Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with the Trust, the
Adviser receives a fee for performing certain bookkeeping and
accounting services for the Funds. For these services, the
Adviser receives an annual fee of $25,000 per Fund plus .0025 of
1% of average net assets over $50 million. During the fiscal
year ended June 30, 1995, the Adviser received aggregate fees of
$114,541 from the Trust for services performed under this
agreement.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Securities
Corporation ("LSC"), under a Distribution Agreement as described
under Management of the Funds in the Prospectus, which is
incorporated herein by reference. The Distribution Agreement
continues in effect from year to year, provided such continuance
is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of the Trust, and
(ii) by a majority of the trustees who are not parties to the
Agreement or interested persons of any such party. The Trust
has agreed to pay all expenses in connection with registration
of its shares with the Securities and Exchange Commission and
auditing and filing fees in connection with registration of its
shares under the various state blue sky laws and assumes the
cost of preparation of prospectuses and other expenses. The
Adviser bears all sales and promotional expenses.
<PAGE> 20
As agent, LSC offers shares of each Fund to investors in
states where the shares are qualified for sale, at net asset
value, without sales commissions or other sales load to the
investor. No sales commission or "12b-1" payment is paid by any
Fund. LSC offers the Funds' shares only on a best-efforts
basis.
TRANSFER AGENT
SSI performs certain transfer agency services for the
Trust, as described under Management of the Funds in the
Prospectus. For performing these services, SSI receives from
each Fund a fee based on an annual rate of 0.140 of 1% of the
Fund's average daily net assets. Prior to May 1, 1995, SSI
received the following payments from each of the Funds: (1) a
fee of $4.00 for each new account opened; (2) monthly payments
of $1.466 per open shareholder account; (3) payments of $0.611
per closed shareholder account for each month through June of
the calendar year following the year in which the account is
closed; (4) $0.3025 per shareholder account for each dividend
paid; and (5) $1.415 for each shareholder-initiated transaction.
The Board of Trustees believes the charges by SSI to the Funds
are comparable to those of other companies performing similar
services. (See Investment Advisory Services.)
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian
for the Trust. It is responsible for holding all securities and
cash of the Funds, receiving and paying for securities
purchased, delivering against payment securities sold, receiving
and collecting income from investments, making all payments
covering expenses of the Funds, and performing other
administrative duties, all as directed by authorized persons.
The custodian does not exercise any supervisory function in such
matters as purchase and sale of portfolio securities, payment of
dividends, or payment of expenses of the Funds.
Portfolio securities purchased in the U.S. are maintained
in the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the
U.S. are maintained in the custody of foreign banks and trust
companies that are members of the Bank's Global Custody Network,
and foreign depositories ("foreign sub-custodians"). Each of
the domestic and foreign custodial institutions holding
portfolio securities has been approved by the Board of Trustees
in accordance with regulations under the Investment Company Act
of 1940.
The Board of Trustee reviews, at least annually, whether it
is in the best interest of each Fund and its shareholders to
maintain Fund assets in each custodial institution. However,
with respect to foreign sub-custodians, there can be no
assurance that a Fund, and the value of its shares, will not be
adversely affected by acts of foreign governments, financial or
operational difficulties of the foreign sub-custodians,
difficulties and costs of obtaining jurisdiction over, or
enforcing judgments against, the foreign sub-custodians, or
application of foreign law to a Fund's foreign sub-custodial
arrangements. Accordingly, an investor should recognize that
the non-investment risks involved in holding assets abroad are
greater than those associated with investing in the United
States.
<PAGE> 21
The Funds may invest in obligations of the custodian and
may purchase or sell securities from or to the custodian.
INDEPENDENT AUDITORS
The independent auditors for the Trust are Ernst & Young
LLP, 233 South Wacker Drive, Chicago, Illinois 60606. The
independent auditors audit and report on the Funds' annual
financial statements, review certain regulatory reports and the
Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services
when engaged to do so by the Trust.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
each Fund's portfolio securities. Purchases and sales of
portfolio securities are ordinarily transacted with the issuer
or with a primary market maker acting as principal or agent for
the securities on a net basis, with no brokerage commission
being paid by a Fund. Transactions placed through dealers
reflect the spread between the bid and asked prices.
Occasionally, a Fund may make purchases of underwritten issues
at prices that include underwriting discounts or selling
concessions.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important
factor in this decision, but a number of other judgmental
factors may also enter into the decision. These include: the
Adviser's knowledge of current transaction costs; the nature of
the security being traded; the size of the transaction; the
desired timing of the trade; the activity existing and expected
in the market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker
or dealer selected and others that are considered; the Adviser's
knowledge of the financial stability of the broker or dealer
selected and such other brokers or dealers; and the Adviser's
knowledge of actual or apparent operational problems of any
broker or dealer. Recognizing the value of these factors, a
Fund may incur a transaction charge in excess of that which
another broker or dealer may have charged for effecting the same
transaction. Evaluations of the reasonableness of the costs of
portfolio transactions, based on the foregoing factors, are made
on an ongoing basis by the Adviser's staff and reports are made
annually to the Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to
be capable of providing the best combination of price and
execution with respect to a particular portfolio transaction for
a Fund, the Adviser often selects a broker or dealer that has
furnished it with research products or services such as research
reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings,
dividends and similar data, and computer databases, quotation
equipment and services, research-oriented computer software and
services, and services of economic and other consultants.
Selection of brokers or dealers is not made pursuant to an
agreement or
<PAGE> 22
understanding with any of the brokers or dealers; however, the
Adviser uses an internal allocation procedure to identify those
brokers or dealers who provide it with research products or
services and the amount of research products or services they
provide, and endeavors to direct sufficient commissions
generated by its clients' accounts in the aggregate, including
the Funds, to such brokers or dealers to ensure the continued
receipt of research products or services the Adviser feels are
useful. In certain instances, the Adviser receives from brokers
and dealers products or services which are used both as
investment research and for administrative, marketing, or other
non-research purposes. In such instances, the Adviser makes a
good faith effort to determine the relative proportions of such
products or services which may be considered as investment
research. The portion of the costs of such products or services
attributable to research usage may be defrayed by the Adviser
(without prior agreement or understanding, as noted above)
through brokerage commissions generated by transactions of
clients (including the Funds), while the portions of the costs
attributable to non-research usage of such products or services
is paid by the Adviser in cash. No person acting on behalf of a
Fund is authorized, in recognition of the value of research
products or services, to pay a price in excess of that which
another broker or dealer might have charged for effecting the
same transaction. Research products or services furnished by
brokers and dealers through whom a Fund effects transactions may
be used in servicing any or all of the clients of the Adviser
and not all such research products or services are used in
connection with the management of such Fund.
The Trust has arranged for its custodian to act as a
soliciting dealer to accept any fees available to the custodian
as a soliciting dealer in connection with any tender offer for
Fund portfolio securities. The custodian will credit any such
fees received against its custodial fees.
The Board has reviewed the legal developments pertaining to
and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. The Board has been advised
by counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers ("NASD"). Therefore, the
Funds will not attempt to recapture underwriting discounts or
selling concessions.
During the last fiscal year, Cash Reserves held securities
of Salomon Inc., one of its regular broker-dealers or the parent
of such broker or dealer that derive more than 15% of gross
revenue from securities-related activities. At June 30, 1995,
Cash Reserves held $23,921,705 in such securities.
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund intends to comply with the special provisions of
the Internal Revenue Code that relieve it of federal income tax
to the extent of its net investment income and capital gains
currently distributed to shareholders.
<PAGE> 23
Because capital gain distributions reduce net asset value,
if a shareholder purchases shares shortly before a record date,
he will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as
his tax basis.
Each Fund expects that none of its dividends will qualify
for the deduction for dividends received by corporate
shareholders.
ADDITIONAL INFORMATION ON THE DETERMINATION OF NET ASSET VALUE
Please refer to Net Asset Value in the Prospectus, which is
incorporated herein by reference. Each Fund values its
portfolio by the "amortized cost method" by which it attempts to
maintain its net asset value at $1.00 per share. This involves
valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the
market value of the instrument. Although this method provides
certainty in valuation, it may result in periods during which
value as determined by amortized cost is higher or lower than
the price a Fund would receive if it sold the instrument. Other
assets are valued at a fair value determined in good faith by
the Board of Trustees.
In connection with the Funds' use of amortized cost and the
maintenance of each Fund's per share net asset value of $1.00,
the Trust has agreed, with respect to each Fund: (i) to seek to
maintain a dollar-weighted average portfolio maturity
appropriate to its objective of maintaining relative stability
of principal and not in excess of 90 days; (ii) not to purchase
a portfolio instrument with a remaining maturity of greater than
thirteen months; and (iii) to limit its purchase of portfolio
instruments to those instruments that are denominated in U.S.
dollars which the Board of Trustees determines present minimal
credit risks and that are of eligible quality as determined by
any major rating service as defined under SEC Rule 2a-7 or, in
the case of any instrument that is not rated, of comparable
quality as determined by the Board.
Each Fund has also agreed to establish procedures
reasonably designed to stabilize the Fund's price per share as
computed for the purpose of sales and redemptions at $1.00.
Such procedures include review of the Funds' portfolio holdings
by the Board of Trustees, at such intervals as it deems
appropriate, to determine whether the Funds' net asset values
calculated by using available market quotations or market
equivalents deviate from $1.00 per share based on amortized
cost. Calculations are made to compare the value of its
investments valued at amortized cost with market value. Market
values are obtained by using actual quotations provided by
market makers, estimates of market value, values from yield data
obtained from reputable sources for the instruments, values
obtained from the Adviser's matrix, or values obtained from an
independent pricing service. Any such service might value a
Fund's investments based on methods which include consideration
of: yields or prices of securities of comparable quality,
coupon, maturity and type; indications as to values
<PAGE> 24
from dealers; and general market conditions. The service may
also employ electronic data processing techniques, a matrix
system or both to determine valuations.
In connection with each Fund's use of the amortized cost
method of portfolio valuation to maintain its net asset value at
$1.00 per share, a Fund might incur or anticipate an unusual
expense, loss, depreciation, gain or appreciation that would
affect its net asset value per share or income for a particular
period. The extent of any deviation between a Fund's net asset
value based upon available market quotations or market
equivalents and $1.00 per share based on amortized cost will be
examined by the Board of Trustees as it deems appropriate. If
such deviation exceeds 1/2 of 1%, the Board of Trustees will
promptly consider what action, if any, should be initiated. In
the event the Board of Trustees determines that a deviation
exists that may result in material dilution or other unfair
results to investors or existing shareholders, it will take such
action as it considers appropriate to eliminate or reduce to the
extent reasonably practicable such dilution or unfair results.
Actions which the Board might take include: selling portfolio
instruments prior to maturity to realize capital gains or losses
or to shorten average portfolio maturity; increasing, reducing,
or suspending dividends or distributions from capital or capital
gains; or redeeming shares in kind. The Board might also
establish a net asset value per share by using market values, as
a result of which the net asset value might deviate from $1.00
per share.
INVESTMENT PERFORMANCE
A Fund may quote a "Current Yield" or "Effective Yield" or
both from time to time. The Current Yield is an annualized
yield based on the actual total return for a seven-day period.
The Effective Yield is an annualized yield based on a daily
compounding of the Current Yield. These yields are each
computed by first determining the "Net Change in Account Value"
for a hypothetical account having a share balance of one share
at the beginning of a seven-day period ("Beginning Account
Value"), excluding capital changes. The Net Change in Account
Value will always equal the total dividends declared with
respect to the account, assuming a constant net asset value of
$1.00.
The yields are then computed as follows:
Net Change in Account Value 365
--------------------------- ----
Current Yield = Beginning Account Value x 7
[1 + Net Change in Account Value]365/7
--------------------------------------
Effective Yield = Beginning Account Value - 1
For example, the yields of the Funds for the seven-day period
ended June 30, 1995 were:
Cash Reserves
0.001045205 365
----------- ---
Current Yield = $1.00 x 7 = 5.45%
<PAGE> 25
[1+$0.001045205]365/7
---------------------
Effective Yield = $1.00 - 1 = 5.60%
Government Reserves
0.001018356 365
----------- ---
Current Yield = $1.00 x 7 = 5.31%
[1+$0.001018356]365/7
---------------------
Effective Yield = $1.00 - 1 = 5.45%
The average dollar-weighted portfolio maturities of Cash
Reserves and of Government Reserves for the seven days ended
June 30, 1995 were 61 and 46 days, respectively.
In addition to fluctuations reflecting changes in net
income of a Fund resulting from changes in income earned on its
portfolio securities and in its expenses, a Fund's yield also
would be affected if the Fund were to restrict or supplement its
dividends in order to maintain its net asset value at $1.00.
(See Net Asset Value in the Prospectus and Additional
Information on the Determination of Net Asset Value herein.)
Portfolio changes resulting from net purchases or net
redemptions of Fund shares may affect yield. Accordingly, a
Fund's yield may vary from day to day and the yield stated for a
particular past period is not a representation as to its future
yield. A Fund's yield is not assured, and its principal is not
insured; however, each Fund will attempt to maintain its net
asset value per share at $1.00.
Comparison of a Fund's yield with those of alternative
investments (such as savings accounts, various types of bank
deposits, and other money market funds) should be made with
consideration of differences between the Fund and the
alternative investments, differences in the periods and methods
used in the calculation of the yields being compared, and the
impact of income taxes on alternative investments.
Each Fund may quote total return figures from time to time.
A "Total Return" on a per share basis is the amount of dividends
distributed per share plus or minus the change in the net asset
value per share for a period. A "Total Return Percentage" may
be calculated by dividing the value of a share at the end of a
period (including reinvestment of distributions) by the value of
the share at the beginning of the period and subtracting one.
Average Annual Total Return is computed as follows: ERV =
P(1+T)n
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).
For example, for a $1,000 investment in a Fund, the "Total
Return," the "Total Return Percentage," and the "Average Annual Total
Return" at June 30, 1995 were:
<PAGE> 26
TOTAL RETURN TOTAL RETURN AVERAGE ANNUAL
PERCENTAGE TOTAL RETURN
------------ ------------ ------------
Cash Reserves
1 year 1,050 4.96% 4.96%
5 years 1,241 24.05 4.40
10 years 1,757 75.68 5.80
Government
Reserves
1 year 1,048 4.78 4.78
5 years 1,234 23.36 4.29
10 years 1,712 71.18 5.52
Investment performance figures assume reinvestment of all
dividends and distributions, and do not take into account any
federal, state, or local income taxes which shareholders must
pay on a current basis. They are not necessarily indicative of
future results. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing a Fund's performance and in providing
some basis for comparison with other investment alternatives, it
should not be used for comparison with other investments using
different reinvestment assumptions or time periods.
In advertising and sales literature, a Fund may compare its
yield and performance with that of other mutual funds, indexes
or averages of other mutual funds, indexes of related financial
assets or data, and other competing investment and deposit
products available from or through other financial institutions.
The composition of these indexes or averages differs from that
of the Funds. Comparison of a Fund to an alternative investment
should be made with consideration of differences in features and
expected performance.
All of the indexes and averages noted below will be
obtained from the indicated sources or reporting services, which
the Funds believe to be generally accurate. A Fund may also
note its mention in newspapers, magazines, or other media from
time to time. However, the Funds assume no responsibility for
the accuracy of such data. Newspapers and magazines that might
mention the Funds include, but are not limited to, the
following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
<PAGE> 27
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
The Funds may compare their performance to the Consumer
Price Index (All Urban), a widely-recognized measure of
inflation.
The yields of Government Reserves and Cash Reserves may be
compared to the average yield of the following services as
indicated below:
<TABLE>
<CAPTION>
BENCHMARK FUND
<S> <C>
Donoghue's Money Fund Averages [trademark]--U.S. Treasury Government Reserves
Donoghue's Money Fund Averages [trademark]
--U.S. Government & Agencies Government Reserves
Donoghue's Money Fund Averages [trademark]--Government Government Reserves
Donoghue's Money Fund Averages [trademark]--Prime Cash Reserves
Donoghue's Money Fund Averages [trademark]--Prime
and Eurodollar Cash Reserves
Donoghue's Money Fund Averages [trademark]--Prime,
Eurodollar, and Yankeedollar Cash Reserves
Donoghue's Money Fund Averages [trademark]--Aggressive Cash Reserves
Donoghue's Money Fund Averages [trademark]--Taxable Cash Reserves
(Includes the previous four categories)
Donoghue's Money Fund Averages [trademark]--All Taxable Both Funds
Lipper Money Market Instrument Funds Average Cash Reserves
Lipper Short-Term U.S. Government Funds Average Government Reserves
<PAGE> 27
Lipper Short-Term Income Fund Average Both Funds
ICD Money Market Taxable Funds Average Cash Reserves
ICD Money Market Government Securities Average Government Reserves
ICD All Taxable Short-Term Fund Average Both Funds
</TABLE>
Should these services reclassify a Fund to a different
category or develop (and place a Fund into) a new category, that
Fund may compare its performance, rank, or yield with those of
other funds in the newly-assigned category published by the
service.
<PAGE> 28
Each Fund may compare its after-tax yield (computed by
multiplying the yield by one minus the highest marginal federal
individual tax rate) to the average yield for the tax-free
categories of the aforementioned services.
Investors may desire to compare the performance and
features of Cash Reserves and Government Reserves to those of
various bank products. Each Fund may compare its yield to the
average rates of bank and thrift institution money market
deposit accounts, Super N.O.W. accounts, and certificates of
deposit. The rates published weekly by the BANK RATE MONITOR
[copyright mark], a North Palm Beach (Florida) financial
reporting service, in its BANK RATE MONITOR [copyright mark]
National Index are averages of the personal account rates
offered on the Wednesday prior to the date of publication by one
hundred leading banks and thrift institutions in the top ten
Consolidated Standard Metropolitan Statistical Areas. Account
minimums range upward from $2,500 in each institution and
compounding methods vary. Super N.O.W. accounts generally offer
unlimited checking, while money market deposit accounts
generally restrict the number of checks that may be written. If
more than one rate is offered, the lowest rate is used. Rates
are subject to change at any time specified by the institution.
Bank account deposits may be insured. Shareholder accounts in a
Fund are not insured. Bank passbook savings accounts compete
with money market mutual fund products with respect to certain
liquidity features but may not offer all of the features
available from a money market mutual fund, such as check
writing. Bank passbook savings accounts normally offer a fixed
rate of interest while the yield of each Fund fluctuates. Bank
checking accounts normally do not pay interest but compete with
money market mutual funds with respect to certain liquidity
features (e.g., the ability to write checks against the
account). Bank certificates of deposit may offer fixed or
variable rates for a set term. (Normally, a variety of terms
are available.) Withdrawal of these deposits prior to maturity
will normally be subject to a penalty. In contrast, shares of a
Fund are redeemable at the next determined net asset value
(normally, $1.00 per share) after a request is received, without
charge.
In advertising and sales literature, a Fund may also cite
its rating, recognition, or other mention by Morningstar or any
other entity. Morningstar's rating system is based on risk-
adjusted total return performance and is expressed in a star-
rating format. The risk-adjusted number is computed by
subtracting a Fund's risk score (which is a function of the
Fund's monthly returns less the 3-month T-bill return) from the
Fund's load-adjusted total return score. This numerical score
is then translated into rating categories, with the top 10%
labeled five star, the next 22.5% labeled four star, the next
35% labeled three star, the next 22.5% labeled two star, and the
bottom 10% one star. A high rating reflects either above-
average returns or below-average risk, or both.
Of course, past performance is not indicative of future
results.
_________________________
To illustrate the historical returns on various types of
financial assets, the Funds may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based
investment firm. Ibbotson constructs (or obtains) very long-
term (since 1926) total return data (including, for example,
total return indexes, total return
<PAGE> 29
percentages, average annual total returns and standard
deviations of such returns) for the following asset types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
_________________________
A Fund may also use hypothetical returns to be used as an
example in a mix of asset allocation strategies. One such
example is reflected in the chart below, which shows the effect
of tax deferral on a hypothetical investment. This chart
assumes that an investor invested $2,000 a year on January 1,
for any specified period, in both a Tax-Deferred Investment and
a Taxable Investment, that both investments earn either 3%, 5%
or 7% compounded annually, and that the investor withdrew the
entire amount at the end of the period. (A tax rate of 39.6% is
applied annually to the Taxable Investment and on the withdrawal
of earnings on the Tax-Deferred Investment.)
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
INTEREST RATE 3% 5% 7% 3% 5% 7%
Compounding
Years Tax-Deferred Investment Taxable Investment
30 $82,955 $108,031 $145,856 $80,217 $98,343 $121,466
25 65,164 80,337 101,553 63,678 75,318 89,528
20 49,273 57,781 68,829 48,560 55,476 63,563
15 35,022 39,250 44,361 34,739 38,377 42,455
10 22,184 23,874 25,779 22,106 23,642 25,294
5 10,565 10,969 11,393 10,557 10,943 11,342
1 2,036 2,060 2,085 2,036 2,060 2,085
From time to time, a Fund may offer in its advertising and
sales literature to send an investment strategy guide, a tax
guide, or other supplemental information to investors and
shareholders. It may also mention the Stein Roe Counselor
[service mark] and the Stein Roe Counselor Preferred [service
mark] programs and asset allocation and other investment
strategies.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's
opinion as to the credit quality of the security being rated.
However, the ratings are general and are not absolute standards
of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Adviser believes that the quality of
debt securities in which a Fund invests should be continuously
reviewed and that individual analysts give different weightings
to the various factors involved in credit analysis. A rating is
not a recommendation to purchase, sell or hold a security
because it does not take into account market value or
suitability for a particular investor. When a security has
<PAGE> 30
received a rating from more than one service, each rating should
be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating
services from other sources that they consider reliable.
Ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of such information, or for other
reasons.
The following is a description of the characteristics of
ratings used by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P").
CORPORATE BOND RATINGS
RATINGS BY MOODY'S
AAA. Bonds rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements
are likely to change, such changes as can be visualized are more
unlikely to impair the fundamentally strong position of such
bonds.
AA. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
bonds.
A. Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA. Bonds rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
<PAGE> 31
CAA. Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
CA. Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the highest rated
issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated
categories.
BB, B, CCC, CC, AND C. Debt rated BB, B, CCC, CC or C is
regarded, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB indicates the lowest
degree of speculation and C the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears. The D rating also
is used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
NOTE: The ratings from AA to CCC may be modified by the
addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories. Foreign
<PAGE> 32
debt is rated on the same basis as domestic debt measuring the
creditworthiness of the issuer; ratings of foreign debt do not
take into account currency exchange and related uncertainties.
COMMERCIAL PAPER RATINGS
RATINGS BY MOODY'S
Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial
paper obligations are supported by the credit of another entity
or entities, Moody's, in assigning ratings to such issuers,
evaluates the financial strength of the indicated affiliated
corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the
total rating assessment.
RATINGS BY S&P
A brief description of the applicable rating symbols and
their meaning follows:
A. Issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3
to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues
determined to possess overwhelming safety characteristics will
be denoted with a plus (+) sign designation.
____________________
<PAGE> 1
Statement of Additional Information Dated July 1, 1996
STEIN ROE INCOME TRUST
BOND FUNDS
STEIN ROE LIMITED MATURITY INCOME FUND
STEIN ROE GOVERNMENT INCOME FUND
STEIN ROE INTERMEDIATE BOND FUND
STEIN ROE INCOME FUND
P.O. Box ______, Chicago, Illinois 60680
800-338-2550
The Funds listed above are series of the Stein Roe Income
Trust (the "Trust"). Each series of the Trust represents shares
of beneficial interest in a separate portfolio of securities and
other assets, with its own objectives and policies.
This Statement of Additional Information is not a
prospectus but provides additional information that should be
read in conjunction with Funds' Prospectus dated July 1, 1996
and any supplements thereto. The Prospectus may be obtained at
no charge by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History..........................2
Investment Policies......................................3
Limited Maturity Income Fund........................3
Government Income Fund..............................5
Intermediate Bond Fund..............................6
Income Fund.........................................7
Portfolio Investments and Strategies.....................9
Investment Restrictions.................................24
Additional Investment Considerations....................27
Purchases and Redemptions...............................28
Management..............................................29
Financial Statements....................................32
Principal Shareholders..................................32
Investment Advisory Services............................33
Distributor.............................................36
Transfer Agent..........................................36
Custodian...............................................37
Independent Auditors....................................37
Portfolio Transactions..................................38
Additional Income Tax Considerations....................40
Investment Performance..................................40
Appendix--Ratings.......................................46
<PAGE> 2
GENERAL INFORMATION AND HISTORY
Stein Roe & Farnham Incorporated (the "Adviser") is
investment adviser and provides administrative and accounting
and recordkeeping services to the Funds.
As used herein, "Limited Maturity Income Fund" refers to
the series of the Trust designated Stein Roe Limited Maturity
Income Fund, "Government Income Fund" refers to the series of
the Trust designated Stein Roe Government Income Fund,
"Intermediate Bond Fund" refers to the series of the Trust
designated Stein Roe Intermediate Bond Fund, and "Income Fund"
refers to the series of the Trust designated Stein Roe Income
Fund.
Currently six series are authorized and outstanding. On
November 1, 1995, the name of the Trust was changed from
SteinRoe Income Trust to Stein Roe Income Trust. Prior to
November 1, 1995, Limited Maturity Income Fund, Government
Income Fund, Intermediate Bond Fund and Income Fund were named
SteinRoe Limited Maturity Income Fund, SteinRoe Government
Income Fund, SteinRoe Intermediate Bond Fund and SteinRoe Income
Fund, respectively. Prior to April 2, 1990, SteinRoe Government
Income Fund was named SteinRoe Governments Plus and SteinRoe
Intermediate Bond Fund was named SteinRoe Managed Bonds.
SteinRoe Income Fund was named SteinRoe High-Yield Bonds prior
to November 1, 1989.
Each share of a series is entitled to participate pro rata
in any dividends and other distributions declared by the Board
on shares of that series, and all shares of a series have equal
rights in the event of liquidation of that series.
Each whole share (or fractional share) outstanding on the
record date established in accordance with the By-Laws shall be
entitled to a number of votes on any matter on which it is
entitled to vote equal to the net asset value of the share (or
fractional share) in United States dollars determined at the
close of business on the record date (for example, a share
having a net asset value of $10.50 would be entitled to 10.5
votes). As a business trust, the Trust is not required to hold
annual shareholder meetings. However, special meetings may be
called for purposes such as electing or removing trustees,
changing fundamental policies, or approving an investment
advisory contract. If requested to do so by the holders of at
least 10% of the Trust's outstanding shares, the Trust will call
a special meeting for the purpose of voting upon the question of
removal of a trustee or trustees and will assist in the
communications with other shareholders as required by Section
16(c) of the Investment Company Act of 1940. All shares of the
Trust are voted together in the election of trustees. On any
other matter submitted to a vote of shareholders, shares are
voted by individual series and not in the aggregate, except that
shares are voted in the aggregate when required by the
Investment Company Act of 1940 or other applicable law. When
the Board of Trustees determines that the matter affects only
the interests of one or more series, shareholders of the
unaffected series are not entitled to vote on such matters.
<PAGE> 3
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND
STRUCTURE
Each Fund may in the future seek to achieve its investment
objective by pooling its assets with assets of other mutual
funds managed by the Adviser in another mutual fund having the
same investment objective and substantially the same investment
policies and restrictions as the Fund. The Adviser is expected
to manage any such mutual fund in which a Fund would invest.
Such investment would be subject to determination by the
trustees that it was in the best interests of the Fund and its
shareholders, and shareholders would receive advance notice of
any such change. There are presently no plans to convert any
Fund to this type of structure.
INVESTMENT POLICIES
The following information supplements the discussion of the
Funds' respective investment objectives and policies described
in the Prospectus. In pursuing its objective, each Fund will
invest as described below and may employ the investment
techniques described in the Prospectus and elsewhere in this
Statement of Additional Information. Investments and strategies
that are common to two or more Funds are described under
Portfolio Investments and Strategies. Each Fund's investment
objective is a non-fundamental policy and may be changed by the
Board of Trustees without the approval of a "majority of the
outstanding voting securities" /1/ of that Fund.
LIMITED MATURITY INCOME FUND
The Fund's investment objective is to provide a high level
of current income, consistent with the preservation of capital.
The Fund attempts to achieve its objective by investing
primarily in securities issued or guaranteed as to principal and
interest by the U.S. Government or by its agencies or
instrumentalities ("U.S. Government Securities") and other high-
quality fixed-income securities. It is expected that under
normal circumstances, the Fund will invest at least 65% of its
assets in securities with an effective maturity of three years
or less, and that the dollar-weighted average effective maturity
of the portfolio will not exceed three years. The effective
maturity of a debt instrument is the weighted average period
over which the Adviser expects the principal to be paid, and
differs from stated maturity in that it estimates the effect of
expected principal prepayments and call provisions. With
respect to GNMA securities and other mortgage-backed securities,
the effective maturity is likely to be substantially less than
the stated maturity of the mortgages in the underlying pools.
With respect to obligations with call provisions, the effective
maturity is typically the next call date on which the obligation
reasonably may be expected to be called. Securities without
prepayment or call provisions generally have an effective
maturity equal to their stated maturity. During periods of
rising interest rates, the effective maturity of mortgage-backed
securities and callable obligations may increase substantially
because they are not likely to be prepaid, which may result in
greater net asset value fluctuation.
- -----------------
/1/ A "majority of the outstanding voting securities" means the
approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (ii)
more than 50% of the outstanding shares of the Fund.
- -----------------
<PAGE> 4
U.S. Government Securities include: (i) bills, notes,
bonds, and other debt securities, differing as to maturity and
rates of interest, that are issued by and are direct obligations
of the U.S. Treasury; and (ii) other securities that are issued
or guaranteed as to principal and interest by the U.S.
Government or by its agencies or instrumentalities and that
include, but are not limited to, Government National Mortgage
Association ("GNMA"), Federal Farm Credit Banks, Federal Home
Loan Banks, Farmers Home Administration, Federal Home Loan
Mortgage Corporation ("FHLMC"), and Federal National Mortgage
Association ("FNMA").
In addition, the Fund may invest in principal portions or
coupon portions of U.S. Government Securities that have been
separated (stripped) by banks, brokerage firms, or other
entities./2/ Stripped securities are usually sold separately in
the form of receipts or certificates representing undivided
interests in the stripped portion and are not considered to be
issued or guaranteed by the U.S. Government. Stripped
securities may be more volatile than non-stripped securities.
U.S. Government Securities are generally viewed by the Adviser
as being among the safest of debt securities with respect to the
timely payment of principal and interest (but not with respect
to any premium paid on purchase), but generally bear a lower
rate of interest than corporate debt securities. However, they
are subject to market risk like other debt securities, and
therefore the Fund's shares can be expected to fluctuate in
value.
Depending on market conditions, the Fund may invest a
substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC. Securities issued
by GNMA represent an interest in a pool of mortgages insured by
the Federal Housing Administration or the Farmers Home
Administration, or guaranteed by the Veterans Administration.
Securities issued by FNMA and FHLMC, U.S. Government-sponsored
corporations, also represent an interest in a pool of mortgages.
The timely payment of principal and interest on GNMA
securities is guaranteed by GNMA and backed by the full faith
and credit of the U.S. Treasury. FNMA guarantees full and
timely payment of interest and principal on FNMA securities.
FHLMC guarantees timely payment of interest and ultimate
collection of principal on FHLMC securities. FNMA and FHLMC
securities are not backed by the full faith and credit of the
U.S. Treasury.
Mortgage-backed debt securities, such as those issued by
GNMA, FNMA, and FHLMC, are of the "modified pass-through type,"
which means the interest and principal payments on mortgages in
the pool are "passed through" to investors. During periods of
declining interest rates, there is increased likelihood that
mortgages will be prepaid, with a resulting loss of the full-
term benefit of any premium paid by the Fund on purchase of such
securities; in addition, the proceeds of prepayment would likely
be invested at lower interest rates.
- ------------------------
/2/ The Trust has been informed that, in the view of the staff
of the Securities and Exchange Commission, any U.S. Government
Security that is stripped into its constituent elements by a
holder of the security is per se illiquid and therefore subject
to the Fund's restriction on investments in illiquid securities.
- ------------------------
<PAGE> 5
The Fund may also invest in other types of debt securities;
however, under normal circumstances, at least 65% of the Fund's
assets will be invested in U.S. Government Securities, non-U.S.
Government Securities that are rated at least AA by Standard &
Poor's Corporation ("S&P") or Aa by Moody's Investors Service,
Inc. ("Moody's"), and high-quality money market instruments.
The Fund may invest up to 35% of its assets in other debt
securities that are rated at least investment grade (BBB by S&P
or Baa by Moody's). Securities rated BBB by S&P or Baa by
Moody's are neither highly protected nor poorly secured. Such
securities have some speculative characteristics, and changes in
economic conditions or other circumstances are more likely to
lead to a weakened capacity of the issuers of such securities to
make principal and interest payments than is the case for
issuers of higher grade securities. If the rating of a security
held by the Fund is lost or reduced below investment grade, the
Fund is not required to dispose of the security, but the Adviser
will consider that fact in determining whether the Fund should
continue to hold the security.
GOVERNMENT INCOME FUND
This Fund's investment objective is to provide a high level
of current income. It invests primarily in U.S. Government
Securities.
Because the Fund's investment policy permits it to invest
in U.S. Government Securities that are not backed by the full
faith and credit of the U.S. Treasury, investment in the Fund
may involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and
interest on the securities in the Fund's portfolio that are
supported only by the issuing or guaranteeing U.S. Government
agency or instrumentality since the Fund must look principally
or solely to that entity for ultimate repayment.
Depending on market conditions, the Fund may invest a
substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC.
Under normal market conditions, the Fund will invest at
least 80% of its assets in U.S. Government Securities. The Fund
may also invest up to 20% of its assets in other types of debt
securities, including collateralized mortgage obligations
("CMOs") and in principal portions or coupon portions of U.S.
Government Securities that have been separated (stripped) by
banks, brokerage firms, or other entities. CMOs are securities
collateralized by mortgages and mortgage-backed securities.
CMOs are not guaranteed by either the U.S. Government or by its
agencies or instrumentalities. Stripped securities are usually
sold separately in the form of receipts or certificates
representing undivided interests in the stripped portion.
Stripped securities may be more volatile than non-stripped
securities. The staff of the Securities and Exchange Commission
believes that stripped securities are illiquid. The Fund has
temporarily agreed to treat stripped securities as subject to
the Fund's restriction on investment in illiquid securities.
The Fund will invest in debt securities rated at least
investment grade or, if unrated, deemed by the Adviser to be of
comparable quality. Securities rated in the fourth grade are
neither highly protected nor poorly
<PAGE> 6
secured. Such securities have some speculative characteristics,
and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity of the issuers of
such securities to make principal and interest payments than is
the case for issuers of higher grade securities. If the rating
of a security held by the Fund is lost or reduced below
investment grade, the Fund is not required to dispose of the
security, but the Adviser will consider that fact in determining
whether the Fund should continue to hold the security.
INTERMEDIATE BOND FUND
This Fund's investment objective is to provide a high level
of current income, consistent with the preservation of capital,
by investing primarily in marketable debt securities. Under
normal market conditions, the Fund will invest at least 65% of
the value of its total assets (taken at market value at the time
of investment) in convertible and non-convertible bonds and
debentures, and at least 60% of its assets will be invested in
the following:
(1) Marketable straight-debt securities of domestic issuers,
and of foreign issuers payable in U.S. dollars, rated at time
of purchase within the three highest grades assigned by
Moody's Investors Service, Inc. ("Moody's") (Aaa, Aa, or A)
or by Standard & Poor's Corporation ("S&P") (AAA, AA, or A);
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P
at time of purchase, or, if unrated, issued or guaranteed by
a corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements /3/,
of banks having total assets in excess of $1 billion.
Under normal market conditions, the Fund invests at least
65% of its assets in securities with an average life of between
three and ten years, and expects that the dollar-weighted
average life of its portfolio will be between three and ten
years. Average life is the weighted average period over which
the Adviser expects the principal to be paid, and differs from
stated maturity in that it estimates the effect of expected
principal prepayments and call provisions. With respect to GNMA
securities and other mortgage-backed securities, average life is
likely to be substantially less than the stated maturity of the
mortgages in the underlying pools. With respect to obligations
with call provisions, average life is typically the next call
date on which the obligation reasonably may be expected to be
called. Securities without prepayment or call provisions
generally have an average life equal to their stated maturity.
During periods of rising interest rates, the average life of
mortgage-backed securities and callable obligations may increase
substantially because they are not likely to be prepaid, which
may result in greater net asset value fluctuation.
- ------------------
/3/ A repurchase agreement involves the sale of securities to
the Fund, with the concurrent agreement of the seller to
repurchase the securities at the same price plus an amount equal
to an agreed-upon interest rate, within a specified time. In
the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and losses.
- ------------------
<PAGE> 7
The Fund also may invest in other debt securities
(including those convertible into, or carrying warrants to
purchase, common stocks or other equity interests, and privately
placed debt securities); preferred stocks (including those
convertible into, or carrying warrants to purchase, common
stocks or other equity interests); and marketable common stocks
that the Adviser considers likely to yield relatively high
income in relation to cost.
Lower-quality debt securities (often referred to as "below
investment grade" or "junk bonds") are obligations of issuers
that are predominantly speculative with respect to the issuer's
capacity to pay interest and repay principal. The Fund may
invest in lower-quality debt securities; for example, if the
Adviser believes the financial condition of the issuers or the
protection offered to the particular obligations is stronger
than is indicated by low ratings or otherwise.
Some issuers of debt securities choose not to have their
securities rated by a rating service, and the Fund may invest in
unrated securities that the Adviser believes are suitable for
investment.
Investment in lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely
disrupt the market for these securities and adversely affect the
value of outstanding bonds and the ability of the issuers to
repay principal and interest. In addition, lower-quality bonds
are less sensitive to interest rate changes than higher-quality
instruments (see Risks and Investment Considerations in the
Prospectus) and generally are more sensitive to adverse economic
changes or individual corporate developments. During a period
of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty
in servicing their principal and interest payment obligations.
Lower-quality debt securities tend to be less marketable
than higher-quality debt securities because the market for them
is less broad. The market for unrated debt securities is even
narrower. During periods of thin trading in these markets, the
spread between bid and asked prices is likely to increase
significantly, and the Fund may have greater difficulty selling
its portfolio securities. (See Net Asset Value.) The market
value of these securities and their liquidity may be affected by
adverse publicity and investor perceptions.
INCOME FUND
The Income Fund attempts to achieve its objective by
investing principally in medium-quality debt securities, which
are obligations of issuers that the Adviser believes possess
adequate, but not outstanding, capacities to service their debt
securities, such as securities rated A or Baa by Moody's or A or
BBB by S&P. The Adviser generally attributes to medium-quality
securities the same characteristics as do rating services.
Although the Income Fund will invest at least 60% of its
assets in medium- or higher-quality securities, the Income Fund
may also invest to a lesser extent in
<PAGE> 8
securities of lower quality (in the case of rated securities,
having a rating by Moody's or S&P of not less than C). Although
the Fund can invest up to 40% of its assets in lower-quality
securities, it does not intend to invest more than 35% in lower-
quality securities. Lower-quality debt securities are
obligations of issuers that are predominantly speculative with
respect to the issuer's capacity to pay interest and repay
principal. The Income Fund may invest in lower-quality debt
securities; for example, if the Adviser believes the financial
condition of the issuers or the protection offered to the
particular obligations is stronger than is indicated by low
ratings or otherwise. The Income Fund may invest in higher-
quality securities; for example, under extraordinary economic or
financial market conditions, or when the spreads between the
yields on medium- and high-quality securities are relatively
narrow.
Some issuers of debt securities choose not to have their
securities rated by a rating service, and the Income Fund may
invest in unrated securities that the Adviser believes are
suitable for investment.
Investment in medium- or lower-quality debt securities
involves greater investment risk, including the possibility of
issuer default or bankruptcy. An economic downturn could
severely disrupt the market for these securities and adversely
affect the value of outstanding bonds and the ability of the
issuers to repay principal and interest. In addition, lower-
quality bonds are less sensitive to interest rate changes than
higher-quality instruments (see Risks and Investment
Considerations in the Prospectus) and generally are more
sensitive to adverse economic changes or individual corporate
developments. During a period of adverse economic changes,
including a period of rising interest rates, issuers of such
bonds may experience difficulty in servicing their principal and
interest payment obligations.
Achievement of the Income Fund's investment objective will
be more dependent on the Adviser's credit analysis than would be
the case if the Income Fund were investing in higher-quality
debt securities. Since the ratings of rating services (which
evaluate the safety of principal and interest payments, not
market risks) are used only as preliminary indicators of
investment quality, the Adviser employs its own credit research
and analysis, from which it has developed a credit rating system
based upon comparative credit analyses of issuers within the
same industry. These analyses may take into consideration such
quantitative factors as an issuer's present and potential
liquidity, profitability, internal capability to generate funds,
debt/equity ratio and debt servicing capabilities, and such
qualitative factors as an assessment of management, industry
characteristics, accounting methodology, and foreign business
exposure.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and the Income Fund may have greater
difficulty selling its portfolio securities. (See Net Asset
Value.) The market value of these securities and their
liquidity may be affected by adverse publicity and investor
perceptions.
<PAGE> 9
Under normal market conditions, the Income Fund will invest
at least 65% of the value of its total assets (taken at market
value) in convertible and non-convertible bonds and debentures.
Such securities may be accompanied by the right to acquire
equity securities evidenced by warrants attached to the security
or acquired as part of a unit with the security. Equity
securities acquired by conversion or exercise of such a right
may be retained by the Income Fund for a sufficient time to
permit orderly disposition thereof or to establish long-term
holding periods for federal income tax purposes.
The Income Fund may invest up to 35% of its total assets in
other debt securities, marketable preferred and common stocks,
and foreign and municipal securities that the Adviser considers
likely to yield relatively high income in relation to costs, and
rights to acquire such securities. (Municipal securities are
securities issued by or on behalf of state and local
governments, the interest on which is generally exempt from
federal income tax.) Any assets not otherwise invested may be
invested in money market instruments.
PORTFOLIO INVESTMENTS AND STRATEGIES
DERIVATIVES
Consistent with its objective, each Fund may invest in a
broad array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security
index, an interest rate, or a currency ("Derivatives").
Derivatives are most often used to manage investment risk
or to create an investment position indirectly because it is
more efficient or less costly than direct investment that cannot
be readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and
directions of movements in security prices, interest rates and
other market factors affecting the Derivative itself or the
value of the underlying asset or benchmark. In addition,
correlations in the performance of an underlying asset to a
Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well
regulated and may be less marketable than exchange-traded
Derivatives.
Income Fund does not currently intend to invest, nor has
the Fund during its past fiscal year invested, more than 5% of
its net assets in any type of Derivative, except options,
futures contracts, and futures options. Each of Government
Income Fund and Intermediate Bond Fund does not currently intend
to invest, nor has such Fund during its past fiscal year
invested, more than 5% of its net assets in any type of
Derivative except options, futures contracts, futures options
and obligations collateralized by either mortgages or other
assets. Limited Maturity Income Fund does not
<PAGE> 10
currently intend to invest, nor has the Fund during the past
fiscal year invested, more than 5% of its net assets in any type
of Derivatives except options, futures contracts, futures
options, obligations collateralized by either mortgages or other
assets, and floating rate instruments. (See Mortgage and Other
Asset-Backed Securities, Floating Rate Instruments, and Options
and Futures below.)
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
Each of Limited Maturity Income Fund, Government Income
Fund, and Intermediate Bond Fund may invest in securities
secured by mortgages or other assets such as automobile or home
improvement loans and credit card receivables. These
instruments may be issued or guaranteed by the U.S. Government
or by its agencies or instrumentalities or by private entities
such as commercial, mortgage and investment banks and financial
companies or financial subsidiaries of industrial companies.
Mortgage-backed securities provide either a pro rata
interest in underlying mortgages or an interest in
collateralized mortgage obligations ("CMOs") which represent a
right to interest and/or principal payments from an underlying
mortgage pool. CMOs are not guaranteed by either the U.S.
Government or by its agencies or instrumentalities, and are
usually issued in multiple classes each of which has different
payment rights, pre-payment risks and yield characteristics.
Mortgage-backed securities involve the risk of pre-payment on
the underlying mortgages at a faster or slower rate than the
established schedule. Pre-payments generally increase with
falling interest rates and decrease with rising rates but they
also are influenced by economic, social and market factors. If
mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit
of any premium paid by the Fund on purchase of the CMO, and the
proceeds of pre-payment would likely be invested at lower
interest rates. The Funds tend to invest in CMOs of classes
known as planned amortization classes ("PACs") which have pre-
payment protection features tending to make them less
susceptible to price volatility.
Non-mortgage asset-backed securities usually have less pre-
payment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
FLOATING RATE INSTRUMENTS
Limited Maturity Income Fund may also invest in floating
rate instruments which provide for periodic adjustments in
coupon interest rates that are automatically reset based on
changes in amount and direction of specified market interest
rates. In addition, the adjusted duration of some of these
instruments may be materially shorter than their stated
maturities. To the extent such instruments are subject to
lifetime or periodic interest rate caps or floors, such
instruments may experience greater price volatility than debt
instruments without such features. Adjusted duration is an
inverse relationship between market price and interest rates and
refers to the approximate percentage change in price for a 100
basis point change in yield. For
<PAGE> 11
example, if interest rates decrease by 100 basis points, a
market price of a security with an adjusted duration of 2 would
increase by approximately 2%.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (7) under Investment Restrictions,
each Fund may lend its portfolio securities to broker-dealers
and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the market value of the
securities loaned by a Fund. The Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer
on the securities loaned, and would also receive an additional
return that may be in the form of a fixed fee or a percentage of
the collateral. The Fund would have the right to call the loan
and obtain the securities loaned at any time on notice of not
more than five business days. In the event of bankruptcy or
other default of the borrower, the Fund could experience both
delays in liquidating the loan collateral or recovering the
loaned securities and losses including (a) possible decline in
the value of the collateral or in the value of the securities
loaned during the period while the Fund seeks to enforce its
rights thereto, (b) possible subnormal levels of income and lack
of access to income during this period, and (c) expenses of
enforcing its rights.
None of the Funds has loaned portfolio securities during
its last fiscal year, nor does it intend to loan more than 5% of
its net assets.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE
AGREEMENTS
Each of the Funds may purchase securities on a when-issued
or delayed-delivery basis, as described in the Prospectus. A
Fund makes such commitments only with the intention of actually
acquiring the securities, but may sell the securities before
settlement date if the Adviser deems it advisable for investment
reasons. Securities purchased on a when-issued or delayed-
delivery basis are sometimes done on a "dollar roll" basis.
Dollar roll transactions consist of the sale by a Fund of
securities with a commitment to purchase similar but not
identical securities, generally at a lower price at a future
date. A dollar roll may be renewed after cash settlement and
initially may involve only a firm commitment agreement by a Fund
to buy a security. A dollar roll transaction involves the
following risks: if the broker-dealer to whom a Fund sells the
security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the
security may change adversely over the term of the dollar roll;
the security which a Fund is required to repurchase may be worth
less than a security which the Fund originally held; and the
return earned by a Fund with the proceeds of a dollar roll may
not exceed transaction costs.
Each of the Funds may enter into reverse repurchase
agreements with banks and securities dealers. A reverse
repurchase agreement is a repurchase agreement in which the Fund
is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of securities because it avoids
certain market risks and transaction costs.
<PAGE> 12
At the time a Fund enters into a binding obligation to
purchase securities on a when-issued basis or enters into a
reverse repurchase agreement, liquid assets (cash, U.S.
Government or other "high grade" debt obligations) of the Fund
having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the books of
the Fund and held by the custodian throughout the period of the
obligation. The use of these investment strategies, as well as
borrowing under a line of credit as described below, may
increase net asset value fluctuation.
Standby commitment agreements create an additional risk for
each Fund because the other party to the standby agreement
generally will not be obligated to deliver the security, but the
Fund will be obligated to accept it if delivered. Depending on
market conditions, the Fund may receive a commitment fee for
assuming this obligation. If prevailing market interest rates
increase during the period between the date of the agreement and
the settlement date, the other party can be expected to deliver
the security and, in effect, pass any decline in value to the
Fund. If the value of the security increases after the
agreement is made, however, the other party is unlikely to
deliver the security. In other words, a decrease in the value
of the securities to be purchased under the terms of a standby
commitment agreement will likely result in the delivery of the
security, and, therefore, such decrease will be reflected in the
Fund's net asset value. However, any increase in the value of
the securities to be purchased will likely result in the non-
delivery of the security and, therefore, such increase will not
affect the net asset value unless and until the Fund actually
obtains the security.
SHORT SALES
Each Fund may make short sales "against the box." In a
short sale, the Fund sells a borrowed security and is required
to return the identical security to the lender. A short sale
"against the box" involves the sale of a security with respect
to which the Fund already owns an equivalent security in kind
and amount. A short sale "against the box" enables a Fund to
obtain the current market price of a security which it desires
to sell but is unavailable for settlement.
LINE OF CREDIT
Subject to restriction (8) under Investment Restrictions,
each Fund may establish and maintain a line of credit with a
major bank in order to permit borrowing on a temporary basis to
meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of
portfolio securities.
PIK AND ZERO COUPON BONDS
Each Fund may invest in both zero coupon bonds and bonds
the interest on which is payable in kind ("PIK bonds"). A zero
coupon bond is a bond that does not pay interest for its entire
life. A PIK bond pays interest in the form of additional
securities. The market prices of both zero coupon and PIK bonds
are affected to a greater extent by changes in prevailing levels
of interest rates and thereby tend to be more volatile in price
than securities that pay interest periodically and in cash. In
<PAGE> 13
addition, because a Fund accrues income with respect to these
securities prior to the receipt of such interest in cash, it may
have to dispose of portfolio securities under disadvantageous
circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax
consequences.
RATED SECURITIES
For a description of the ratings applied by rating services
to debt securities, please refer to the Appendix. The rated
debt securities described under Investment Policies above for
each Fund include securities given a rating conditionally by
Moody's or provisionally by S&P. If the rating of a security
held by a Fund is withdrawn or reduced, the Fund is not required
to sell the security, but the Adviser will consider such fact in
determining whether that Fund should continue to hold the
security. To the extent that the ratings accorded by Moody's or
S&P for debt securities may change as a result of changes in
such organizations, or changes in their rating systems, each
Fund will attempt to use comparable ratings as standards for its
investments in debt securities in accordance with its investment
policies.
FOREIGN SECURITIES
Each of Limited Maturity Income Fund, Intermediate Bond
Fund, and Income Fund may invest up to 25% of total assets
(taken at market value at the time of investment) in securities
of foreign issuers that are not publicly traded in the United
States ("foreign securities"). For purposes of these limits,
foreign securities do not include securities represented by
American Depositary Receipts ("ADRs"), securities denominated in
U.S. dollars, or securities guaranteed by U.S. persons.
Investment in foreign securities may involve a greater degree of
risk (including risks relating to exchange fluctuations, tax
provisions, or expropriation of assets) than does investment in
securities of domestic issuers.
Such Funds may invest in both "sponsored" and "unsponsored"
ADRs. In a sponsored ADR, the issuer typically pays some or all
of the expenses of the depositary and agrees to provide its
regular shareholder communications to ADR holders. An
unsponsored ADR is created independently of the issuer of the
underlying security. The ADR holders generally pay the expenses
of the depositary and do not have an undertaking from the issuer
of the underlying security to furnish shareholder
communications. No Fund expects to invest as much as 5% of its
total assets in unsponsored ADRs.
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, the Funds'
investment performance is affected by the strength or weakness
of the U.S. dollar against these currencies. For example, if
the dollar falls in value relative to the Japanese yen, the
dollar value of a yen-denominated stock held in the portfolio
will rise even though the price of the stock remains unchanged.
Conversely, if the dollar rises in value relative to the yen,
the dollar value of the yen-denominated stock will fall. (See
discussion of transaction hedging and portfolio hedging under
Currency Exchange Transactions.)
<PAGE> 14
Investors should understand and consider carefully the
risks involved in foreign investing. Investing in foreign
securities, positions in which are generally denominated in
foreign currencies, and utilization of forward foreign currency
exchange contracts involve certain considerations comprising
both risks and opportunities not typically associated with
investing in U.S. securities. These considerations include:
fluctuations in exchange rates of foreign currencies; possible
imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to
the United States; less public information with respect to
issuers of securities; less governmental supervision of stock
exchanges, securities brokers, and issuers of securities; lack
of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading
practices; less liquidity and frequently greater price
volatility in foreign markets than in the United States;
possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational,
and financial protections applicable to foreign sub-custodial
arrangements.
Although the Funds will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment
in these nations.
Currency Exchange Transactions. Currency exchange
transactions may be conducted either on a spot (i.e., cash)
basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward
contracts are contractual agreements to purchase or sell a
specified currency at a specified future date (or within a
specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks
and broker-dealers, are not exchange traded, and are usually for
less than one year, but may be renewed.
The Funds' foreign currency exchange transactions are
limited to transaction and portfolio hedging involving either
specific transactions or portfolio positions, except to the
extent described below under Synthetic Foreign Positions.
Transaction hedging is the purchase or sale of forward contracts
with respect to specific receivables or payables of a Fund
arising in connection with the purchase and sale of its
portfolio securities. Portfolio hedging is the use of forward
contracts with respect to portfolio security positions
denominated or quoted in a particular foreign currency.
Portfolio hedging allows the Fund to limit or reduce its
exposure in a foreign currency by entering into a forward
contract to sell such foreign currency (or another foreign
currency that acts as a proxy for that currency) at a future
date for a price payable in U.S. dollars so that the value of
the foreign-denominated portfolio securities can be
approximately matched by a foreign-denominated liability. A
Fund may not engage in portfolio hedging with respect to the
currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in that
particular
<PAGE> 15
currency, except that a Fund may hedge all or part of its
foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case,
a Fund may enter into a forward contract where the amount of the
foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering
into separate forward contracts for each currency held in a
Fund. No Fund may engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a
particular currency, a Fund may either sell the portfolio
security related to such contract and make delivery of the
currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual
obligation to deliver the currency by purchasing an offsetting
contract with the same currency trader obligating it to purchase
on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for a Fund
to purchase additional currency on the spot market (and bear the
expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to
deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to
sell on the spot market some of the currency received upon the
sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss to
the extent that there has been movement in forward contract
prices. If a Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period
between a Fund's entering into a forward contract for the sale
of a currency and the date it enters into an offsetting contract
for the purchase of the currency, the Fund will realize a gain
to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, a Fund will suffer a loss to the
extent the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell. A
default on the contract would deprive a Fund of unrealized
profits or force the Fund to cover its commitments for purchase
or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does
not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the
value of the hedged currency should rise. Moreover, it may not
be possible for a Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. The cost to a Fund of engaging in currency
exchange transactions varies with such factors as the currency
involved, the length of the contract period, and prevailing
<PAGE> 16
market conditions. Since currency exchange transactions are
usually conducted on a principal basis, no fees or commissions
are involved.
Synthetic Foreign Positions. The Funds may invest in debt
instruments denominated in foreign currencies. In addition to,
or in lieu of, such direct investment, a Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars, and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of
exchange. Because of the availability of a variety of highly
liquid U.S. dollar debt instruments, a synthetic foreign
position utilizing such U.S. dollar instruments may offer
greater liquidity than direct investment in foreign currency
debt instruments. The results of a direct investment in a
foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield
and gain or loss from changes in currency exchange rates, in
general should be similar, but would not be identical because
the components of the alternative investments would not be
identical.
The Funds may also construct a synthetic foreign position
by entering into a swap arrangement. A swap is a contractual
agreement between two parties to exchange cash flows--at the
time of the swap agreement and again at maturity, and, with some
swaps, at various intervals through the period of the agreement.
The use of swaps to construct a synthetic foreign position would
generally entail the swap of interest rates and currencies. A
currency swap is a contractual arrangement between two parties
to exchange principal amounts in different currencies at a
predetermined foreign exchange rate. An interest rate swap is a
contractual agreement between two parties to exchange interest
payments on identical principal amounts. An interest rate swap
may be between a floating and a fixed rate instrument, a
domestic and a foreign instrument, or any other type of cash
flow exchange. A currency swap generally has the same risk
characteristics as a forward currency contract, and all types of
swaps have counter-party risk. Depending on the facts and
circumstances, swaps may be considered illiquid. Illiquid
securities usually have greater investment risk and are subject
to greater price volatility. The net amount of the excess, if
any, of a Fund's obligations over which it is entitled to
receive with respect to an interest rate or currency swap will
be accrued daily and liquid assets (cash, U.S. Government
securities, or other "high grade" debt obligations) of the Fund
having a value at least equal to such accrued excess will be
segregated on the books of the Fund and held by the Custodian
for the duration of the swap.
The Funds may also construct a synthetic foreign position
by purchasing an instrument whose return is tied to the return
of the desired foreign position. An investment in these
"principal exchange rate linked securities" (often called PERLS)
can produce a similar return to a direct investment in a foreign
security.
RULE 144A SECURITIES
Each Fund may purchase securities that have been privately
placed but that are eligible for purchase and sale under Rule
144A under the 1933 Act. That Rule
<PAGE> 17
permits certain qualified institutional buyers, such as the
Fund, to trade in privately placed securities that have not been
registered for sale under the 1933 Act. The Adviser, under the
supervision of the Board of Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus
subject to the Fund's restriction of investing no more than 15%
of its net assets in illiquid securities. A determination of
whether a Rule 144A security is liquid or not is a question of
fact. In making this determination, the Adviser will consider
the trading markets for the specific security, taking into
account the unregistered nature of a Rule 144A security. In
addition, the Adviser could consider the (1) frequency of trades
and quotes, (2) number of dealers and potential purchasers, (3)
dealer undertakings to make a market, and (4) nature of the
security and of marketplace trades (e.g., the time needed to
dispose of the security, the method of soliciting offers, and
the mechanics of transfer). The liquidity of Rule 144A
securities would be monitored and, if as a result of changed
conditions, it is determined that a Rule 144A security is no
longer liquid, the Fund's holdings of illiquid securities would
be reviewed to determine what, if any, steps are required to
assure that the Fund does not invest more than 15% of its assets
in illiquid securities. Investing in Rule 144A securities could
have the effect of increasing the amount of the Fund's assets
invested in illiquid securities if qualified institutional
buyers are unwilling to purchase such securities. The Fund does
not expect to invest as much as 5% of its total assets in Rule
144A securities that have not been deemed to be liquid by the
Adviser.
PORTFOLIO TURNOVER
For information on the portfolio turnover rate of the
Funds, see Financial Highlights in the Prospectus. General
portfolio turnover information is also contained in the
Prospectus under Risks and Investment Considerations.
The portfolio turnover rates of Limited Maturity Income
Fund, Government Income Fund, and Intermediate Bond Fund have
been greater than 100% in recent fiscal years because of
increased volatility in the financial markets and the Adviser's
techniques for reacting to changes in the markets to shift
exposures to certain sectors and to capture gains. The turnover
rate for each of the Funds in the future may vary greatly from
year to year, and when portfolio changes are deemed appropriate
due to market or other conditions, such turnover rate may be
greater than might otherwise be anticipated. A high rate of
portfolio turnover may result in increased transaction expenses
and the realization of capital gains or losses. Distributions
of any net realized gains are subject to federal income tax.
(See Financial Highlights, Risks and Investment Considerations,
and Distributions and Income Taxes in the Prospectus, and
Additional Income Tax Considerations in this Statement of
Additional Information.)
OPTIONS ON SECURITIES AND INDEXES
Each Fund may purchase and may sell both put options and
call options on debt or other securities or indexes in
standardized contracts traded on national securities exchanges,
boards of trade, or similar entities, or quoted on NASDAQ, and
agreements, sometimes called cash puts, that may accompany the
purchase of a new issue of bonds from a dealer.
<PAGE> 18
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium,
the right to buy from (call) or sell to (put) the seller
(writer) of the option the security underlying the option (or
the cash value of the index) at a specified exercise price at
any time during the term of the option. The writer of an option
on an individual security has the obligation upon exercise of
the option to deliver the underlying security upon payment of
the exercise price or to pay the exercise price upon delivery of
the underlying security. Upon exercise, the writer of an option
on an index is obligated to pay the difference between the cash
value of the index and the exercise price multiplied by the
specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial
or securities market, a specific group of financial instruments
or securities, or certain economic indicators.)
A Fund will write call options and put options only if they
are "covered." In the case of a call option on a security, the
option is "covered" if the Fund owns the security underlying the
call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if
additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by
its custodian) upon conversion or exchange of other securities
held in its portfolio.
If an option written by a Fund expires, the Fund realizes a
capital gain equal to the premium received at the time the
option was written. If an option purchased by a Fund expires,
the Fund realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, underlying security or
index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction
can be effected when the Fund desires.
A Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the
Fund will realize a capital loss. If the premium received from
a closing sale transaction is more than the premium paid to
purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. The principal
factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market
price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by a Fund is an asset of the
Fund, valued initially at the premium paid for the option. The
premium received for an option written by a Fund is recorded as
a deferred credit. The value of an option purchased or written
is marked-to-market daily and is valued at the closing price on
the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between
the last bid and asked prices.
<PAGE> 19
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options
on securities and on indexes. For example, there are
significant differences between the securities markets and
options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to
achieve its objectives. A decision as to whether, when and how
to use options involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist
when a Fund seeks to close out an option position. If a Fund
were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to
realize any profit or the option would expire and become
worthless. If a Fund were unable to close out a covered call
option that it had written on a security, it would not be able
to sell the underlying security until the option expired. As
the writer of a covered call option, a Fund foregoes, during the
option's life, the opportunity to profit from increases in the
market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund,
the Fund would not be able to close out the option. If
restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Fund may use interest rate futures contracts and index
futures contracts. An interest rate or index futures contract
provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument
or the cash value of an index /4/ at a specified price and time.
A public market exists in futures contracts covering a number of
indexes as well as the following financial instruments: U.S.
Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-
month U.S. Treasury bills; 90-day commercial paper; bank
certificates of deposit; Eurodollar certificates of deposit; and
foreign currencies. It is expected that other futures contracts
will be developed and traded.
The Funds may purchase and write call and put futures
options. Futures options possess many of the same
characteristics as options on securities and indexes (discussed
above). A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position
in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is
true. A Fund might, for example, use futures contracts to hedge
against
- -------------------
/4/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at
the close of the last trading day of the contract and the price
at which the index contract was originally written. Although
the value of a securities index is a function of the value of
certain specified securities, no physical delivery of those
securities is made.
- -------------------
<PAGE> 20
or gain exposure to fluctuations in the general level of
security prices, anticipated changes in interest rates or
currency fluctuations that might adversely affect either the
value of the Fund's securities or the price of the securities
that the Fund intends to purchase. Although other techniques
could be used to reduce that Fund's exposure to security price,
interest rate and currency fluctuations, the Fund may be able to
achieve its exposure more effectively and perhaps at a lower
cost by using futures contracts and futures options.
Each Fund will only enter into futures contracts and
futures options that are standardized and traded on an exchange,
board of trade, or similar entity, or quoted on an automated
quotation system.
The success of any futures transaction depends on the
Adviser correctly predicting changes in the level and direction
of security prices, interest rates, currency exchange rates and
other factors. Should those predictions be incorrect, a Fund's
return might have been better had the transaction not been
attempted; however, in the absence of the ability to use futures
contracts, the Adviser might have taken portfolio actions in
anticipation of the same market movements with similar
investment results but, presumably, at greater transaction
costs.
When a purchase or sale of a futures contract is made by a
Fund, the Fund is required to deposit with its custodian (or
broker, if legally permitted) a specified amount of cash or U.S.
Government securities or other securities acceptable to the
broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good
faith deposit on the futures contract that is returned to the
Fund upon termination of the contract, assuming all contractual
obligations have been satisfied. Each Fund expects to earn
interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each
day the Fund pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract.
This process is known as "marking-to-market." Variation margin
paid or received by a Fund does not represent a borrowing or
loan by a Fund but is instead settlement between the Fund and
the broker of the amount one would owe the other if the futures
contract had expired at the close of the previous trading day.
In computing daily net asset value, each Fund will mark-to-
market its open futures positions.
A Fund is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by
it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or
sales of matching futures contracts (same exchange, underlying
security or index, and delivery month). If an offsetting
purchase price is less than the
<PAGE> 21
original sale price, the Fund realizes a capital gain, or if it
is more, the Fund realizes a capital loss. Conversely, if an
offsetting sale price is more than the original purchase price,
the Fund realizes a capital gain, or if it is less, the Fund
realizes a capital loss. The transaction costs must also be
included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures
contracts and futures options as hedging techniques. A purchase
or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee
that there will be a correlation between price movements in the
futures contract and in the portfolio exposure sought. In
addition, there are significant differences between the
securities and futures markets that could result in an imperfect
correlation between the markets, causing a given transaction not
to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: variations in
speculative market demand for futures, futures options and debt
securities, including technical influences in futures trading
and futures options and differences between the financial
instruments and the instruments underlying the standard
contracts available for trading in such respects as interest
rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount
that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached
in a futures contract subject to the limit, no more trades may
be made on that day at a price beyond that limit. The daily
limit governs only price movements during a particular trading
day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable
positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of
positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist
at a time when a Fund seeks to close out a futures or a futures
option position. The Fund would be exposed to possible loss on
the position during the interval of inability to close and would
continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a
significant trading history. As a result, there can be no
assurance that an active secondary market will develop or
continue to exist.
<PAGE> 22
LIMITATIONS ON OPTIONS AND FUTURES
If other options, futures contracts, or futures options of
types other than those described herein are traded in the
future, each Fund may also use those investment vehicles,
provided the Board of Trustees determines that their use is
consistent with the Fund's investment objective.
A Fund will not enter into a futures contract or purchase
an option thereon if, immediately thereafter, the initial margin
deposits for futures contracts held by that Fund plus premiums
paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money,"/5/ would exceed 5%
of the Fund's total assets.
When purchasing a futures contract or writing a put on a
futures contract, a Fund must maintain with its custodian (or
broker, if legally permitted) cash or cash equivalents
(including any margin) equal to the market value of such
contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash
equivalents (including any margin) equal to the amount by which
such option is in-the-money until the option expires or is
closed out by the Fund.
A Fund may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market
value of all such open positions exceeds the current value of
the securities in its portfolio, plus or minus unrealized gains
and losses on the open positions, adjusted for the historical
relative volatility of the relationship between the portfolio
and the positions. For this purpose, to the extent the Fund has
written call options on specific securities in its portfolio,
the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being deemed a
"commodity pool operator," each Fund will use commodity futures
or commodity options contracts solely for bona fide hedging
purposes within the meaning and intent of Regulation 1.3(z), or,
with respect to positions in commodity futures and commodity
options contracts that do not come within the meaning and intent
of 1.3(z), the aggregate initial margin and premiums required to
establish such positions will not exceed 5% of the fair market
value of the assets of a Fund, after taking into account
unrealized profits and unrealized losses on any such contracts
it has entered into [in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount (as
defined in Section 190.01(x) of the Commission Regulations) may
be excluded in computing such 5%].
As long as a Fund continues to sell its shares in certain
states, the Fund's
- ---------------
/5/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- ---------------
<PAGE> 23
options transactions will also be subject to certain non-
fundamental investment restrictions set forth under Investment
Restrictions in this Statement of Additional Information.
TAXATION OF OPTIONS AND FUTURES
If a Fund exercises a call or put option that it holds, the
premium paid for the option is added to the cost basis of the
security purchased (call) or deducted from the proceeds of the
security sold (put). For cash settlement options and futures
options exercised by a Fund, the difference between the cash
received at exercise and the premium paid is a capital gain or
loss.
If a call or put option written by a Fund is exercised, the
premium is included in the proceeds of the sale of the
underlying security (call) or reduces the cost basis of the
security purchased (put). For cash settlement options and
futures options written by a Fund, the difference between the
cash paid at exercise and the premium received is a capital gain
or loss.
Entry into a closing purchase transaction will result in
capital gain or loss. If an option written by a Fund was in-
the-money at the time it was written and the security covering
the option was held for more than the long-term holding period
prior to the writing of the option, any loss realized as a
result of a closing purchase transaction will be long-term. The
holding period of the securities covering an in-the-money option
will not include the period of time the option is outstanding.
A futures contract held until delivery results in capital
gain or loss equal to the difference between the price at which
the futures contract was entered into and the settlement price
on the earlier of delivery notice date or expiration date. If a
Fund delivers securities under a futures contract, the Fund also
realizes a capital gain or loss on those securities.
For federal income tax purposes, a Fund generally is
required to recognize as income for each taxable year its net
unrealized gains and losses as of the end of the year on
options, futures and futures options positions ("year-end mark-
to-market"). Generally, any gain or loss recognized with
respect to such positions (either by year-end mark-to-market or
by actual closing of the positions) is considered to be 60%
long-term and 40% short-term, without regard to the holding
periods of the contracts. However, in the case of positions
classified as part of a "mixed straddle," the recognition of
losses on certain positions (including options, futures and
futures options positions, the related securities and certain
successor positions thereto) may be deferred to a later taxable
year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures put
options) that are intended to hedge against a change in the
value of securities held by a Fund: (1) will affect the holding
period of the hedged securities; and (2) may cause unrealized
gain or loss on such securities to be recognized upon entry into
the hedge.
In order for a Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived
<PAGE> 24
from loans of securities, and gains from the sale of securities
or foreign currencies or other income (including but not limited
to gains from options, futures, and forward contracts). In
addition, gains realized on the sale or other disposition of
securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. Any net gain
realized from futures (or futures options) contracts will be
considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement. In order
to avoid realizing excessive gains on securities held less than
three months, the Fund may be required to defer the closing out
of certain positions beyond the time when it would otherwise be
advantageous to do so.
Each Fund distributes to shareholders annually any net
capital gains that have been recognized for federal income tax
purposes (including year-end mark-to-market gains) on options
and futures transactions. Such distributions are combined with
distributions of capital gains realized on the Fund's other
investments and shareholders are advised of the nature of the
payments.
INVESTMENT RESTRICTIONS
Each Fund operates under the following investment
restrictions. A Fund may not:
(1) invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market
value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that
this restriction does not apply to U.S. Government Securities
and except that all or substantially all of the assets of the
Fund may be invested in another registered investment company
having the same investment objective and substantially similar
investment policies as the Fund;
(2) invest in a security if, with respect to 75% of the
Fund's assets, as a result of such investment, more than 5% of
its total assets (taken at market value at the time of such
investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities and except that all or substantially all of the
assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund;
(3) invest in a security if, as a result of such
investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one
issuer, except that all or substantially all of the assets of
the Fund may be invested in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein);
(5) [Government Income Fund only] purchase or sell
commodities or commodities contracts or oil, gas or mineral
programs, except that it may enter into futures
<PAGE> 25
and options on futures; [Limited Maturity Income Fund,
Intermediate Bond Fund and Income Fund only] purchase or sell
commodities or commodities contracts or oil, gas or mineral
programs, except that it may enter into (i) futures and options
on futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities, but it may make margin deposits in
connection with transactions in options, futures, and options on
futures;
(7) make loans, although the Fund may (a) lend portfolio
securities and participate in an interfund lending program with
other Stein Roe Funds provided that no such loan may be made if,
as a result, the aggregate of such loans would exceed 33 1/3% of
the value of the Fund's total assets (taken at market value at
the time of such loans); (b) purchase money market instruments
and enter into repurchase agreements; and (c) acquire publicly-
distributed or privately-placed debt securities;
(8) borrow except that the Fund may (a) borrow for non-
leveraging, temporary or emergency purposes, (b) engage in
reverse repurchase agreements and make other borrowings,
provided that the combination of (a) and (b) shall not exceed 33
1/3% of the value of the Fund's total assets (including the
amount borrowed) less liabilities (other than borrowings) or
such other percentage permitted by law, and (c) enter into
futures and options transactions; the Fund may borrow from
banks, other Stein Roe Funds, and other persons to the extent
permitted by applicable law;
(9) act as an underwriter of securities, except insofar as
it may be deemed to be an "underwriter" for purposes of the
Securities Act of 1933 on disposition of securities acquired
subject to legal or contractual restrictions on resale, except
that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund; or
(10) issue any senior security except to the extent
permitted under the Investment Company Act of 1940.
For each Fund, the above restrictions are fundamental
policies and may not be changed without the approval of a
"majority of the outstanding voting securities" of the Fund, as
previously defined herein. The policy on the scope of
transactions involving lending of portfolio securities to
broker-dealers and banks (as set forth herein under Investment
Techniques) is also a fundamental policy.
Each Fund is also subject to the following restrictions and
policies that may be changed by the Board of Trustees. Unless
otherwise indicated, a Fund may not: /6/
(A) invest for the purpose of exercising control or
management;
- ------------------------
/6/ None of the following restrictions shall prevent a Fund from
investing all or substantially all of its assets in another
investment company having the same investment objective and
substantially similar investment policies as the Fund.
- ------------------------
<PAGE> 26
(B) purchase more than 3% of the stock of another
investment company or purchase stock of other investment
companies equal to more than 5% of the Fund's total assets
(valued at time of purchase) in the case of any one other
investment company and 10% of such assets (valued at time of
purchase) in the case of all other investment companies in the
aggregate; any such purchases are to be made in the open market
where no profit to a sponsor or dealer results from the
purchase, other than the customary broker's commission, except
for securities acquired as part of a merger, consolidation or
acquisition of assets; /7/
(C) mortgage, pledge, hypothecate or in any manner
transfer, as security for indebtedness, any securities owned or
held by it, except as may be necessary in connection with (i)
borrowings permitted in (8) above and (ii) options, futures, and
options on futures;
(D) purchase or retain securities of any issuer if 5% of
the securities of such issuer are owned by those officers and
trustees or directors of the Trust or of its investment adviser
who each own beneficially more than l/2 of 1% of its securities;
(E) purchase portfolio securities for the Fund from, or
sell portfolio securities to, any of the officers and directors
or trustees of the Trust or of its investment adviser;
(F) purchase shares of other open-end investment
companies, except in connection with a merger, consolidation,
acquisition, or reorganization;
(G) invest more than 5% of its net assets (valued at time
of investment) in warrants, nor more than 2% of its net assets
in warrants which are not listed on the New York or American
stock exchange;
(H) purchase a put or call option if the aggregate
premiums paid for all put and call options exceed 20% of its net
assets (less the amount by which any such positions are in-the-
money), excluding put and call options purchased as closing
transactions;
(I) write an option on a security unless the option is
issued by the Options Clearing Corporation, an exchange, or
similar entity;
(J) buy or sell an option on a security, a futures
contract, or an option on a futures contract unless the option,
the futures contract, or the option on the futures contract is
offered through the facilities of a national securities
association or listed on a national exchange or similar entity;
(K) invest in limited partnerships in real estate unless
they are readily marketable;
- -----------------
/7/ The Funds have been informed that the staff of the
Securities and Exchange Commission takes the position that the
issuers of certain CMOs and certain other collateralized assets
are investment companies and that subsidiaries of foreign banks
may be investment companies for purposes of Section 12(d)(1) of
the Investment Company Act of 1940, which limits the ability of
one investment company to invest in another investment company.
Accordingly, the Funds intend to operate within the applicable
limitations under Section 12(d)(1)(A) of that Act.
- -----------------
<PAGE> 27
(L) sell securities short unless (i) the Fund owns or has
the right to obtain securities equivalent in kind and amount to
those sold short at no added cost or (ii) the securities sold
are "when issued" or "when distributed" securities which the
Fund expects to receive in a recapitalization, reorganization,
or other exchange for securities the Fund contemporaneously owns
or has the right to obtain and provided that transactions in
options, futures, and options on futures are not treated as
short sales;
(M) invest more than 5% of its total assets (taken at
market value at the time of a particular investment) in
securities of issuers (other than issuers of federal agency
obligations or securities issued or guaranteed by any foreign
country or asset-backed securities) that, together with any
predecessors or unconditional guarantors, have been in
continuous operation for less than three years ("unseasoned
issuers");
(N) [Government Income Fund, Intermediate Bond Fund and
Income Fund only] invest more than 15% of its total assets
(taken at market value at the time of a particular investment)
in restricted securities, other than securities eligible for
resale pursuant to Rule 144A under the Securities Act of 1933;
[Limited Maturity Income Fund only] invest more than 10% of its
total assets (taken at market value at the time of a particular
investment) in restricted securities, other than securities
eligible for resale pursuant to Rule 144A under the Securities
Act of 1933;
(O) invest more than 15% of its total assets (taken at
market value at the time of a particular investment) in
restricted securities /8/ and securities of unseasoned issuers;
or
(P) invest more than 10% of its net assets (taken at
market value at the time of a particular investment) in illiquid
securities, including repurchase agreements maturing in more
than seven days.
ADDITIONAL INVESTMENT CONSIDERATIONS
The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. It has worked
to build wealth for generations by being guided by three primary
objectives which it believes are the foundation of a successful
investment program. These objectives are preservation of
capital, limited volatility through managed risk, and consistent
above-average returns.
Because every investor's needs are different, Stein Roe
mutual funds are designed to accommodate different investment
objectives, risk tolerance levels, and time horizons. In
selecting a mutual fund, investors should ask the following
questions:
What are my investment goals?
- ----------------------
/8/ As long as it is required to do so by the Ohio Division of
Securities, the Trust will consider a security eligible for
resale pursuant to Rule 144A under the Securities Act of 1933 to
be a restricted security.
- ----------------------
<PAGE> 28
It is important to a choose a fund that has investment
objectives compatible with your investment goal.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share
price, such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If
you have a longer investment time frame, you may seek to
maximize your investment returns by investing in a mutual fund
that offers greater yield or appreciation potential in exchange
for greater investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks
which will vary depending on investment objective and security
type. However, mutual funds seek to reduce risk through
professional investment management and portfolio
diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values
than bond or money market mutual funds. Although there is no
guarantee that they will be able to maintain a stable net asset
value of $1.00 per share, money market funds emphasize safety
of principal and liquidity, but tend to offer lower income
potential than bond funds. Bond funds tend to offer higher
income potential than money market funds but tend to have
greater risk of principal and yield volatility.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
Net Asset Value, and Shareholder Services, and that information
is incorporated herein by reference. The Prospectus discloses
that you may purchase (or redeem) shares through investment
dealers, banks, or other institutions. It is the responsibility
of any such institution to establish procedures insuring the
prompt transmission to the Trust of any such purchase order.
The state of Texas has asked that the Trust disclose in its
Statement of Additional Information, as a reminder to any such
bank or institution, that it must be registered as a dealer in
Texas.
Each Fund's net asset value is determined on days on which
the New York Stock Exchange (the "NYSE") is open for trading.
The NYSE is regularly closed on Saturdays and Sundays and on New
Year's Day, the third Monday in February, Good Friday, the last
Monday in May, Independence Day, Labor Day, Thanksgiving, and
Christmas. If one of these holidays falls on a Saturday or
Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively. Net asset value will not be
determined on days when the NYSE is closed unless, in the
judgment of the Board of Trustees, net asset value of a Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., Chicago time.
The Trust reserves the right to suspend or postpone
redemptions of shares of any Fund during any period when: (a)
trading on the NYSE is restricted, as
<PAGE> 29
determined by the Securities and Exchange Commission, or the
NYSE is closed for other than customary weekend and holiday
closings; (b) the Securities and Exchange Commission has by
order permitted such suspension; or (c) an emergency, as
determined by the Securities and Exchange Commission, exists,
making disposal of portfolio securities or valuation of net
assets of such Fund not reasonably practicable.
The Trust intends to pay all redemptions in cash and is
obligated to redeem shares of a Fund solely in cash up to the
lesser of $250,000 or one percent of the net assets of that Fund
during any 90-day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly
by a distribution in kind of securities. If redemptions were
made in kind, the redeeming shareholders might incur transaction
costs in selling the securities received in the redemptions.
Due to the relatively high cost of maintaining smaller
accounts, the Trust reserves the right to redeem shares in any
account for their then-current value (which will be promptly
paid to the investor) if at any time the shares in the account
do not have a value of at least $1,000. An investor will be
notified that the value of his account is less than the minimum
and allowed at least 30 days to bring the value of the account
up to at least $1,000 before the redemption is processed. The
Agreement and Declaration of Trust also authorizes the Trust to
redeem shares under certain other circumstances as may be
specified by the Board of Trustees.
MANAGEMENT
The following table sets forth certain information with
respect to trustees and officers.
<TABLE>
<CAPTION>
POSITION(S) HELD PRINCIPAL OCCUPATION(S)
NAME AGE WITH THE TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
Gary A. Anetsberger 39 Senior Vice-President Controller of the Mutual Funds division of Stein Roe & Farnham
Incorporated (the "Adviser"); senior vice president of the Adviser
since April, 1996; vice president of the Adviser, January, 1991 to
April, 1996
Timothy K. Armour 47 President; Trustee President of the Mutual Funds division of the Adviser and director
(1) (2) of the Adviser since June, 1992; senior vice president and director
of marketing of Citibank Illinois prior thereto
Jilaine Hummel Bauer 40 Executive Vice-President; General counsel and secretary of the Adviser since November 1995;
Secretary senior vice president of the Adviser since April, 1992; vice
president of the Adviser prior thereto
Ann H. Benjamin 38 Vice-President Senior vice president of the Adviser since July, 1994; vice
president of the Adviser from January, 1992 to July, 1994; associate
of the Adviser prior thereto
Kenneth L. Block (3) 76 Trustee Chairman Emeritus of A. T. Kearney, Inc. (international management
consultants)
<PAGE> 30
William W. Boyd (3) 69 Trustee Chairman and director of Sterling Plumbing Group, Inc. (manufacturer
of plumbing products) since 1992; chairman, president, and chief
executive officer of Sterling Plumbing Group, Inc. prior thereto
Thomas W. Butch 39 Vice-President Senior vice president of the Adviser since September, 1994; first
vice president, corporate communications, of Mellon Bank Corporation
prior thereto
N. Bruce Callow 50 Executive Vice-President President of the Investment Counsel division of the Adviser since
June, 1994; senior vice president of trust and financial services
for The Northern Trust prior thereto
Lindsay Cook (1) 44 Trustee Senior vice president of Liberty Financial Companies, Inc. (the
indirect parent of the Adviser)
Douglas A. Hacker 40 Trustee Senior vice president and chief financial officer, United Airlines,
since July, 1994; senior vice president--Finance, United Airlines,
February, 1993 to July, 1994; vice president--corporate & fleet
planning, American Airlines, 1991 to February, 1993
Philip D. Hausken 38 Vice-President Vice president of the Adviser since November, 1995; corporate
counsel for the Adviser since July, 1994; assistant regional
director, midwest regional office of the Securities and Exchange
Commission prior thereto
Michael T. Kennedy 34 Vice-President Senior vice president of the Adviser since October, 1994; vice
president of the Adviser from January, 1992 to October, 1994;
associate of the Adviser prior thereto
Stephen P. Lautz 39 Vice-President Vice president of the Adviser since May, 1994; associate of the
Adviser prior thereto
Steven P. Luetger 42 Vice-President Senior vice president of the Adviser
Lynn C. Maddox 55 Vice-President Senior vice president of the Adviser
Anne E. Marcel 38 Vice-President Vice president of the Adviser since April, 1996; manager, Mutual
Fund Sales & Services of the Adviser since October, 1994; supervisor
of the Counselor Department of the Adviser from October, 1992 to
October, 1994; vice president of Selected Financial Services from
May, 1990 to March, 1992
Francis W. Morley 76 Trustee Chairman of Employer Plan Administrators and Consultants Co.
(2) (3) (designer, administrator, and communicator of employee benefit
plans)
Jane M. Naeseth 46 Vice-President Senior vice president of the Adviser since January, 1991; vice
president of the Adviser prior thereto
Charles R. Nelson (3) 53 Trustee Van Voorhis Professor of Political Economy of the University of
Washington
<PAGE> 31
Nicolette D. Parrish 46 Vice-President; Senior compliance administrator and assistant secretary of the
Assistant Secretary Adviser since November 1995; senior legal assistant for the Adviser
prior thereto
Sharon R. Robertson 34 Controller Accounting manager for the Adviser's Mutual Funds division
Janet B. Rysz 40 Assistant Secretary Senior compliance administrator and assistant secretary of the
Adviser
Thomas P. Sorbo 35 Vice-President Senior vice president of the Adviser since January, 1994; vice
president of the Adviser from September, 1992 to December, 1993;
associate of Travelers Insurance Company prior thereto
Thomas C. Theobald 58 Trustee Managing partner, William Blair Capital Partners (private equity
fund) since 1994; chief executive officer and chairman of the Board
of Directors of Continental Bank Corporation, 1987-1994
Gordon R. Worley (3) 76 Trustee Private investor
Hans P. Ziegler 55 Executive Vice-President Chief executive officer of the Adviser since May, 1994; president of
the Investment Counsel division of the Adviser from July, 1993 to
June, 1994; president and chief executive officer, Pitcairn
Financial Management Group prior thereto
Margaret O. Zwick 29 Treasurer Compliance manager for the Adviser's Mutual Funds division since
August 1995; compliance accountant, January 1995 to July 1995;
section manager, January 1994 to January 1995; supervisor, February
1990 to December 1993
<FN>
___________________________
(1) Trustee who is an "interested person" of the Trust and of
the Adviser, as defined in the Investment Company Act of
1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope
and results of the audit.
</TABLE>
Certain of the trustees and officers of Municipal Trust and
of Base Trust are trustees or officers of other investment
companies managed by the Adviser. Ms. Bauer and Mr. Cook are
also vice presidents of the Funds' distributor, Liberty
Securities Corporation. The address of Mr. Block is 11 Woodley
Road, Winnetka, Illinois 60093; that of Mr. Boyd is 2900 Golf
Road, Rolling Meadows, Illinois 60008; that of Mr. Cook is 600
Atlantic Avenue, Boston, MA 02210; that of Mr. Hacker is P.O.
Box 66100, Chicago, IL 60666; that of Mr. Morley is 20 North
Wacker Drive, Suite 2275, Chicago, Illinois 60606; that of Mr.
Nelson is Department of Economics, University of Washington,
Seattle, Washington 98195; that of Mr. Theobald is Suite 3300,
222 West Adams Street, Chicago, IL 60606; that of Mr. Worley is
1407 Clinton Place, River Forest, Illinois 60305; and that of
the officers is One South Wacker Drive, Chicago, Illinois 60606.
<PAGE> 32
Officers and trustees affiliated with the Adviser serve
without any compensation from the Trust. In compensation for
their services to the Trust, trustees who are not "interested
persons" of the Trust or the Adviser are paid an annual retainer
of $8,000 (divided equally among the Funds of the Trust) plus an
attendance fee from each Fund for each meeting of the Board or
committee thereof attended at which business for that Fund is
conducted. The attendance fees (other than for a Nominating
Committee meeting) are based on each Fund's net assets as of the
preceding December 31. For a Fund with net assets of less than
$251 million, the fee is $200 per meeting; with $251 million to
$500 million, $350; with $501 million to $750 million, $500;
with $750 million to $1 billion, $650; and with over $1 billion
in net assets, $800. Each non-interested trustee also receives
an aggregate of $500 for attending each meeting of the
Nominating Committee. The Trust has no retirement or pension
plans. The following table sets forth compensation paid by the
Trust during the fiscal year ended June 30, 1995 to each of the
trustees:
Aggregate Total Compensation Paid to
Compensation Trustees from the Trust and
Name of Trustee from the Trust the Stein Roe Fund Complex*
- --------------- -------------- ---------------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Kenneth L. Block $23,350 $74,850
William W. Boyd 15,900 48,200
Francis W. Morley 23,350 76,400
Charles R. Nelson 23,350 77,200
Gordon R. Worley 23,350 74,850
_______________
* During this period, the Stein Roe Fund Complex consisted of
the six series of the Trust, four series of Stein Roe Municipal
Trust, eight series of SteinRoe Investment Trust, and one series
of SR&F Base Trust. Messrs. Hacker and Theobald were elected
trustees on June 18, 1996.
FINANCIAL STATEMENTS
Please refer to the Funds' 6/30/95 Financial Statements
(balance sheets and schedules of investments as of 6/30/95 and
the statements of operations, changes in net assets, and notes
thereto) and the report of independent auditors contained in the
6/30/95 Annual Report of the Funds and to the Funds' 12/31/95
Financial Statements (unaudited balance sheets and schedules of
investments as of 12/31/95 and the statements of operations,
changes in net assets, and notes thereto) contained in the
12/31/95 Semiannual Report of the Funds. The Financial
Statements and the report of independent auditors (but no other
material from the Annual Report or the Semiannual Report) are
incorporated herein by reference. The Annual Report and the
Semiannual Report may be obtained at no charge by telephoning
800-338-2550.
PRINCIPAL SHAREHOLDERS
As of August 1, 1995, the only persons known by the Trust
to own of record or "beneficially" 5% or more of outstanding
shares of any Fund within the definition of that term as
contained in Rule 13d-3 under the Securities Exchange Act of
1934 was as follows:
<PAGE> 33
APPROXIMATE %
OF OUTSTANDING
NAME AND ADDRESS FUND SHARES HELD
- ---------------------- ----------------------- --------------
First Bank National Limted Maturity Income
Association* Fund 18.7%
410 N. Michigan Avenue Government Income Fund 29.4
Chicago, IL 60611 Intermediate Bond Fund 21.0
Income Fund 23.4
Charles Schwab & Co., Government Incme Fund 7.9
Inc.* Intermediate Bond Fund 26.9
Attn: Mutual Fund Dept. Income Fund 14.4
101 Montgomery Street
San Francisco, CA 94104
Dunspaugh-Dalton Government Income Fund 5.8
Foundation Inc.
9040 Sunset Drive
Miami FL 33173
Priests of the Sacred Limited Maturity Income
Heart Fund 5.3
P.O. Box 289
Hales Corners, WI 53130
<PAGE> 33
Trustees, Liberty Limited Maturity Income
Financial Companies Fund 5.3
Pension Plan & Trust
U/A/D 12/7/92
600 Atlantic Avenue
Boston, MA 02210
___________________
*Shares held of record, but not beneficially.
The following table shows shares of the Funds held by the
categories of persons indicated, and in each case the approximate
percentage of outstanding shares represented:
CLIENTS OF THE
ADVISER IN THEIR TRUSTEEES AND
CLIENT ACCOUNTS OFFICERS AS OF
AS OF 7/31/95* 7/31/95
-------------------- --------------------
Shares Held Percent Shares Held Percent
----------- ------- ----------- -------
Limited Maturity
Income Fund 1,383,235 46.6% 33,046 1.1%
Government Income Fund 820,214 21.4 29,261 **
Intermediate Bond Fund 9,337,255 26.3 67,838 **
Income Fund 6,932,040 39.9 60,807 **
______________
*The Adviser may have discretionary authority over such shares
and, accordingly, they could be deemed to be owned
"beneficially" by the Adviser under Rule 13d-3. However, the
Adviser disclaims actual beneficial ownership of such shares.
**Represents less than 1% of the outstanding shares.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated, investment adviser to the
Funds, is a wholly owned subsidiary of SteinRoe Services Inc.
("SSI"), the Funds' transfer agent, which is a wholly owned
subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority-owned subsidiary of Liberty
Mutual Equity Corporation, which is a wholly owned subsidiary of
Liberty Mutual Insurance Company. Liberty Mutual Insurance
Company is a mutual insurance company, principally in
<PAGE> 34
the property/casualty insurance field, organized under the laws
of Massachusetts in 1912.
The directors of the Adviser are Kenneth R. Leibler, C.
Allen Merritt, Jr., Timothy K. Armour, N. Bruce Callow, and Hans
P. Ziegler. Mr. Leibler is President and Chief Executive
Officer of Liberty Financial; Mr. Merritt is Senior Vice
President and Treasurer of Liberty Financial; Mr. Armour is
President of the Adviser's Mutual Funds division; Mr. Callow is
President of the Adviser's Investment Counsel division; and Mr.
Ziegler is Chief Executive Officer of the Adviser. The business
address of Messrs. Leibler and Merritt is Federal Reserve Plaza,
Boston, Massachusetts 02210; and that of Messrs. Armour, Callow,
and Ziegler is One South Wacker Drive, Chicago, Illinois 60606.
The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of June 30, 1995, the Adviser
managed over $22.4 billion in assets: over $4.9 billion in
equities and over $17.5 billion in fixed-income securities
(including $2.3 billion in municipal securities). The $22.4
billion in managed assets included over $5.5 billion held by
open-end mutual funds managed by the Adviser (approximately 21%
of the mutual fund assets were held by clients of the Adviser).
These mutual funds were owned by over 148,000 shareholders. The
$5.5 billion in mutual fund assets included over $550 million in
over 33,000 IRA accounts. In managing those assets, the Adviser
utilizes a proprietary computer-based information system that
maintains and regularly updates information for approximately
6,500 companies. The Adviser also monitors over 1,400 issues
via a proprietary credit analysis system. At June 30, 1995, the
Adviser employed approximately 17 research analysts and 34
account managers. The average investment-related experience of
these individuals was 19 years.
Stein Roe Counselor [service mark] and Stein Roe Counselor
Preferred [service mark] are professional investment advisory
services offered by the Adviser to Fund shareholders. Each is
designed to help shareholders construct Fund investment
portfolios to suit their individual needs. Based on information
shareholders provide about their financial goals and objectives
in response to a questionnaire, the Adviser's investment
professionals create customized portfolio recommendations.
Shareholders participating in Stein Roe Counselor [service mark]
are free to self direct their investments while considering the
Adviser's recommendations; shareholders participating in Stein
Roe Counselor Preferred [service mark] enjoy the added benefit
of having the Adviser implement portfolio recommendations
automatically for a fee of 1% or less, depending on the size of
their portfolios. In addition to reviewing shareholders' goals
and objectives periodically and updating portfolio
recommendations to reflect any changes, the Adviser provides
shareholders participating in these programs with a dedicated
Counselor [service mark] representative. Other distinctive
services include specially designed account statements with
portfolio performance and transaction data, newsletters, and
regular investment, economic, and market updates. A $50,000
minimum investment is required to participate in either program.
<PAGE> 35
Please refer to the description of the Adviser, each Fund's
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management of
the Funds and Fee Table in the Prospectus, which is incorporated
herein by reference. Each Fund's advisory agreement was
replaced on July 1, 1996 with separate management and
administrative agreements. The table below shows gross advisory
fees paid by the Funds and any expense reimbursements by the
Adviser to them, which are described in the Prospectus.
YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
FUND PAYMENT 6/30/95 6/30/94 6/30/93
- -------------- ------------ ---------- ---------- ----------
Limited Maturity Advisory fee $ 172,301 $ 154,386 $ 8,543
Income Fund Reimbursement 234,580 178,477 45,317
Government Income Fund Advisory fee 253,463 338,576 365,973
Reimbursement 38,282 -- --
Intermediate Bond Fund Advisory fee 1,491,075 1,579,884 1,399,017
Reimbursement 25,687 -- --
Income Fund Advisory fee 1,011,101 1,004,273 810,495
Reimbursement 48,232 14,043 --
The Adviser provides office space and executive and other
personnel to the Funds and bears any sales or promotional
expenses. Each Fund pays all expenses other than those paid by
the Adviser, including but not limited to printing and postage
charges and securities registration and custodian fees and
expenses incidental to its organization.
Each Fund's administrative agreement provides that the
Adviser shall reimburse the Fund to the extent that total annual
expenses of the Fund (including fees paid to the Adviser, but
excluding taxes, interest, brokers' commissions and other normal
charges incident to the purchase and sale of portfolio
securities, and expenses of litigation to the extent permitted
under applicable state law) exceed the applicable limits
prescribed by any state in which shares of such Fund are being
offered for sale to the public; however, such reimbursement for
any fiscal year will not exceed the amount of the fees paid by
such Fund under that agreement for such year. The Trust
believes that currently the most restrictive state limit on
expenses is that of California, which limit currently is 2 1/2%
of the first $30 million of average net assets, 2% of the next
$70 million, and 1 1/2% thereafter. In addition, in the
interest of further limiting the Funds' expenses, the Adviser
may voluntarily waive its management fee and/or absorb certain
expenses for a Fund, as described in the Prospectus. Any such
reimbursements will enhance the yields of such Fund.
The management agreement of each Fund also provides that
neither the Adviser nor any of its directors, officers,
stockholders (or partners of stockholders), agents, or employees
shall have any liability to the Trust or any shareholder of the
Fund for any error of judgment, mistake of law or any loss
arising out of any investment, or for any other act or omission
in the performance by the Adviser of its duties under the
agreement, except for liability resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part
in the performance of its duties or from reckless disregard by
the Adviser of the Adviser's obligations and duties under that
agreement.
<PAGE> 36
Any expenses that are attributable solely to the
organization, operation, or business of a Fund shall be paid
solely out of that Fund's assets. Any expenses incurred by the
Trust that are not solely attributable to a particular Fund are
apportioned in such manner as the Adviser determines is fair and
appropriate, unless otherwise specified by the Board of
Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with the Trust, the
Adviser receives a fee for performing certain bookkeeping and
accounting services for each Fund. For these services, the
Adviser receives an annual fee of $25,000 per Fund plus .0025 of
1% of average net assets over $50 million. During the fiscal
year ended June 30, 1995, the Adviser received aggregate fees of
$114,541 from the Trust for services performed under this
agreement.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Securities
Corporation ("LSC"), under a Distribution Agreement as described
under Management of the Funds in the Prospectus, which is
incorporated herein by reference. The Distribution Agreement
continues in effect from year to year, provided such continuance
is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of the Trust, and
(ii) by a majority of the trustees who are not parties to the
Agreement or interested persons of any such party. The Trust
has agreed to pay all expenses in connection with registration
of its shares with the Securities and Exchange Commission and
auditing and filing fees in connection with registration of its
shares under the various state blue sky laws and assumes the
cost of preparation of prospectuses and other expenses. The
Adviser bears all sales and promotional expenses, including
payments to LSC for the sales of Fund shares. The Adviser also
makes payments to other broker-dealers, banks, and other
institutions for the sales of Fund shares in amounts up to 0.25%
of the annual average value of accounts of such shares.
As agent, LSC offers shares of each Fund to investors in
states where the shares are qualified for sale, at net asset
value, without sales commissions or other sales load to the
investor. No sales commission or "12b-1" payment is paid by any
Fund. LSC offers the Funds' shares only on a best-efforts
basis.
TRANSFER AGENT
SSI performs certain transfer agency services for the
Trust, as described under Management of the Funds in the
Prospectus. For performing these services, SSI receives from
each Fund a fee based on an annual rate of 0.15 of 1% of the
Fund's average daily net assets. Prior to May 1, 1995, SSI
received the following payments from each of the Funds: (1) a
fee of $4.00 for each new account opened; (2) monthly payments
of $1.466 per open shareholder account; (3) payments of $0.611
per closed shareholder account for each month through June of
the calendar year following the
<PAGE> 37
year in which the account is closed; (4) $0.3025 per shareholder
account for each dividend paid; and (5) $1.415 for each
shareholder-initiated transaction. The Board of Trustees
believes the charges by SSI to the Funds are comparable to those
of other companies performing similar services. (See Investment
Advisory Services.)
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian
for the Trust. It is responsible for holding all securities and
cash of the Funds, receiving and paying for securities
purchased, delivering against payment securities sold, receiving
and collecting income from investments, making all payments
covering expenses of the Funds, and performing other
administrative duties, all as directed by authorized persons.
The custodian does not exercise any supervisory function in such
matters as purchase and sale of portfolio securities, payment of
dividends, or payment of expenses of the Funds.
Portfolio securities purchased in the U.S. are maintained
in the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the
U.S. are maintained in the custody of foreign banks and trust
companies that are members of the Bank's Global Custody Network,
and foreign depositories ("foreign sub-custodians"). Each of
the domestic and foreign custodial institutions holding
portfolio securities has been approved by the Board of Trustees
in accordance with regulations under the Investment Company Act
of 1940.
The Board of Trustees of the Trust reviews, at least
annually, whether it is in the best interest of each Fund and
its shareholders to maintain assets in each custodial
institution. However, with respect to foreign sub-custodians,
there can be no assurance that a Fund, and the value of its
shares, will not be adversely affected by acts of foreign
governments, financial or operational difficulties of the
foreign sub-custodians, difficulties and costs of obtaining
jurisdiction over, or enforcing judgments against, the foreign
sub-custodians, or application of foreign law to a Fund's
foreign sub-custodial arrangements. Accordingly, an investor
should recognize that the non-investment risks involved in
holding assets abroad are greater than those associated with
investing in the United States.
The Funds may invest in obligations of the custodian and
may purchase or sell securities from or to the custodian.
INDEPENDENT AUDITORS
The independent auditors for the Trust are Ernst & Young
LLP, 233 South Wacker Drive, Chicago, Illinois 60606. The
independent auditors audit and report on the Funds' annual
financial statements, review certain regulatory reports and the
Funds' federal income tax returns, and perform other
professional accounting, auditing, tax and advisory services
when engaged to do so by the Trust.
<PAGE> 38
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Funds. Purchases and sales of portfolio securities are
ordinarily transacted with the issuer or with a primary market
maker acting as principal or agent for the securities on a net
basis, with no brokerage commission being paid by a Fund.
Transactions placed through dealers reflect the spread between
the bid and asked prices. Occasionally, a Fund may make
purchases of underwritten issues at prices that include
underwriting discounts or selling concessions.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important
factor in this decision, but a number of other judgmental
factors may also enter into the decision. These include: the
Adviser's knowledge of current transaction costs; the nature of
the security being traded; the size of the transaction; the
desired timing of the trade; the activity existing and expected
in the market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker
or dealer selected and others that are considered; the Adviser's
knowledge of the financial stability of the broker or dealer
selected and such other brokers or dealers; and the Adviser's
knowledge of actual or apparent operational problems of any
broker or dealer. Recognizing the value of these factors, a
Fund may incur a transaction charge in excess of that which
another broker or dealer may have charged for effecting the same
transaction. Evaluations of the reasonableness of the costs of
portfolio transactions, based on the foregoing factors, are made
on an ongoing basis by the Adviser's staff and reports are made
annually to the Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to
be capable of providing the best combination of price and
execution with respect to a particular portfolio transaction for
a Fund, the Adviser often selects a broker or dealer that has
furnished it with research products or services such as research
reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings,
dividends and similar data, and computer databases, quotation
equipment and services, research-oriented computer software and
services, and services of economic and other consultants.
Selection of brokers or dealers is not made pursuant to an
agreement or understanding with any of the brokers or dealers;
however, the Adviser uses an internal allocation procedure to
identify those brokers or dealers who provide it with research
products or services and the amount of research products or
services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate,
including the Funds, to such brokers or dealers to ensure the
continued receipt of research products or services the Adviser
feels are useful. In certain instances, the Adviser receives
from brokers and dealers products or services which are used
both as investment research and for administrative, marketing,
or other non-research purposes. In such instances, the Adviser
makes a good faith effort to determine the relative proportions
of such products or services which may be considered as
investment research. The portion of the costs of such products
or services attributable to research usage may be defrayed by
the Adviser (without prior
<PAGE> 39agreement or understanding, as noted above) through
brokerage commissions generated by transactions of clients
(including the Funds), while the portions of the costs
attributable to non-research usage of such products or services
is paid by the Adviser in cash. No person acting on behalf of a
Fund is authorized, in recognition of the value of research
products or services, to pay a price in excess of that which
another broker or dealer might have charged for effecting the
same transaction. Research products or services furnished by
brokers and dealers through whom transactions are effected may
be used in servicing any or all of the clients of the Adviser
and not all such research products or services are used in
connection with the management of such Fund.
The Board has reviewed the legal developments pertaining to
and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. The Board has been advised
by counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers ("NASD"). Therefore, except
with respect to purchases by the Income Fund of municipal
securities which are not subject to NASD Rules, the Funds will
not attempt to recapture underwriting discounts or selling
concessions. If the Income Fund were to purchase municipal
securities, it would attempt to recapture selling concessions
included in prices paid by the Income Fund in underwritten
offerings; however, the Adviser would not be able to negotiate
discounts from the fixed offering price for those issuers for
which there is a strong demand, and will not allow the failure
to obtain a discount to prejudice its ability to purchase an
issue for the Income Fund.
The following table shows any commissions paid by the Funds
on futures transactions during the past three fiscal years. The
Funds did not pay commissions on any other transactions.
Limited Inter- Govern-
Maturity mediate ment
Income Bond Income Income
Fund Fund Fund Fund
-------- ------- ------- --------
Total brokerage commissions paid
during year ended 6/30/95 -0- $25,000 -0- $7,625
Number of futures contracts -0- 1,000 -0- 305
Total brokerage commissions paid
during year ended 6/30/94 -0- $32,900 -0- $5,002
Total brokerage commissions paid
during year ended 6/30/93 -0- $6,020 -0- $1,905
The Trust has arranged for its custodian to act as a
soliciting dealer to accept any fees available to the custodian as
a soliciting dealer in connection with any tender offer for
portfolio securities. The custodian will credit any such fees
received against its custodial fees.
During the last fiscal year, certain Funds held securities of
one or more of their regular broker-dealers or the parent of such
broker or dealer that derive more than 15% of gross revenue from
securities-related activities. Such holdings were as follows at
June 30, 1995:
Amount of
Fund Broker-Dealer Securities Held
- ------------------------ --------------------------- ---------------
<PAGE> 40
Limited Maturity Income
Fund Lehman Brothers Holdings Inc. $ 978,640
Limited Maturity Income
Fund Salomon Inc. 985,420
Intermediate Bond Fund Lehman Brothers Holdings Inc. 3,044,310
Intermediate Bond Fund Merrill Lynch 1,338,233
Intermediate Bond Fund Kidder Peabody 3,797,535
Intermediate Bond Fund Prudential Home Mortgage
Financial Company 6,383,860
Income Fund Goldman Sachs 1,942,400
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund intends to comply with the special provisions of
the Internal Revenue Code that relieve it of federal income tax
to the extent of its net investment income and capital gains
currently distributed to shareholders.
Because capital gain distributions reduce net asset value,
if a shareholder purchases shares shortly before a record date,
he will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as
his tax basis.
Each Fund expects that none of its dividends will qualify
for the deduction for dividends received by corporate
shareholders.
INVESTMENT PERFORMANCE
A Fund may quote yield figures from time to time. The
"Yield" of a Fund is computed by dividing the net investment
income per share earned during a 30-day period (using the
average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The
Yield formula provides for semiannual compounding which assumes
that net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period.
For a given period, an "Average Annual Total Return" may be
computed by finding the average annual compounded rate that
would equate a hypothetical initial amount invested of $1,000 to
the ending redeemable value.
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1)6 -1].
Where: a = dividends and interest earned during the period
. (For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which net
asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the net asset value of the Fund.
<PAGE> 41
For example, the Yields of the Funds for the 30-day period ended
June 30, 1995 were:
Limited Maturity Income Fund Yield = 4.95%
Government Income Fund Yield = 6.10%
Intermediate Bond Fund Yield = 6.06%
Income Fund Yield = 6.66%
Each Fund may quote total return figures from time to time.
A "Total Return" on a per share basis is the amount of dividends
received per share plus or minus the change in the net asset value
per share for a period. A "Total Return Percentage" may be
calculated by dividing the value of a share at the end of a period
(including reinvestment of distributions) by the value of the
share at the beginning of the period and subtracting one.
Average Annual Total Return is computed as follows: ERV = P(1+T)n
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).
For example, for a $1,000 investment in a Fund, the "Total
Return," the "Total Return Percentage," and the "Average Annual
Total Return" at June 30, 1995 were:
AVERAGE
TOTAL ANNUAL
RETURN TOTAL
TOTAL RETURN PERCENTAGE RETURN
------------ ---------- ------
Limited Maturity Income Fund
1 year 1,070 6.96% 6.96%
Life of Fund* 1,092 9.22 3.90
Government Income Fund
1 year 1,109 10.94 10.94
5 years 1,482 48.18 8.18
*Life of Fund 2,003 100.33 7.74
Intermediate Bond Fund
1 year 1,101 10.11 10.11
5 years 1,529 52.87 8.86
10 years 2,408 140.80 9.19
Income Fund
1 year 1,128 12.79 12.79
5 years 1,618 61.84 10.11
*Life of Fund 2,224 122.24 8.95
_________________________
*Life of Fund is from its commencement of operations: 3/11/93
for Limited Maturity Income Fund and 3/5/86 for Government
Income Fund and Income Fund.
Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must
pay on a current basis. They are not necessarily indicative of
<PAGE> 42
future results. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing a Fund's performance and in providing
some basis for comparison with other investment alternatives, it
should not be used for comparison with other investments using
different reinvestment assumptions or time periods.
In advertising and sales literature, a Fund may compare its
yield and performance with that of other mutual funds, indexes
or averages of other mutual funds, indexes of related financial
assets or data, and other competing investment and deposit
products available from or through other financial institutions.
The composition of these indexes or averages differs from that
of the Funds. Comparison of a Fund to an alternative investment
should be made with consideration of differences in features and
expected performance.
All of the indexes and averages noted below will be
obtained from the indicated sources or reporting services, which
the Funds believe to be generally accurate. A Fund may also
note its mention in newspapers, magazines, or other media from
time to time. However, the Funds assume no responsibility for
the accuracy of such data. Newspapers and magazines that might
mention the Funds include, but are not limited to, the
following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
<PAGE> 43
The Washington Post
Working Women
Worth
Your Money
All of the Funds may compare their performance to the
Consumer Price Index (All Urban), a widely-recognized measure of
inflation.
A Fund's performance may be compared to the following as
indicated below:
<TABLE>
<CAPTION>
BENCHMARK FUND(S)
<S> <C>
Donoghue's Money Fund Averages/Aggressive Limited Maturity Income Fund
Donoghue's Money Fund Averages/All Taxable Limited Maturity Income Fund
Donoghue's Money Fund Averages/Government Limited Maturity Income Fund
Donoghue's Money Fund Averages--Prime Limited Maturity Income Fund
Donoghue's Money Fund Averages--Prime and Eurodollar Limited Maturity Income Fund
Donoghue's Money Fund Averages--Prime,
Eurodollar, and Yankeedollar Limited Maturity Income Fund
Donoghue's Money Fund Averages--Taxable
(includes the previous four categories) Limited Maturity Income Fund
Donoghue's Money Fund Averages--U.S. Government
& Agencies Limited Maturity Income Fund
Donoghue's Money Fund Averages--U.S. Treasury Limited Maturity Income Fund
ICD All Long-Term Fixed Income Funds Average All Funds
ICD All Taxable Short-Term Fund Average Limited Maturity Income Fund
ICD Government Securities Average Limited Maturity Income Fund, Government Income Fund
ICD Government Securities Index Limited Maturity Income Fund, Government Income Fund
ICD High Quality Bond Funds Average Limited Maturity Income Fund, Intermediate Bond Fund,
Income Fund
ICD High-Yield Bond Funds Average Income Fund
ICD Income Funds Index All Funds
ICD Money Market Government Securities Average Limited Maturity Income Fund
ICD Money Market Taxable Funds Average Limited Maturity Income Fund
ICD Taxable Bond Fund Average All Funds
Lehman Brothers One-to-Three-Year Government Index Limited Maturity Income Fund
Lipper All Long-Term Fixed Income Funds Average All Funds
Lipper Corporate Bond Funds (A Rated) Average Limited Maturity Income Fund, Intermediate Bond Fund
Lipper Corporate Bond Funds (BBB Rated) Average Limited Maturity Income Fund, Income Fund
Lipper High Current Yield Funds Average Income Fund
Lipper Intermediate-Term (5-10 Year) Investment
Grade Debt Funds Average Limited Maturity Income Fund, Intermediate Bond Fund
Lipper Long-Term Taxable Bond Funds Average All Funds
Lipper Money Market Instrument Funds Average Limited Maturity Income Fund
Lipper Short-Term (1-3 Year) Investment Grade Debt
Funds Average Limited Maturity Income Fund
Lipper Short-Term (1-3 Year) U.S. Government Debt
Funds Average Limited Maturity Income Fund
Lipper Short-Term Income Fund Average Limited Maturity Income Fund
Lipper Short-Term U.S. Government Funds Average Limited Maturity Income Fund
Lipper U.S. Government Funds Average Limited Maturity Income Fund, Government Income Fund
Merrill Lynch Corporate and Government Master Index All Funds
Merrill Lynch High-Yield Master Index Income Fund
Merrill Lynch Mortgage Master Index Limited Maturity Income Fund, Government Income Fund
Merrill Lynch One-to-Three-Year Government Index Limited Maturity Income Fund
Morningstar All Long-Term Fixed Income Funds Average All Funds
Morningstar Corporate Bond (General) Average Limited Maturity Income Fund, Income Fund
Morningstar Corporate Bond (High Quality) Average Limited Maturity Income Fund, Intermediate Bond Fund
Morningstar Corporate Bond (High Yield) Average Income Fund
Morningstar Government Bond (General) Average Limited Maturity Income Fund, Government Income Fund
Morningstar Long-Term Taxable Bond Funds Average All Funds
Salomon Brothers Broad Investment Grade Bond Index All Funds
Salomon Brothers Mortgage Index Limited Maturity Income Fund, Government Income Fund
</TABLE>
The Lipper, ICD, and Morningstar averages are unweighted
averages of total return performance of mutual funds as
classified, calculated, and published by these independent
services that monitor the performance of mutual funds. The
Funds may also use comparative performance as computed in a
ranking by these services or category averages and rankings
provided by another independent service. Should these services
reclassify a Fund to a different category or develop (and place
a Fund into) a new category, that Fund may compare its
performance or rank against other funds in the newly-assigned
category (or the average of such category) as published by the
service.
In advertising and sales literature, a Fund may also cite
its rating, recognition, or other mention by Morningstar or any
other entity. Morningstar's rating system is based on risk-
adjusted total return performance and is expressed in a star-
rating format. The risk-adjusted number is computed by
subtracting a Fund's risk score
<PAGE> 45
(which is a function of the Fund's monthly returns less the 3-
month T-bill return) from the Fund's load-adjusted total return
score. This numerical score is then translated into rating
categories, with the top 10% labeled five star, the next 22.5%
labeled four star, the next 35% labeled three star, the next
22.5% labeled two star, and the bottom 10% one star. A high
rating reflects either above-average returns or below-average
risk, or both.
The Merrill Lynch Mortgage Master Index measures total
return performance of federal agency mortgage-backed pass-
through securities. The Merrill Lynch High-Yield Master Index
measures the total return performance of corporate debt issues
rated less than investment grade but not in default. The
Merrill Lynch Corporate and Government Master Index measures
total return performance of a broad range of U.S. Treasury,
federal agency, and corporate debt securities, but excluding
mortgage-backed securities.
The Salomon Brothers Broad Investment Grade Bond Index
measures the market-weighted total return of a wide range of
debt securities, including U.S. Treasury/agency securities,
investment-grade corporate bonds, and mortgage pass-through
securities. The Salomon Brothers Mortgage Index measures total
return of the mortgage pass-through securities market.
Of course, past performance is not indicative of future
results.
____________________
To illustrate the historical returns on various types of
financial assets, the Funds may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based
investment firm. Ibbotson constructs (or obtains) very long-
term (since 1926) total return data (including, for example,
total return indexes, total return percentages, average annual
total returns and standard deviations of such returns) for the
following asset types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
____________________
A Fund may also use hypothetical returns to be used as an
example in a mix of asset allocation strategies. One such
example is reflected in the chart below, which shows the effect
of tax deferral on a hypothetical investment. This chart
assumes that an investor invested $2,000 a year on January 1,
for any specified period, in both a Tax-Deferred Investment and
a Taxable Investment, that both investments earn either 6%, 8%
or 10% compounded annually, and that the investor withdrew the
entire amount at the end of the period. (A tax rate of 39.6% is
applied annually to the Taxable Investment and on the withdrawal
of earnings on the Tax-Deferred Investment.)
<PAGE> 46
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
INTEREST RATE 6% 8% 10% 6% 8% 10%
Compounding
Years Tax-Deferred Investment Taxable Investment
30 $124,992 $171,554 $242,340 $109,197 $135,346 $168,852
25 90,053 115,177 150,484 82,067 97,780 117,014
20 62,943 75,543 91,947 59,362 68,109 78,351
15 41,684 47,304 54,099 40,358 44,675 49,514
10 24,797 26,820 29,098 24,453 26,165 28,006
5 11,178 11,613 12,072 11,141 11,546 11,965
1 2,072 2,096 2,121 2,072 2,096 2,121
Average Life Calculations. From time to time, a Fund may
quote an average life figure for its portfolio. Average life is
the weighted average period over which the Adviser expects the
principal to be paid, and differs from stated maturity in that
it estimates the effect of expected principal prepayments and
call provisions. With respect to GNMA securities and other
mortgage-backed securities, average life is likely to be
substantially less than the stated maturity of the mortgages in
the underlying pools. With respect to obligations with call
provisions, average life is typically the next call date on
which the obligation reasonably may be expected to be called.
Securities without prepayment or call provisions generally have
an average life equal to their stated maturity.
Dollar Cost Averaging. Dollar cost averaging is an
investment strategy that requires investing a fixed amount of
money in Fund shares at set intervals. This allows you to
purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average
cost per share.
Like any investment strategy, dollar cost averaging can't
guarantee a profit or protect against losses in a steadily
declining market. Dollar cost averaging involves uninterrupted
investing regardless of share price and therefore may not be
appropriate for every investor.
From time to time, a Fund may offer in its advertising and
sales literature to send an investment strategy guide, a tax
guide, or other supplemental information to investors and
shareholders. It may also mention the Stein Roe Counselor
[service mark] and the Stein Roe Counselor Preferred [service
mark] programs and asset allocation and other investment
strategies.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's
opinion as to the credit quality of the security being rated.
However, the ratings are general and are not absolute standards
of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Adviser believes that the quality of
debt securities in which a Fund invests should be continuously
reviewed and that individual analysts give different weightings
to the various factors involved in credit analysis. A rating is
not a recommendation to purchase, sell or hold a security
because it does not take into account market value or
suitability for a particular investor. When a security has
<PAGE> 47
received a rating from more than one service, each rating should
be evaluated independently. Ratings are based on current
information furnished by the issuer or obtained by the rating
services from other sources that they consider reliable.
Ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of such information, or for other
reasons.
The following is a description of the characteristics of
ratings used by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P").
CORPORATE BOND RATINGS
RATINGS BY MOODY'S
AAA. Bonds rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements
are likely to change, such changes as can be visualized are more
unlikely to impair the fundamentally strong position of such
bonds.
AA. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
bonds.
A. Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
BAA. Bonds rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
BA. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
<PAGE> 48
CAA. Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
CA. Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the highest rated
issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated
categories.
BB, B, CCC, CC, AND C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB indicates the lowest
degree of speculation and C the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears. The D rating is
also used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
NOTES:
<PAGE> 49
The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the
major rating categories. Foreign debt is rated on the same
basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account
currency exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities
whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and
interest only and principal only mortgage securities. The
absence of an "r" symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in
total return.
COMMERCIAL PAPER RATINGS
RATINGS BY MOODY'S
Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial
paper obligations are supported by the credit of another entity
or entities, Moody's, in assigning ratings to such issuers,
evaluates the financial strength of the indicated affiliated
corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the
total rating assessment.
RATINGS BY S&P
A brief description of the applicable rating symbols and
their meaning follows:
A. Issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3
to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues
determined to possess overwhelming safety characteristics will
be denoted with a plus (+) sign designation.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) 1. Financial Statements included in Part A of this Amendment
to the Registration Statement: Financial Highlights.
2. Financial statements included in Part B of this Amendment:
Financial statements (investments as of 6/30/95, balance
sheets as of 6/30/95, statements of operations for the
year ended 6/30/95, statements of changes in net assets
for each of the two years in the period ended June 30, 1995,
and notes thereto) are incorporated by reference to
Registrant's 6/30/95 annual reports. Investments as of
12/31/95, balance sheets as of 12/31/95, statements of
operations for the period ended 12/31/95, statements of
changes in net assets for the period ended 12/31/95, and
notes thereto are incorporated by reference to Registrant's
12/31/95 semiannual reports. Schedule I has been omitted as
the required information is presented in the portfolio of
investments. Schedules II, III, IV, and V have been
omitted as the required information is not present.
(b) Exhibits: [Note: As used herein, the term "Registration
Statement" refers to the Registration Statement of the
Registrant on Form N-1A under the Securities Act of 1933, No.
33-02633. The terms "Pre-Effective Amendment" and "PEA"
refer, respectively, to a pre-effective amendment and a post-
effective amendment to the Registration Statement.]
1. (a) Agreement and Declaration of Trust as amended through
10/25/94. (Exhibit 1 to PEA #27.)*
(b) Amendment to Agreement and Declaration of Trust dated
11/1/95.
2. (a) By-Laws of Registrant as amended through 10/24/90.
(Exhibit 2 to PEA #14.)*
(b) Amendment to By-Laws dated 2/3/93. (Exhibit 2(b) to
PEA #21.)*
3. None.
4. None. The Registrant no longer issues share certificates.
5. (a) Investment advisory agreement dated 11/1/96 between
Registrant and Stein Roe & Farnham Incorporated (the
"Adviser") relating to the series Stein Roe Cash
Reserves Fund.
(b) Investment advisory agreement dated 11/1/96 between
Registrant and the Adviser relating to Stein Roe
Government Reserves Fund.
(c) Investment advisory agreement dated 11/1/94 between
Registrant and the Adviser relating to Stein Roe
Income Fund. (Exhibit 5(c) to PEA #27.)*
(d) Investment advisory agreement dated 11/1/94 between
Registrant and the Adviser relating to Stein Roe
Government Income Fund. (Exhibit 5(d) to PEA #27.)*
(e) Investment advisory agreement dated 11/1/94 between
Registrant and the Adviser relating to Stein Roe
Intermediate Bond Fund. (Exhibit 5(e) to PEA #27.)*
(f) Investment advisory agreement dated 11/1/94 between
Registrant and the Adviser relating to Stein Roe
Limited Maturity Income Fund. (Exhibit 5(f) to PEA
#27.)*
(g) Expense undertakings of the Adviser with respect to
Stein Roe Income Fund dated 10/29/93; and with respect
to Stein Roe Government Income Fund, Stein Roe
Intermediate Bond Fund, Stein Roe Government Reserves
Fund and Stein Roe Limited Maturity Income Fund dated
10/31/95.
6. (a) Underwriting agreement between the Stein Roe Funds and
Liberty Securities Corporation dated 6/22/87.
(Exhibit 6 to PEA #2.)*
(b) Form of first amendment to underwriting agreement
dated 10/28/92. (Exhibit 6(b) to PEA #17.)*
7. None.
8. Custodian contract between Registrant and State Street
Bank and Trust Company dated 2/24/86 as amended through
5/8/95. (Exhibit 8 to PEA #27).*
9. (a) Transfer agency agreement dated 8/1/95 between
Registrant and SteinRoe Services Inc. (Exhibit 9(a) to
PEA #27.)*
(b) Form of Accounting and Bookkeeping Agreement (11/1/94).
Exhibit 9(h) to PEA #26.)*
10. (a) Stein Roe Income Fund:
(1) Opinion of Bell, Boyd & Lloyd. (Exhibit 10(a) to
Pre-Effective Amendment.)*
(2) Opinion of Ropes & Gray dated 2/12/86. (Exhibit
10(b) to Pre-Effective Amendment.)*
(b) Stein Roe Cash Reserves Fund, Stein Roe Government
Reserves Fund, Stein Roe Government Income Fund, and
Stein Roe Intermediate Bond Fund:
(1) Opinion and consent of Bell, Boyd & Lloyd.
(Exhibit 10(b)(1) to PEA #4.)*
(2) Opinion and consent of Ropes & Gray. (Exhibit
10(b)(2) to PEA #4.)*
(c) Opinion of Bell, Boyd & Lloyd with respect to the
series Stein Roe Limited Maturity Income Fund.
(Exhibit 10(c) to PEA #20.)*
11. (a) Consent of Ernst & Young LLP.
(b) Consent of Morningstar, Inc. (Exhibit 11(b) to PEA
#14.)*
12. None.
13. Inapplicable.
14. (a) Stein Roe Funds Individual Retirement Account Plan.
(b) Stein Roe & Farnham Prototype Paired Defined
Contribution Plan. (Exhibit 14(b) to PEA #14.)*
15. None.
16. (a) Schedules for computation of yield of Stein Roe Cash
Reserves Fund and Stein Roe Government Reserves Fund
and schedules for computation of total return of
SteinRoe Governments Plus (now named Stein Roe
Government Income Fund), SteinRoe Managed Bonds (now
named Stein Roe Intermediate Bond Fund), and Stein Roe
Income Fund. (Exhibit 16 to PEA #7).*
(b) Schedules for computation of total return of Stein Roe
Cash Reserves Fund and Stein Roe Government Reserves
Fund and schedules for computation of yield for Stein
Roe Government Income Fund, Stein Roe Intermediate Bond
Fund, and Stein Roe Income Fund. (Exhibit 16(b) to PEA
#8.)*
(c) Schedules for computation of total return and yield of
Stein Roe Limited Maturity Income Fund. (Exhibit 16(c)
to PEA #26.)*
17. (a) Financial Data Schedule for the series Stein Roe Cash
Reserves Fund.
(b) Financial Data Schedule for the series Stein Roe
Government Reserves Fund.
(c) Financial Data Schedule for the series Stein Roe Income
Fund.
(d) Financial Data Schedule for the series Stein Roe
Government Income Fund.
(e) Financial Data Schedule for the series Stein Roe
Intermediate Bond Fund.
(f) Financial Data Schedule for the series Stein Roe
Limited Maturity Income Fund
18. Inapplicable.
19. (Miscellaneous.)
(a) Fund Application.
(b) Funds-on-Call Application. (Exhibit 17(b) to PEA
#16).*
(c) Automatic Redemption Services Application. (Exhibit
17(c) to PEA #16).*
________
*Incorporated by reference.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
The Registrant does not consider that it is directly or indirectly
controlling, controlled by, or under common control with other
persons within the meaning of this Item. See "Investment Advisory
Services," "Management," and "Transfer Agent" in the Statement of
Additional Information, each of which is incorporated herein by
reference.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders
Title of Series as of April 19, 1996
--------------- -----------------------
Stein Roe Cash Reserves Fund......................21,620
Stein Roe Government Reserves Fund.................2,130
Stein Roe Income Fund..............................3,407
Stein Roe Government Income Fund...................1,555
Stein Roe Intermediate Bond Fund...................5,231
Stein Roe Limited Maturity Income Fund.............1,943
ITEM 27. INDEMNIFICATION.
Article Tenth of the Agreement and Declaration of Trust of
Registrant (Exhibit 1), which Article is incorporated herein by
reference, provides that Registrant shall provide indemnification
of its trustees and officers (including each person who serves or
has served at Registrant's request as a director, officer, or
trustee of another organization in which Registrant has any
interest as a shareholder, creditor or otherwise) ("Covered
Persons") under specified circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act")
provides that neither the Agreement and Declaration of Trust nor
the By-Laws of Registrant, nor any other instrument pursuant to
which Registrant is organized or administered, shall contain any
provision which protects or purports to protect any trustee or
officer of Registrant against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. In
accordance with Section 17(h) of the 1940 Act, Article Tenth shall
not protect any person against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Unless otherwise permitted under the 1940 Act,
(i) Article Tenth does not protect any person against any
liability to Registrant or to its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office;
(ii) in the absence of a final decision on the merits by a court
or other body before whom a proceeding was brought that a Covered
Person was not liable by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office, no indemnification is permitted under
Article Tenth unless a determination that such person was not so
liable is made on behalf of Registrant by (a) the vote of a
majority of the trustees who are neither "interested persons" of
Registrant, as defined in Section 2(a)(19) of the 1940 Act, nor
parties to the proceeding ("disinterested, non-party trustees"),
or (b) an independent legal counsel as expressed in a written
opinion; and
(iii) Registrant will not advance attorneys' fees or other
expenses incurred by a Covered Person in connection with a civil
or criminal action, suit or proceeding unless Registrant receives
an undertaking by or on behalf of the Covered Person to repay the
advance (unless it is ultimately determined that he is entitled to
indemnification) and (a) the Covered Person provides security for
his undertaking, or (b) Registrant is insured against losses
arising by reason of any lawful advances, or (c) a majority of the
disinterested, non-party trustees of Registrant or an independent
legal counsel as expressed in a written opinion, determine, based
on a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the
Covered Person ultimately will be found entitled to
indemnification.
Any approval of indemnification pursuant to Article Tenth does not
prevent the recovery from any Covered Person of any amount paid to
such Covered Person in accordance with Article Tenth as
indemnification if such Covered Person is subsequently adjudicated
by a court of competent jurisdiction not to have acted in good
faith in the reasonable belief that such Covered Person's action
was in, or not opposed to, the best interests of Registrant or to
have been liable to Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of such Covered
Person's office.
Article Tenth also provides that its indemnification provisions
are not exclusive.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers, and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a trustee, officer,
or controlling person of Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such trustee,
officer, or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Registrant, its trustees and officers, its investment adviser, the
other investment companies advised by the adviser, and persons
affiliated with them are insured against certain expenses in
connection with the defense of actions, suits, or proceedings, and
certain liabilities that might be imposed as a result of such
actions, suits, or proceedings. Registrant will not pay any
portion of the premiums for coverage under such insurance that
would (1) protect any trustee or officer against any liability to
Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office or (2) protect its investment adviser or
principal underwriter, if any, against any liability to Registrant
or its shareholders to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of its duties, or by reason of its
reckless disregard of its duties and obligations under its
contract or agreement with the Registrant; for this purpose the
Registrant will rely on an allocation of premiums determined by
the insurance company.
Pursuant to the indemnification agreement among the Registrant,
its transfer agent and its investment adviser dated July 1, 1995,
the Registrant, its trustees, officers and employees, its transfer
agent and the transfer agent's directors, officers and employees
are indemnified by Registrant's investment adviser against any and
all losses, liabilities, damages, claims and expenses arising out
of any act or omission of the Registrant or its transfer agent
performed in conformity with a request of the investment adviser
that the transfer agent and the Registrant deviate from their
normal procedures in connection with the issue, redemption or
transfer of shares for a client of the investment adviser.
Registrant, its trustees, officers, employees and representatives
and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933 are
indemnified by the distributor of Registrant's shares (the
"distributor"), pursuant to the terms of the distribution
agreement, which governs the distribution of Registrant's shares,
against any and all losses, liabilities, damages, claims and
expenses arising out of the acquisition of any shares of the
Registrant by any person which (i) may be based upon any wrongful
act by the distributor or any of the distributor's directors,
officers, employees or representatives or (ii) may be based upon
any untrue or alleged untrue statement of a material fact
contained in a registration statement, prospectus, statement of
additional information, shareholder report or other information
covering shares of the Registrant filed or made public by the
Registrant or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
therein not misleading if such statement or omission was made in
reliance upon information furnished to the Registrant by the
distributor in writing. In no case does the distributor's
indemnity indemnify an indemnified party against any liability to
which such indemnified party would otherwise be subject by reason
of willful misfeasance, bad faith, or negligence in the
performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under the
distribution agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser is a wholly-owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn is a wholly-owned subsidiary of Liberty
Financial Companies, Inc., which in turn is a subsidiary of
Liberty Mutual Equity Corporation, which in turn is a subsidiary
of Liberty Mutual Insurance Company. The Adviser acts as
investment adviser to individuals, trustees, pension and profit-
sharing plans, charitable organizations, and other investors. In
addition to Registrant, it also acts as investment adviser to
other no-load investment companies having different investment
policies.
During the past two years, neither the Adviser nor any of its
directors or officers, except for Kenneth R. Leibler, C. Allen
Merritt, Jr., N. Bruce Callow, Bruno Bertocci, and David P. Harris
has been engaged in any business, profession, vocation, or
employment of a substantial nature either on their own account or
in the capacity of director, officer, partner, or trustee, other
than as an officer or associate of the Adviser. Mr. Leibler is
President and Chief Executive Officer of Liberty Financial
Companies, Inc.; Mr. Merritt is Senior Vice President and Treasurer
of Liberty Financial Companies, Inc.; Mr. Callow was senior vice
president of trust and financial services for The Northern Trust
prior to June, 1994. Messrs. Bertocci and Harris were global
equity portfolio managers with Rockefeller & Co. prior to May, 1995
and, commencing January 1, 1996, are dually employed by Colonial
Management Associates, Inc. as vice presidents and portfolio
managers.
Certain directors and officers of the Adviser also serve and have
during the past two years served in various capacities as
officers, directors, or trustees of SSI and of the Registrant,
Stein Roe Income Trust, Stein Roe Municipal Trust, SR&F Base
Trust, SteinRoe Variable Investment Trust and LFC Utilities Trust,
investment companies managed by the Adviser. (The listed entities
are located at One South Wacker Drive, Chicago, Illinois 60606,
except for SteinRoe Variable Investment Trust and LFC Utilities
Trust, which are located at Federal Reserve Plaza, Boston, MA
02210.) A list of such capacities is given below.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Gary A. Anetsberger Vice President
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President; Secretary
Philip D. Hausken Vice President
Kenneth J. Kozanda Vice President; Treasurer
Stephen P. Lautz Vice President
Kenneth R. Leibler Director
C. Allen Merritt, Jr. Director; Vice President
Hans P. Ziegler Director, President, Vice Chairman
Chairman
SR&F BASE TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President;
Secretary Vice-President
Ann H. Benjamin Vice-President
N. Bruce Callow Executive Vice-President
Philip D. Hausken Vice-President
Michael T. Kennedy Vice-President
Stephen P. Lautz Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
Anthony G. Zulfer, Jr. Trustee
STEIN ROE INCOME TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President;
Secretary Vice-President
Ann H. Benjamin Vice-President
Thomas W. Butch Vice-President
N. Bruce Callow Executive Vice-President
Philip D. Hausken Vice-President
Michael T. Kennedy Vice-President
Stephen P. Lautz Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
Anthony G. Zulfer, Jr. Trustee
STEIN ROE INVESTMENT TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President;
Secretary Vice-President
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Vice-President
N. Bruce Callow Executive Vice-President
Daniel K. Cantor Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
David P. Harris Vice-President
Philip D. Hausken Vice-President
Harvey B. Hirschhorn Vice-President
Alfred F. Kugel Trustee
Stephen P. Lautz Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Richard B. Peterson Vice-President
Gloria J. Santella Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President;
Secretary Vice-President
Thomas W. Butch Vice-President
N. Bruce Callow Executive Vice-President
Joanne T. Costopoulos Vice-President
Philip D. Hausken Vice-President
Stephen P. Lautz Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
Anthony G. Zulfer, Jr. Trustee
STEINROE VARIABLE INVESTMENT TRUST
Gary A. Anetsberger Treasurer
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President
Ann H. Benjamin Vice President
E. Bruce Dunn Vice President
Erik P. Gustafson Vice President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
Richard B. Peterson Vice President
LFC UTILITIES TRUST
Gary A. Anetsberger Vice President
Ophelia L. Barsketis Vice President
ITEM 29. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Liberty Securities
Corporation, is a wholly-owned subsidiary of Liberty Investment
Services, Inc., which in turn is a wholly-owned subsidiary of
Liberty Financial Companies, Inc., which in turn is a subsidiary
of Liberty Mutual Equity Corporation, which in turn is a
subsidiary of Liberty Mutual Insurance Company. Liberty
Securities Corporation is principal underwriter for the following
investment companies:
Stein Roe Income Trust
Stein Roe Municipal Trust
Stein Roe Investment Trust
Liberty Financial Trust
Liberty Growth Properties Limited Partnership
Liberty Income Properties Limited Partnership
Liberty/Heritage Limited Partnership II
Liberty/Kuester Limited Partnership III
Liberty/Manhattan Beach Limited Partnership
Liberty/High Income Plus Limited Partnership
Liberty/Overland Park Limited Partnership
Set forth below is information concerning the directors and
officers of Liberty Securities Corporation:
Positions
Positions and Offices and Offices
Name with Underwriter with Registrant
- ------------------ -------------------- ---------------
Porter P. Morgan Chairman of the Board; Director None
Frank L. Tarantino President; Chief Operating
Officer; Director None
Robert L. Spadafora Executive Vice President -
Sales and Marketing None
John T. Treece, Jr. Senior Vice President - Operations None
John W. Reading Senior Vice President, General
Counsel, and Assistant Secretary None
Robert M. Young Senior Vice President - Sales
Development None
Valerie Arendell Senior Vice President - Sales None
Philip J. Iudice Treasurer None
Joanne K. Novak Vice President - Human Resources None
Helene L. Young Vice President - Sales Support None
Gerald H. Stanney, Vice President and Compliance
Jr. Officer (Boston) None
Jilaine Hummel Bauer Vice President and Compliance Exec. V-P &
Officer (Chicago) Secretary
Lindsay Cook Vice President Trustee
Ralph E. Nixon Vice President None
Diane L. Basler Vice President None
Glenn E. Williams Assistant Vice President None
John A. Benning Secretary None
C. Allen Merritt, Jr. Assistant Treasurer; Assistant
Secretary; Director None
The principal business address of Ms. Bauer is One South Wacker
Drive, Chicago, IL 60606; that of Mr. Williams is Two Righter
Parkway, Wilmington, DE 19803; and that of the other officers is
600 Atlantic Avenue, Boston, MA 02210.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Jilaine Hummel Bauer
Executive Vice-President and Secretary
One South Wacker Drive
Chicago, Illinois 60606
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
Since the information called for by Item 5A for the Funds (other
than the Money Market Funds, to which this item does not relate)
is contained in the latest annual report to shareholders,
Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the latest annual report to
shareholders of the Bond Funds upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused
this amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City
of Chicago and State of Illinois on the ___ day of April, 1996.
STEIN ROE INCOME TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated:
Signature Title Date
- ------------------------ --------------------- --------------
TIMOTHY K. ARMOUR President and Trustee April 26, 1996
Timothy K. Armour
Principal Executive Officer
GARY A. ANETSBERGER Senior Vice-President April 26, 1996
Gary A. Anetsberger
Principal Financial Officer
SHARON R. ROBERTSON Controller April 26, 1996
Sharon R. Robertson
Principal Accounting Officer
KENNETH L. BLOCK Trustee April 26, 1996
Kenneth L. Block
WILLIAM W. BOYD Trustee April 26, 1996
William W. Boyd
_____________________ Trustee April 26, 1996
Lindsay Cook
FRANCIS W. MORLEY Trustee April 26, 1996
Francis W. Morley
CHARLES R. NELSON Trustee April 26, 1996
Charles R. Nelson
GORDON R. WORLEY Trustee April 26, 1996
Gordon R. Worley
<PAGE>
STEIN ROE INCOME TRUST
INDEX TO EXHIBITS FILED WITH THIS AMENDMENT
Exhibit
Number Description
- ------- -------------
1(b) Amendment to Declaration of Trust
5(a) Investment advisory agreement relating to Stein Roe Cash
Reserves Fund.
5(b) Investment advisory agreement relating to Stein Roe
Government Reserves Fund.
5(g) Expense undertakings.
11(a) Consent of Ernst & Young LLP.
14(a) Stein Roe & Farnham Funds Individual Retirement
Account Plan.
17(a) Financial Data Schedule for the series Stein Roe Cash
Reserves Fund.
17(b) Financial Data Schedule for the series Stein Roe
Government Reserves Fund.
17(c) Financial Data Schedule for the series Stein Roe Income
Fund.
17(d) Financial Data Schedule for the series Stein Roe
Government Income Fund.
17(e) Financial Data Schedule for the series Stein Roe
Intermediate Bond Fund.
17(f) Financial Data Schedule for the series Stein Roe Limited
Maturity Income Fund.
19(a) Fund Application.
Exhibit 1(b)
STEINROE INCOME TRUST
AMENDMENT TO AGREEMENT AND DECLARATION OF TRUST
The undersigned, being a majority of the duly elected and
qualified Trustees of SteinRoe Income Trust, a voluntary
association with transferable shares organized under the laws of
the Commonwealth of Massachusetts pursuant to an Agreement and
Declaration of Trust dated January 3, 1986 (the "Declaration of
Trust"), do hereby amend the Declaration of Trust as follows and
hereby consent to such amendment:
1. Article First of the Declaration of Trust is deleted and
the following is inserted in lieu thereof:
FIRST: Name
The name of the Trust (which is hereafter called the "Trust")
is Stein Roe Income Trust.
2. Article Thirteenth is deleted and the following is
inserted in lieu thereof:
THIRTEENTH: Use of Name
The Trust acknowledges that it is adopting its trust name,
and may adopt the names of various series of the Trust, through
permission of Stein Roe & Farnham Incorporated, a Delaware
corporation, and agrees that Stein Roe & Farnham Incorporated
reserves to itself and any successor to its business the right to
grant the non-exclusive right to use the name "Stein Roe Income
Trust," or "Stein Roe & Farnham Income Trust" or "SR&F __________
Trust" or "SteinRoe ______ Fund" or "Stein Roe & Farnham _______
Fund" or "Stein Roe __________" or "Stein ___________" or
"SteinRoe," or "Stein Roe," or "Stein," or any similar name to any
other entity, including but not limited to any investment company
of which Stein Roe & Farnham Incorporated or any subsidiary or
affiliate thereof or any successor to the business thereof shall
be the investment adviser.
This instrument may be executed in several counterparts, each
of which shall be deemed an original, but all taken together shall
be one instrument.
IN WITNESS WHEREOF, the undersigned have hereunto set their
hands and seals as of this 1st day of November, 1995.
TIMOTHY K. ARMOUR WILLIAM W. BOYD
KENNETH L. BLOCK LINDSAY COOK
FRANCIS W. MORLEY CHARLES R. NELSON
GORDON R. WORLEY
STATE OF ILLINOIS) SS
COUNTY OF COOK)
Then personally appeared the above-named Timothy K. Armour, known
to me and known to be a trustee of SteinRoe Income Trust, and
acknowledged the foregoing instrument to be his free act and deed,
before me.
NICOLETTE D. PARRISH
Notary Public
My commission expires: 10/30/97
(NOTARIAL SEAL)
STATE OF ILLINOIS) SS
COUNTY OF COOK)
Then personally appeared the above-named William W. Boyd, known to
me and known to be a trustee of SteinRoe Income Trust, and
acknowledged the foregoing instrument to be his free act and deed,
before me.
NICOLETTE D. PARRISH
Notary Public
My commission expires: 10/30/97
(NOTARIAL SEAL)
STATE OF ILLINOIS) SS
COUNTY OF COOK)
Then personally appeared the above-named Kenneth L. Block, known
to me and known to be a trustee of SteinRoe Income Trust, and
acknowledged the foregoing instrument to be his free act and deed,
before me.
NICOLETTE D. PARRISH
Notary Public
My commission expires: 10/30/97
(NOTARIAL SEAL)
STATE OF ILLINOIS) SS
COUNTY OF COOK)
Then personally appeared the above-named Lindsay Cook, known to me
and known to be a trustee of SteinRoe Income Trust, and
acknowledged the foregoing instrument to be his free act and deed,
before me.
NICOLETTE D. PARRISH
Notary Public
My commission expires: 10/30/97
(NOTARIAL SEAL)
STATE OF ILLINOIS) SS
COUNTY OF COOK)
Then personally appeared the above-named Francis W. Morley, known
to me and known to be a trustee of SteinRoe Income Trust, and
acknowledged the foregoing instrument to be his free act and deed,
before me.
NICOLETTE D. PARRISH
Notary Public
My commission expires: 10/30/97
(NOTARIAL SEAL)
STATE OF ILLINOIS) SS
COUNTY OF COOK)
Then personally appeared the above-named Charles R. Nelson, known
to me and known to be a trustee of SteinRoe Income Trust, and
acknowledged the foregoing instrument to be his free act and deed,
before me.
NICOLETTE D. PARRISH
Notary Public
My commission expires: 10/30/97
(NOTARIAL SEAL)
STATE OF ILLINOIS) SS
COUNTY OF COOK)
Then personally appeared the above-named Gordon R. Worley, known
to me and known to be a trustee of SteinRoe Income Trust, and
acknowledged the foregoing instrument to be his free act and deed,
before me.
NICOLETTE D. PARRISH
Notary Public
My commission expires: 10/30/97
(NOTARIAL SEAL)
<PAGE>
Exhibit 5(a)
INVESTMENT ADVISORY AGREEMENT
STEIN ROE INCOME TRUST, a Massachusetts business trust
registered under the Investment Company Act of 1940 ("1940 Act") as
an open-end diversified management investment company ("Trust"),
hereby appoints STEIN ROE & FARNHAM INCORPORATED, a Delaware
corporation registered under the Investment Advisers Act of 1940 as
an investment adviser, of Chicago, Illinois ("Manager"), to manage
the portion of its assets represented by the shares of beneficial
interest issued in the series designated STEIN ROE CASH RESERVES
FUND ("Fund") and to furnish certain administrative services.
In connection therewith, Trust and Manager hereby agree that:
1. Management. Manager shall manage the investment and
reinvestment of Trust's assets represented by Fund shares ("Fund
assets") and advise with respect thereto for the period and on the
terms set forth in this Agreement, subject to the overall control of
the Board of Trustees of Trust. Manager shall give due
consideration to the investment policies and restrictions and the
other statements concerning Fund in Trust's agreement and
declaration of trust, by-laws, and registration statements under the
1940 Act and the Securities Act of 1933 ("1933 Act"), and to the
provisions of the Internal Revenue Code applicable to Fund as a
regulated investment company. Manager shall for all purposes be
deemed to be an independent contractor and not an agent of Trust and
shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent Trust in any way.
2. Expenses Borne by Trust. Subject to paragraph 3, Trust
shall pay all expenses incidental to its organization, operations
and business not specifically assumed or agreed to be paid by
Manager pursuant to paragraphs 4 and 6, including, without
limitation: all charges of depostories, custodians and other
agencies for the safekeeping and servicing of its cash, securities,
and other property, and of its transfer, shareholder recordkeeping,
dividend disbursing, and redemption agents, if any; all charges for
equipment or services used for obtaining price quotations or for
communication between Manager or Trust and the custodian, transfer
agent or any other agent selected by Trust; all charges for
accounting services provided to Trust by the custodian, the Manager,
or any other provider of accounting services; all charges for
services of Trust's independent auditors; all charges for services
to Trust by legal counsel; all compensation of trustees, other than
those affiliated with Manager, and all expenses incurred in
connection with their services to Trust; all expenses of notices,
proxy solicitation material and reports to its shareholders; all
expenses of preparation and printing of annual or more frequent
revisions of Trust's prospectus and of supplying each then-existing
shareholder or beneficial owner with a copy of such revised
prospectus; all expenses related to preparing and transmitting
certificates representing Trust shares; all expenses of bond and
insurance coverage required by law or deemed advisable by the Board
of Trustees; all brokers' commissions and other normal charges
incident to the purchase and sale of portfolio securities; all taxes
and corporate fees payable to Federal, state or other governmental
agencies, domestic or foreign; all stamp or other transfer taxes;
all expenses of registering and maintaining the registration of
Trust under the 1940 Act and of Trust's shares under the 1933 Act,
of qualifying and maintaining qualification of Trust and of Trust's
shares for sale under securities laws of various states or other
jurisdictions and of registration and qualification of Trust under
all other laws applicable to the Trust or its business activities;
and all fees, dues or other expenses incurred by Trust in connection
with membership of Trust in any trade association or other
investment company organization.
3. Allocation of Expenses Borne by Trust. Any expenses borne
by Trust that are attributable solely to the organization, operation
or business of Fund shall be paid solely out of Fund assets. Any
expense borne by Trust which is not solely attributable to Fund, nor
solely to any other series of shares of Trust, shall be apportioned
in such manner as Manager determines is fair and appropriate, or as
otherwise specified by the Board of Trustees.
4. Expenses Borne by Manager. Manager at its own expense
shall furnish administrative services, executive and other
personnel, office space, and office facilities for conducting that
portion of Trust's business relating to Fund. However, Manager
shall not be required to pay or provide any credit for services
provided by Trust's custodian, transfer agent, or other agents
without additional cost to the Trust.
5. Management Fee. For the services to be rendered and the
charges to be assumed and to be paid by Manager hereunder, Trust
shall pay to Manager out of Fund assets a monthly fee, which is
computed and accrued daily, of (a) one twenty-fourth of one percent
(1/24 of 1%) the first $500 million dollars of average net assets of
Fund; plus (b) three eightieths of one percent (3/80 of 1%) of the
average net assets in excess of $500 million but not exceeding $1
billion, plus (c) one thirtieth of one percent (1/30 of 1%) of the
average net assets of Fund in excess of $1 billion, as determined as
of the close of each day in the monthly period.
6. Expense Limitation. The total expenses allocated to Fund
pursuant to paragraph 3, including fees paid to Manager, but
exclusive of taxes, of interest, of all commissions and other normal
charges incident to the purchase and sale of portfolio securities,
and extraordinary charges such as litigation costs, shall not exceed
the most restrictive applicable limits prescribed by any state in
which Fund shares are being offered for sale to the public, and
Manager agrees to reimburse Trust for any such expense in excess of
such limits, provided that Manager shall not be required to make
such reimbursement for any fiscal year to the extent the
reimbursement exceeds the amount of management fees paid by the Fund
for such year.
7. Non-Exclusivity. The services of Manager to Trust
hereunder are not to be deemed exclusive and Manager shall be free
to render similar services to others.
8. Investment in Fund Shares. Neither Manager nor any of its
directors, officers or stockholders (or partners of stockholders)
shall purchase or sell, or take a long or short position in, Fund
shares, except (a) at the same price as the price to the public at
the time of purchase or sale, or (b) prior to the commencement of
the public offering of shares of Fund at the net asset value of such
shares.
9. Standard of Care. Neither Manager, nor any of its
directors, officers or stockholders (or partners of stockholders),
agents or employees shall be liable or responsible to Trust or its
shareholders for any error of judgment, mistake of law or any loss
arising out of any investment, or for any other act or omission in
the performance by Manager of its duties under this Agreement, except
for liability resulting from willful misfeasance, bad faith or gross
negligence on Manager's part or from reckless disregard by Manager of
its obligations and duties under this Agreement.
10. Amendment. This Agreement may not be amended without the
affirmative votes (a) of a majority of the Board of Trustees,
including a majority of those trustees who are not "interested
persons" of Trust or of Manager, voting in person at a meeting
called for the purpose of voting on such approval, and (b) of a
"majority of the outstanding shares" of Fund. The terms "interested
persons" and "vote of a majority of the outstanding shares" shall be
construed in accordance with their respective definitions in
Sections 2(a)(19) and 2(a)(42) of the 1940 Act and, with respect to
the latter term, in accordance with Rule 18f-2 under the 1940 Act.
11. Termination. This Agreement may be terminated at any
time, without payment of any penalty, by the Board of Trustees of
Trust, or by a vote of a majority of the outstanding shares of Fund,
upon at least sixty (60) days' written notice to Manager. This
Agreement may be terminated by Manager at any time upon at least
sixty (60) days' written notice to Trust. This Agreement shall
terminate automatically in the event of its assignment (as defined
in Section 2(a)(4) of the 1940 Act). Unless terminated as
hereinbefore provided, this Agreement shall continue in effect until
June 30, 1996 and thereafter from year to year only so long as such
continuance is specifically approved at least annually (a) by a
majority of those trustees who are not interested persons of Trust
or of Manager, voting in person at a meeting called for the purpose
of voting on such approval, and (b) by either the Board of Trustees
of Trust or by a vote of a majority of the outstanding shares of
Fund.
12. Non-Liability of Trustees and Shareholders. Any
obligation of Trust hereunder shall be binding only upon the assets
of Trust (or the applicable series thereof) and shall not be binding
upon any trustee, officer, employee, agent or shareholder of Trust.
Neither the authorization of any action by the trustees or
shareholders of Trust nor the execution of this Agreement on behalf
of Trust shall impose any liability upon any trustee or any
shareholder.
13. Use of Manager's Name. The Trust may use the name
"Stein Roe Income Trust" and the Fund may use the name "Stein Roe
Cash Reserves Fund" or any other name derived from the name
"Stein Roe & Farnham" only for so long as this Agreement or any
extension, renewal, or amendment hereof remains in effect, including
any similar agreement with any organization which shall have
succeeded to the business of the Manager as investment adviser. At
such time as this Agreement or any extension, renewal or amendment
hereof, or such other similar agreement shall no longer be in
effect, the Trust and Fund will cease to use any name derived from
the name "Stein Roe & Farnham" or otherwise connected with the
Manager, or with any organization which shall have succeeded to the
Manager's business as investment adviser.
14. References and Headings. In this Agreement and in any
such amendment, references to this Agreement and all expressions
such as "herein," "hereof," and "hereunder" shall be deemed to refer
to this Agreement as amended or affected by any such amendments.
Headings are placed herein for convenience of reference only and shall
not be taken as a part hereof or control or affect the meaning,
construction or effect of this Agreement. This Agreement may be
executed in any number of counterparts, each of which shall be deemed
an original.
Dated: November 1, 1995
STEIN ROE INCOME TRUST
Attest: By: TIMOTHY K. ARMOUR
President
JILAINE HUMMEL BAUER
Secretary
STEIN ROE & FARNHAM INCORPORATED
Attest: By: HANS P. ZIEGLER
Chief Executive Officer
KEITH J. RUDOLF
Secretary
<PAGE>
Exhibit 5(b)
INVESTMENT ADVISORY AGREEMENT
STEIN ROE INCOME TRUST, a Massachusetts business trust
registered under the Investment Company Act of 1940 ("1940 Act") as
an open-end diversified management investment company ("Trust"),
hereby appoints STEIN ROE & FARNHAM INCORPORATED, a Delaware
corporation registered under the Investment Advisers Act of 1940 as
an investment adviser, of Chicago, Illinois ("Manager"), to manage
the portion of its assets represented by the shares of beneficial
interest issued in the series designated STEIN ROE GOVERNMENT RESERVES
FUND ("Fund") and to furnish certain administrative services.
In connection therewith, Trust and Manager hereby agree that:
1. Management. Manager shall manage the investment and
reinvestment of Trust's assets represented by Fund shares ("Fund
assets") and advise with respect thereto for the period and on the
terms set forth in this Agreement, subject to the overall control of
the Board of Trustees of Trust. Manager shall give due
consideration to the investment policies and restrictions and the
other statements concerning Fund in Trust's agreement and
declaration of trust, by-laws, and registration statements under the
1940 Act and the Securities Act of 1933 ("1933 Act"), and to the
provisions of the Internal Revenue Code applicable to Fund as a
regulated investment company. Manager shall for all purposes be
deemed to be an independent contractor and not an agent of Trust and
shall, unless otherwise expressly provided or authorized, have no
authority to act for or represent Trust in any way.
2. Expenses Borne by Trust. Subject to paragraph 3, Trust
shall pay all expenses incidental to its organization, operations
and business not specifically assumed or agreed to be paid by
Manager pursuant to paragraphs 4 and 6, including, without
limitation: all charges of depostories, custodians and other
agencies for the safekeeping and servicing of its cash, securities,
and other property, and of its transfer, shareholder recordkeeping,
dividend disbursing, and redemption agents, if any; all charges for
equipment or services used for obtaining price quotations or for
communication between Manager or Trust and the custodian, transfer
agent or any other agent selected by Trust; all charges for
accounting services provided to Trust by the custodian, the Manager,
or any other provider of accounting services; all charges for
services of Trust's independent auditors; all charges for services
to Trust by legal counsel; all compensation of trustees, other than
those affiliated with Manager, and all expenses incurred in
connection with their services to Trust; all expenses of notices,
proxy solicitation material and reports to its shareholders; all
expenses of preparation and printing of annual or more frequent
revisions of Trust's prospectus and of supplying each then-existing
shareholder or beneficial owner with a copy of such revised
prospectus; all expenses related to preparing and transmitting
certificates representing Trust shares; all expenses of bond and
insurance coverage required by law or deemed advisable by the Board
of Trustees; all brokers' commissions and other normal charges
incident to the purchase and sale of portfolio securities; all taxes
and corporate fees payable to Federal, state or other governmental
agencies, domestic or foreign; all stamp or other transfer taxes;
all expenses of registering and maintaining the registration of
Trust under the 1940 Act and of Trust's shares under the 1933 Act,
of qualifying and maintaining qualification of Trust and of Trust's
shares for sale under securities laws of various states or other
jurisdictions and of registration and qualification of Trust under
all other laws applicable to the Trust or its business activities;
and all fees, dues or other expenses incurred by Trust in connection
with membership of Trust in any trade association or other
investment company organization.
3. Allocation of Expenses Borne by Trust. Any expenses borne
by Trust that are attributable solely to the organization, operation
or business of Fund shall be paid solely out of Fund assets. Any
expense borne by Trust which is not solely attributable to Fund, nor
solely to any other series of shares of Trust, shall be apportioned
in such manner as Manager determines is fair and appropriate, or as
otherwise specified by the Board of Trustees.
4. Expenses Borne by Manager. Manager at its own expense
shall furnish administrative services, executive and other
personnel, office space, and office facilities for conducting that
portion of Trust's business relating to Fund. However, Manager
shall not be required to pay or provide any credit for services
provided by Trust's custodian, transfer agent, or other agents
without additional cost to the Trust.
5. Management Fee. For the services to be rendered and the
charges to be assumed and to be paid by Manager hereunder, Trust
shall pay to Manager out of Fund assets a monthly fee, which is
computed and accrued daily, of (a) one twenty-fourth of one percent
(1/24 of 1%) the first $500 million dollars of average net assets of
Fund; plus (b) three eightieths of one percent (3/80 of 1%) of the
average net assets in excess of $500 million but not exceeding $1
billion, plus (c) one thirtieth of one percent (1/30 of 1%) of the
average net assets of Fund in excess of $1 billion, as determined as
of the close of each day in the monthly period.
6. Expense Limitation. The total expenses allocated to Fund
pursuant to paragraph 3, including fees paid to Manager, but
exclusive of taxes, of interest, of all commissions and other normal
charges incident to the purchase and sale of portfolio securities,
and extraordinary charges such as litigation costs, shall not exceed
the most restrictive applicable limits prescribed by any state in
which Fund shares are being offered for sale to the public, and
Manager agrees to reimburse Trust for any such expense in excess of
such limits, provided that Manager shall not be required to make
such reimbursement for any fiscal year to the extent the
reimbursement exceeds the amount of management fees paid by the Fund
for such year.
7. Non-Exclusivity. The services of Manager to Trust
hereunder are not to be deemed exclusive and Manager shall be free
to render similar services to others.
8. Investment in Fund Shares. Neither Manager nor any of its
directors, officers or stockholders (or partners of stockholders)
shall purchase or sell, or take a long or short position in, Fund
shares, except (a) at the same price as the price to the public at
the time of purchase or sale, or (b) prior to the commencement of
the public offering of shares of Fund at the net asset value of such
shares.
9. Standard of Care. Neither Manager, nor any of its
directors, officers or stockholders (or partners of stockholders),
agents or employees shall be liable or responsible to Trust or its
shareholders for any error of judgment, mistake of law or any loss
arising out of any investment, or for any other act or omission in
the performance by Manager of its duties under this Agreement, except
for liability resulting from willful misfeasance, bad faith or gross
negligence on Manager's part or from reckless disregard by Manager of
its obligations and duties under this Agreement.
10. Amendment. This Agreement may not be amended without the
affirmative votes (a) of a majority of the Board of Trustees,
including a majority of those trustees who are not "interested
persons" of Trust or of Manager, voting in person at a meeting
called for the purpose of voting on such approval, and (b) of a
"majority of the outstanding shares" of Fund. The terms "interested
persons" and "vote of a majority of the outstanding shares" shall be
construed in accordance with their respective definitions in
Sections 2(a)(19) and 2(a)(42) of the 1940 Act and, with respect to
the latter term, in accordance with Rule 18f-2 under the 1940 Act.
11. Termination. This Agreement may be terminated at any
time, without payment of any penalty, by the Board of Trustees of
Trust, or by a vote of a majority of the outstanding shares of Fund,
upon at least sixty (60) days' written notice to Manager. This
Agreement may be terminated by Manager at any time upon at least
sixty (60) days' written notice to Trust. This Agreement shall
terminate automatically in the event of its assignment (as defined
in Section 2(a)(4) of the 1940 Act). Unless terminated as
hereinbefore provided, this Agreement shall continue in effect until
June 30, 1996 and thereafter from year to year only so long as such
continuance is specifically approved at least annually (a) by a
majority of those trustees who are not interested persons of Trust
or of Manager, voting in person at a meeting called for the purpose
of voting on such approval, and (b) by either the Board of Trustees
of Trust or by a vote of a majority of the outstanding shares of
Fund.
12. Non-Liability of Trustees and Shareholders. Any
obligation of Trust hereunder shall be binding only upon the assets
of Trust (or the applicable series thereof) and shall not be binding
upon any trustee, officer, employee, agent or shareholder of Trust.
Neither the authorization of any action by the trustees or
shareholders of Trust nor the execution of this Agreement on behalf
of Trust shall impose any liability upon any trustee or any
shareholder.
13. Use of Manager's Name. The Trust may use the name
"Stein Roe Income Trust" and the Fund may use the name "Stein Roe
Government Reserves Fund" or any other name derived from the name
"Stein Roe & Farnham" only for so long as this Agreement or any
extension, renewal, or amendment hereof remains in effect, including
any similar agreement with any organization which shall have
succeeded to the business of the Manager as investment adviser. At
such time as this Agreement or any extension, renewal or amendment
hereof, or such other similar agreement shall no longer be in
effect, the Trust and Fund will cease to use any name derived from
the name "Stein Roe & Farnham" or otherwise connected with the
Manager, or with any organization which shall have succeeded to the
Manager's business as investment adviser.
14. References and Headings. In this Agreement and in any
such amendment, references to this Agreement and all expressions
such as "herein," "hereof," and "hereunder" shall be deemed to refer
to this Agreement as amended or affected by any such amendments.
Headings are placed herein for convenience of reference only and shall
not be taken as a part hereof or control or affect the meaning,
construction or effect of this Agreement. This Agreement may be
executed in any number of counterparts, each of which shall be deemed
an original.
Dated: November 1, 1995
STEIN ROE INCOME TRUST
Attest: By: TIMOTHY K. ARMOUR
President
JILAINE HUMMEL BAUER
Secretary
STEIN ROE & FARNHAM INCORPORATED
Attest: By: HANS P. ZIEGLER
Chief Executive Officer
KEITH J. RUDOLF
Secretary
<PAGE>
Exhibit 5(g)
October 29, 1993
SteinRoe Income Trust
300 West Adams Street
Chicago, Illinois 60606
Re: SteinRoe Income Fund
Gentlemen:
The firm of Stein Roe & Farnham Incorporated hereby undertakes as
follows:
In the interest of limiting the expenses of the series of
SteinRoe Income Trust designated SteinRoe Income Fund (the
"Fund"), Stein Roe & Farnham Incorporated ("SR&F"), the
investment adviser to the Fund, undertakes to reimburse the
Fund to the extent, but only to the extent, that annualized
expenses (excluding taxes, interest, all commissions and
other normal charges incident to the purchase and sale of
portfolio securities, and extraordinary charges such as
litigation costs, but including fees paid to SR&F) exceed
0.82% of average net assets of the Fund through October 31,
1998. The amount of the expense reimbursement (or any
offsetting reimbursement by the Fund to SR&F) shall be
computed on an annual basis, but accrued and paid monthly.
Sincerely,
STEIN ROE & FARNHAM INCORPORATED
By: Timothy K. Armour
President, Mutual Funds Division
Attest:
By: Jilaine Hummel Bauer
Assistant Secretary
Stein Roe & Farnham Incorporated
300 West Adams Street
Chicago, IL
60606-5109
312.368.7800
Liberty Securities Corporation, Distributor
<PAGE>
October 31, 1995
SteinRoe Income Trust
One South Wacker Drive
Chicago, Illinois 60606
Re: SteinRoe Government Income Fund
Gentlemen:
The firm of Stein Roe & Farnham Incorporated hereby undertakes as
follows:
In the interest of limiting the expenses of the series of
SteinRoe Income Trust designated SteinRoe Government Income
Fund (the "Fund"), Stein Roe & Farnham Incorporated ("SR&F"),
the investment adviser to the Fund, undertakes to voluntarily
waive its management fee and/or absorb certain expenses for
the Fund to the extent, but only to the extent, that
annualized fees and expenses (excluding taxes, interest, all
commissions and other normal charges incident to the purchase
and sale of portfolio securities, and extraordinary charges
such as litigation costs) during the period that this
undertaking is in effect exceed 1% of average net assets
of the Fund. Unless extended in writing by SR&F, this
undertaking shall terminate on October 31, 1996, subject to
the right of SR&F on 30 days' written notice to terminate
this undertaking. The amount of the fee waiver and/or
expense absorption (or any offsetting reimbursement by the
Fund to SR&F) shall be computed on an annual basis, but
accrued and paid monthly.
Sincerely,
STEIN ROE & FARNHAM INCORPORATED
By: Kenneth J. Kozanda
Treasurer
Attest:
By: Jilaine Hummel Bauer
Assistant Secretary
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL
60606-4685
312.368.7700
Liberty Securities Corporation, Distributor
<PAGE>
November 1, 1995
SteinRoe Income Trust
One South Wacker Drive
Chicago, Illinois 60606
Re: SteinRoe Intermediate Bond Fund
Gentlemen:
The firm of Stein Roe & Farnham Incorporated hereby undertakes as
follows:
In the interest of limiting the expenses of the series of
SteinRoe Income Trust designated SteinRoe Intermediate Bond
Fund (the "Fund"), Stein Roe & Farnham Incorporated ("SR&F"),
the investment adviser to the Fund, undertakes to voluntarily
waive its management fee and/or absorb certain expenses for
the Fund to the extent, but only to the extent, that
annualized fees and expenses (excluding taxes, interest, all
commissions and other normal charges incident to the purchase
and sale of portfolio securities, and extraordinary charges
such as litigation costs) during the period that this
undertaking is in effect exceed .7 of 1% of average net assets
of the Fund. Unless extended in writing by SR&F, this
undertaking shall terminate on October 31, 1996, subject to
the right of SR&F on 30 days' written notice to terminate
this undertaking. The amount of the fee waiver and/or
expense absorption (or any offsetting reimbursement by the
Fund to SR&F) shall be computed on an annual basis, but
accrued and paid monthly.
Sincerely,
STEIN ROE & FARNHAM INCORPORATED
By: Kenneth J. Kozanda
Treasurer
Attest:
By: Jilaine Hummel Bauer
Assistant Secretary
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL
60606-4685
312.368.7700
<PAGE>
November 1, 1995
SteinRoe Income Trust
One South Wacker Drive
Chicago, Illinois 60606
Re: SteinRoe Government Reserves
Gentlemen:
The firm of Stein Roe & Farnham Incorporated hereby undertakes as
follows:
In the interest of limiting the expenses of the series of
SteinRoe Income Trust designated SteinRoe Government Reserves
(the "Fund"), Stein Roe & Farnham Incorporated ("SR&F"),
the investment adviser to the Fund, undertakes to voluntarily
waive its management fee and/or absorb certain expenses for
the Fund to the extent, but only to the extent, that
annualized fees and expenses (excluding taxes, interest, all
commissions and other normal charges incident to the purchase
and sale of portfolio securities, and extraordinary charges
such as litigation costs) during the period that this
undertaking is in effect exceed .7 of 1% of average net assets
of the Fund. Unless extended in writing by SR&F, this
undertaking shall terminate on October 31, 1996, subject to
the right of SR&F on 30 days' written notice to terminate
this undertaking. The amount of the fee waiver and/or
expense absorption (or any offsetting reimbursement by the
Fund to SR&F) shall be computed on an annual basis, but
accrued and paid monthly.
Sincerely,
STEIN ROE & FARNHAM INCORPORATED
By: Kenneth J. Kozanda
Treasurer
Attest:
By: Jilaine Hummel Bauer
Assistant Secretary
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL
60606-4685
312.368.7700
<PAGE>
November 1, 1995
SteinRoe Income Trust
One South Wacker Drive
Chicago, Illinois 60606
Re: SteinRoe Limited Maturity Income Fund
Gentlemen:
The firm of Stein Roe & Farnham Incorporated hereby undertakes as
follows:
In the interest of limiting the expenses of the series of
SteinRoe Income Trust designated SteinRoe Limited Maturity
Income Fund (the "Fund"), Stein Roe & Farnham Incorporated
("SR&F"), the investment adviser to the Fund, undertakes to
voluntarily waive its management fee and/or absorb certain expenses
for the Fund to the extent, but only to the extent, that
annualized fees and expenses (excluding taxes, interest, all
commissions and other normal charges incident to the purchase
and sale of portfolio securities, and extraordinary charges
such as litigation costs) during the period that this
undertaking is in effect exceed .65 of 1% of average net assets
of the Fund. Unless extended in writing by SR&F, this
undertaking shall terminate on October 31, 1996, subject to
the right of SR&F on 30 days' written notice to terminate
this undertaking. The amount of the fee waiver and/or
expense absorption (or any offsetting reimbursement by the
Fund to SR&F) shall be computed on an annual basis, but
accrued and paid monthly.
Sincerely,
STEIN ROE & FARNHAM INCORPORATED
By: Kenneth J. Kozanda
Treasurer
Attest:
By: Jilaine Hummel Bauer
Assistant Secretary
Stein Roe & Farnham Incorporated
One South Wacker Drive
Chicago, IL
60606-4685
312.368.7700
Exhibit 11(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions
"Financial Highlights" and "Independent Auditors" and to the
incorporation by reference of our reports dated August 1,
1995 with respect to SteinRoe Government Reserves Fund and
SteinRoe Cash Reserves Fund and August 9, 1995 with respect
to SteinRoe Government Income Fund, SteinRoe Intermediate
Bond Fund, SteinRoe Income Fund and SteinRoe Limited Maturity
Fund in the Registration Statement (Form N-1A) and related
Prospectuses of SteinRoe Income Trust, filed with the
Securities and Exchange Commission in this Post-Effective
Amendment No. 28 to the Registration Statement under the
Securities Act of 1933 (Registration No. 33-02633) and in
this Amendment No. 29 to the Registration Statement under the
Investment Company Act of l940 (Registration No. 811-4552).
ERNST & YOUNG LLP
Chicago, Illinois
April 23, 1996
Exhibit 14(a)
Stein Roe Individual Retirement Account
How to Establish an IRA
IRA Disclosure Statement
Stein Roe IRA Plan
<PAGE> 1
TABLE OF CONTENTS
Page
IRA Disclosure Statement ............1
Revocation Rights....................1
Eligibility .........................2
Contributions........................2
Contribution Corrections.............5
Rollover Contributions and
Asset Transfers ...................5
Spousal IRA Contributions............7
Distribution of Benefits.............7
Taxation of Distributions............9
Reporting to the Internal
Revenue Service...................10
Prohibited Transactions.............10
The Custodian and the Plan Sponsor..10
Investment of Contributions.........11
Charges and Fees....................11
Simplified Employee Pension Plans...12
Stein Roe Funds Individual
Retirement Account Plan...........15
IRA DISCLOSURE STATEMENT
We are required to give you this Disclosure Statement in
order to assure that you are informed and understand the
nature of an Individual Retirement Account ("IRA"). The
Individual Retirement Account Plan and the Application Form
contained in this booklet are considered a single document
which, in a substantially similar form, was approved by the
Internal Revenue Service as a tax-qualified Individual
Retirement Account Plan ("IRA") and received Internal Revenue
Service Prototype Plan No. D100035c dated March 21, 1990. We
intend to apply to the Service for approval of the Plan as
amended and restated in this booklet and will advise Plan
Participants when the Service responds to our application.
Internal Revenue Service approval is a determination only as
to the form of the documents and does not mean that the
Service approves the merits of the Plan.
By adopting the Plan, your IRA is qualified under the
Internal Revenue Code. Use of the Plan also simplifies and
minimizes the administration and investment of your IRA
assets. WE URGE YOU TO READ THIS BOOKLET CAREFULLY BEFORE
ADOPTING THE PLAN.
REVOCATION RIGHTS
If you establish an IRA under the Stein Roe Funds
Individual Retirement Account Plan and you receive this
booklet less than seven days preceding the date on which you
established your IRA, you have the right to revoke your IRA.
(If you receive this booklet at least seven days prior to the
date on which you establish your IRA, you do not have this
right.) If you revoke your IRA, the full amount of your
contributions will be refunded without reduction for fees,
expenses or market fluctuations. In order to avoid possible
losses in market values of contributions during the seven-day
revocation period, the Custodian reserves the right not to
invest your contributions in excess of $2,000 until the end
of the revocation period unless you invest them in Stein Roe
Government Reserves Fund. For your convenience, initial
contributions of $2,000 or less generally will be invested as
soon as possible.
Should you decide to revoke your IRA as described above,
you may do so and will receive a full refund only if you call
SteinRoe Services Inc. ("SSI"), agent of the Custodian, toll
free 800-338-2550, during normal business hours within seven
days from the date on which your IRA is established. Your
telephone IRA revocation instructions will be tape-recorded.
If you fail to properly revoke your IRA within seven days
after it is established, you may not revoke your IRA at a
later date.
The rest of this Disclosure Statement is a general
outline of the provisions of the Plan and certain important
considerations involved in a decision to adopt the Plan for
retirement savings.
ELIGIBILITY
If you are employed (or self-employed) and under age 70
1/2 at the end of a taxable year, you may establish an IRA. A
Spousal IRA may be established for your non-working spouse if
he or she is under age 70 1/2 at the end of a taxable year.
For federal income tax purposes, your IRA contributions may
be treated as deductible or non-deductible. (See:
"Contributions") You may establish an IRA for the purpose of
making a rollover contribution, regardless of your age or
employment status.
CONTRIBUTIONS
In General
As long as you are eligible, you may make annual
contributions to an IRA in an amount of up to the lesser of
100% of compensation or $2,000. Compensation includes salary,
bonuses, wages, overtime pay, tips, professional fees, earned
income from self-employment, and taxable alimony or separate
maintenance payments. It does not include rental income,
dividends or interest, or amounts received as pension,
annuity or deferred compensation income.
Your IRA contributions are held in a Custodial Account
exclusively for your benefit and the benefit of any
beneficiaries you may designate on a Beneficiary Form
delivered to the Custodian. The assets in your IRA generally
may not be combined with those of another individual, and
your right to the entire balance in your IRA is
nonforfeitable.
IRA contributions for a given year may be made until the
due date for filing your federal income tax return for that
year (generally April 15th) but not including extensions. You
must designate the tax year for which each contribution is
made. If you do not designate the appropriate year for a
contribution, your contribution will be applied for the
current year.
Under the Plan, the minimum annual contribution is $500
per Fund account. This minimum amount must be contributed in
a single payment when you establish your IRA. Thereafter, you
may contribute as little as $50 each calendar month. These
minimums do not apply to IRAs established as part of a
Simplified Employee Pension Plan ("SEP") in which there is
more than one participant. Stein Roe & Farnham also may waive
or reduce these minimums.
DEDUCTIBLE CONTRIBUTION LIMIT
General - If neither you nor your spouse, if married, is
an active participant in an employer-maintained retirement
plan during the year for which your contribution is made, you
may make a deductible contribution of up to the lesser of
$2,000 or 100% of your individual compensation. If, however,
either you or your spouse, if married, is an active
participant in an employer-maintained retirement plan, the
deductibility of your contribution depends upon your adjusted
gross income ("AGI") for the year for which your contribution
is made.
If you or your spouse, if married, is an active
participant in an employer-maintained retirement plan, your
contribution is fully deductible if your AGI is less than
$40,000 if you are married, or $25,000 if you are unmarried.
Your deduction is eliminated when your AGI reaches $50,000 if
you are married or $35,000 if you are unmarried. Your
deduction is phased out if your AGI is between these amounts
as explained below. If you are married but do not live with
your spouse for any part of the year and file a separate
return, the deductibility of your contribution is determined
as if you were unmarried.
Active Participant - Your annual IRS Form W-2 from your
employer should indicate whether you are an active
participant for purposes of your IRA deduction. In general,
you (or your spouse) are considered an active participant in
an employer-maintained retirement plan for any year if you
participate in a qualified defined benefit plan, a defined
contribution plan (such as a money purchase pension, profit-
sharing, 401(k), stock bonus or annuity plan), a SEP, or a
government plan (excluding unfunded deferred compensation
plans under section 457 of the Internal Revenue Code) during
any part of the plan year ending with or within the year for
which you make an IRA contribution. You are treated as an
active participant even if your plan benefits are not yet
fully vested and nonforfeitable, but you are not treated as
an active participant if you have not yet satisfied the
plan's minimum age or service eligibility requirements. You
also are treated as an active participant for any year in
which you make a voluntary or mandatory contribution to an
employer-maintained retirement plan, even if your employer
makes no contribution to the plan on your behalf.
Adjusted Gross Income ("AGI") - For purposes of your IRA
deduction limit, your AGI includes any taxable social
security benefits you receive for the year. If you are
married and file a joint return, your deductible contribution
limit is determined on the basis of the combined AGI of you
and your spouse.
NONDEDUCTIBLE CONTRIBUTION LIMIT
To the extent you are not eligible to make a deductible
contribution, you may make a nondeductible contribution up to
the excess of (i) your aggregate contribution limit (100% of
compensation up to $2,000) over (ii) your deductible
contribution limit. If you make a contribution in excess of
your deductible contribution limit, you may correct the
excess by designating it as a nondeductible contribution to
the extent it does not exceed your nondeductible contribution
limit.
You must designate your nondeductible contributions for
a given year on IRS Form 8606 which must be filed with your
federal income tax return for that year. You should retain a
copy of your return and IRS Form 8606 for your reference in
determining the amount of your cumulative deductible and
nondeductible contributions. Your return and IRS Form 8606
will be needed to determine the taxable portion of any
withdrawals you make. The Custodian of your IRA does not
differentiate between deductible and nondeductible
contributions on its own records.
Determining Your Deductible and Nondeductible Contribution
Limits
Your deductible and nondeductible contribution limits
are determined as follows:
1. Determine Excess AGI by subtracting the applicable
threshold AGI (i.e., $40,000, if filing jointly; $25,000
or $0 if not) from your actual AGI; if the difference is
$10,000 or more, stop because your deduction is zero.
2. Subtract the Excess AGI determined in (1) from $10,000.
3. Divide the amount determined in (2) by $10,000.
4. Multiply $2,000 ($2,250 for a Spousal IRA; see "Spousal
IRA Contributions") by the amount (fraction) determined
in (3). If the product is not a multiple of $10, round
the product down to the next lowest $10. This is your
deductible contribution limit. If, however, the product
is less than $200, but greater than $0, your deductible
contribution limit is $200.
5. Subtract your deductible contribution limit from your
aggregate contribution limit (100% of compensation up to
$2,000). This is your nondeductible contribution limit.
If your deductible contribution limit is less than $200
(and your AGI is less than $50,000 or $35,000, respectively),
you may increase your limit to the minimum floor of $200. If
you are married and file a joint return, your deductible
contribution limit applies separately to each spouse.
Example: A working couple filing a joint return has
combined AGI of $47,000 and one spouse is an active
participant in an employer-maintained retirement plan.
Applicable threshold AGI: $40,000
Excess AGI: $47,000 - 40,000 = 7,000
Combined Aggregate Contribution Limit
($2,000 per working spouse): 4,000
Reduction in IRA Contribution Limit:
$4,000 x ($7,000/10,000) = 2,800
Combined Deductible Contribution Limit:
$4,000 - 2,800 = 1,200
Deductible Contribution Limit for each spouse:
$1,200/2 = 600
Nondeductible Contribution Limit for each spouse:
$2,000 - $600 = 1,400
CONTRIBUTION CORRECTIONS
Contributions in excess of your maximum allowable annual
contribution limit are treated as excess contributions
whether or not you deduct them. You will be liable for a
nondeductible excise tax of 6% on the amount of the excess
for the year the excess contribution is made unless (i) you
withdraw the excess and the income earned on the excess prior
to the due date for filing your federal income tax return
(including extensions) and (ii) you do not deduct the excess
on your federal income tax return. Alternatively, you may
direct the Custodian to apply the excess as a contribution
for a subsequent year. The Custodian will automatically treat
a contribution in excess of the maximum dollar contribution
limits as a contribution for the subsequent year unless you
direct the Custodian in writing to distribute to you such
excess and the income earned on the excess prior to the
deadline for filing your federal income tax return for the
year for which the excess contribution was made.
If the excess contribution remains in your IRA after the
due date for filing your tax return, you will be subject to
the 6% excise tax for each year the excess remains
uncorrected. If you withdraw the excess after the date for
filing your federal income tax return for the year in which
the excess contribution was made and the total contribution
for that year exceeded $2,250, the amount withdrawn may be
taxed as ordinary income and also may be subject to a
nondeductible excise tax on premature distributions equal to
10% of the amount withdrawn. The withdrawal penalty (but not
the 6% excise tax) may be avoided if you correct your excess
contribution by applying the excess as a contribution for a
later year.
Contributions you deduct in excess of your deductible
contribution limit are also treated as excess contributions
to the extent you do not designate them as nondeductible
contributions or, if permitted, correct them by withdrawal or
reallocation to a subsequent year as described above.
ROLLOVER CONTRIBUTIONS AND ASSET TRANSFERS
Eligible Rollover Distributions
You may defer taxation on an eligible rollover
distribution from your employer's tax-qualified plan or
403(b) plan by making a rollover contribution of the
distribution to an IRA within 60 days of the date of the
distribution. In addition, if you are a spouse or former
spouse who is receiving an eligible rollover distribution
paid by reason of your spouse's death or pursuant to a
qualified domestic relations order (within the meaning of
section 414(p) of the Internal Revenue Code) issued in a
divorce or similar proceeding you may make a rollover
contribution of that distribution. An "eligible rollover
distribution" is all or any part of the taxable portion of
the balance to your credit in your employer's tax-qualified
plan except (i) any distribution that is required to be made
because you are over age 70 1/2; (ii) any distribution made
over your life or life expectancy (or the lives or life
expectancies of you and a designated beneficiary); and (iii)
any distribution which is part of a series of substantially
equal payments over a period of ten or more years.
You may roll over all or any portion of an eligible
rollover distribution, but only that portion which is
properly rolled over into an IRA will be eligible for the tax
deferral. The remainder will generally be included in your
gross income as ordinary income subject to federal income tax
in the year in which you receive it. If your qualifying
distribution includes property other than cash, you may sell
the property and roll over cash equal to the fair market
value of the property or, with the consent of the Custodian,
you may roll over the property.
Eligible rollover distributions are subject to mandatory
20% federal income tax withholding unless you elect a direct
rollover to an IRA or tax-qualified plan. If you elect a
direct rollover, your distribution proceeds must be made
payable to the trustee or custodian of the IRA or tax-
qualified plan to which the rollover is made. If the proceeds
are made payable to you, mandatory withholding will apply but
you still may roll over all or any portion of your eligible
rollover distribution. However, if you wish to roll over more
than the 80% of your distribution which you directly receive,
you must use other money to make up for the amount withheld
which you elect to roll over.
IRA Rollover Contributions and Asset Transfers
You also may make an IRA-to-IRA rollover contribution,
but you are limited to one IRA-to-IRA rollover every twelve
months (beginning on the date you receive your IRA
distribution, and not on the date you make your rollover
contribution). However, a tax-free IRA asset transfer from
one custodian to another is not treated as a rollover and,
therefore, is not subject to the twelve-month limitation. You
may make an IRA asset transfer to a Stein Roe IRA by
completing the Asset Transfer section of the Application
Form. An asset transfer from your Stein Roe IRA to another
custodian will be made upon receipt by SSI of a written
request signed by both you and your successor custodian in a
form acceptable to SSI. If you make an asset transfer from
your Stein Roe IRA in the year you reach age 70 1/2 or any
subsequent year, the amount transferred will be reduced by
any amount required to satisfy the minimum distribution
requirement for the year of transfer as provided in Section 4
of the Plan. The amount by which the transfer is reduced
shall be distributed to you.
In general, asset transfers and rollover contributions
may be invested in the same IRA as regular contributions.
However, if assets are transferred or rolled over from a plan
("transferor plan") after distribution from the transferor
plan required by sections 401(a)(9), 408(a)(6) or 408(b)(3)
of the Code has commenced ("required distribution"), the
assets must be placed in a separate IRA if you are receiving
required distributions from your pre-existing IRA over a
period longer than the period over which you were receiving
required distributions from the transferor plan. (The assets
from the transferor plan must be distributed over a period no
longer than the period established under the transferor
plan.) In addition, an eligible rollover distribution must be
rolled over into a separate IRA if you wish to preserve the
ability to later roll over those assets to another qualified
plan.
If you wish to make a rollover contribution to the Plan,
you must complete the appropriate sections of the Application
Form. If you decide to make a rollover from your Stein Roe
IRA to another IRA, you must complete and return a
Distribution Request Form to SSI. In order to avoid income
and premature distribution taxes, a rollover must be made
within 60 days of the date of the distribution.
Spousal IRA Contributions
If you are employed (or self-employed), you may elect
the alternative Spousal IRA arrangement for any taxable year
in which your spouse has not more than $250 in compensation
and elects to be treated as having no compensation (for IRA
purposes) on your joint federal income tax return for that
year. Under this arrangement, each of you must sign a
separate Application Form to establish separate IRAs. Because
a separate IRA is established for each of you, you may make
regular IRA contributions to a Spousal IRA which was
established in a previous year. Conversely, Spousal IRA
contributions may be made to an IRA established in a prior
year for the purpose of making regular contributions. Except
for the limitations discussed below, a Spousal IRA is
identical to a regular IRA.
The deductibility of contributions under a spousal
arrangement is determined by the same rules as those
applicable to regular contributions, except that the
contribution limit is 100% of your compensation up to $2,250.
If you reach age 70 1/2 before your spouse does and you are
still employed, you may no longer make contributions to your
IRA but you may continue to make spousal contributions to
your spouse's account until your spouse reaches age 70 1/2.
Your spousal contribution may be divided between your IRAs in
any way you decide so long as at least $250 (but not more
than $2,000) is contributed to either IRA for a single year.
Contributions which exceed the maximum limits are excess
contributions subject to penalties described earlier in this
booklet.
DISTRIBUTION OF BENEFITS
General
You may request a distribution from your IRA by
completing and returning to SSI a Distribution Request Form
acceptable to the Custodian. Distributions must begin no
later than the April 1 following the year in which you attain
age 70 1/2. (If you and your spouse maintain IRAs under a
spousal arrangement, then your age is the relevant age in
applying these requirements to distributions from your IRA
and your spouse's age is the relevant age for your spouse's
IRA.)
You may elect to receive your distribution in cash or in
Fund shares by either one or a combination of the following
methods:
- In a lump sum; or
- In installment payments payable over a period of time not
greater than your life expectancy or the joint and last
survivor life expectancy of you and your designated
beneficiary.
Minimum Distribution Requirements
Beginning with the year in which you reach age 70 1/2,
you must begin to receive a minimum distribution amount each
year. Your initial minimum distribution must be made no later
than the April 1 following the year you reach age 70 1/2;
thereafter your minimum distribution must be made no later
than December 31 of each year. Thus, if you defer your first
minimum distribution until the year following the year you
reach age 70 1/2, you will be required to withdraw a minimum
distribution amount for both the prior and current year.
In general, the minimum distribution amount you are
required to withdraw each year is equal to the balance in
your Stein Roe IRA (aggregating all Fund accounts maintained
under your IRA) on December 31st of the prior year divided by
the applicable life expectancy. Your aggregate account
balance, however, is increased by any rollover contributions
to your Stein Roe IRA received after December 31 that were
distributed from another IRA or tax-qualified plan before
December 31. If you establish an installment plan, you are
responsible for verifying that you have withdrawn the
requisite minimum distribution amount each year and making
additional withdrawals, if necessary. If you maintain more
than one IRA, your minimum distribution amount must be
determined separately for each IRA.
The applicable life expectancy used to determine your
minimum distribution amount each year is either your life
expectancy or the joint and last survivor life expectancies
of you and your designated beneficiary (who is either an
individual, or a trust meeting certain requirements)
determined in the year you reach age 70 1/2 by using Internal
Revenue Service life expectancy tables, reduced by one for
each year elapsed since that year unless you elect to
recalculate life expectancy. You may recalculate your life
expectancy or, if your spouse is your designated beneficiary,
your spouse's life expectancy, or the joint and last survivor
life expectancies of you and your spouse each year. Your
election to recalculate or not recalculate life expectancy
becomes irrevocable on the April 1 following the year you
reach age 70 1/2.. If you elect to recalculate life
expectancy, you are responsible for advising the Custodian of
the recalculated life expectancy each year. In addition, if
you elect to recalculate life expectancy and you (or your
spouse, if applicable) die after payments have commenced, the
life expectancy of the deceased will be reduced to zero and
the maximum period over which the remaining benefits may be
paid to your beneficiaries will be correspondingly reduced.
If your method of distribution is based on the joint and last
survivor life expectancies of you and a non-spouse
beneficiary, the method must comply with regulations designed
to assure at least 50% of the present value of the amount
available for distribution is paid within your life
expectancy. These regulations require certain minimum
distributions based on a table.
Additional Taxes on Distributions
If you receive a distribution prior to age 59 1/2, the
taxable portion of your distribution generally will be
treated as a premature distribution subject to a 10%
additional tax. This additional tax does not apply, however,
to distributions by reason of your death or permanent
disability, or to distributions payable in substantially
equal installments over a period no greater than your life
expectancy or the joint and last survivor life expectancies
of you and your designated beneficiary. If you fail to
withdraw the minimum distribution amount for any year after
reaching age 70 1/2, you will be subject to a 50% additional
tax on the taxable portion of the amount by which the minimum
distribution amount exceeds the amount withdrawn. In
addition, if the aggregate distributions from all of your
IRAs and any tax-qualified retirement plans exceed $150,000
for any year, you may be subject to a 15% additional tax on
the excess amount.
Each of these taxes is nondeductible and is in addition
to the ordinary income tax applicable to the taxable portion
of a distribution.
Distribution of Death Benefits
You may designate one or more beneficiaries to receive
the benefits in your IRA upon your death by filing a properly
executed Beneficiary Form with the Custodian. If you do not
designate a beneficiary, your death benefits will be
distributed to your surviving spouse if you are married or,
if you have no surviving spouse, to your estate. If your
beneficiary fails to elect a method of distribution, your
death benefits will be distributed in a lump sum.
If distributions to you have commenced before your
death, and you die on or after April 1 of the year following
the year you reach age 70 1/2, your death benefits must be
distributed at least as rapidly as under the method by which
you were receiving distributions. If you die before April 1
of the year following the year you reach age 70 1/2,
regardless of whether or not distributions to you have
commenced, your death benefits must be distributed no later
than five years after the last day of the year in which you
die unless your designated beneficiary (who is either an
individual or a trust meeting certain requirements) elects
the alternative distribution method described in the next
paragraph.
If he or she qualifies to elect the alternative
distribution method, your designated beneficiary may elect to
receive your death benefits in installments over a period of
as long as his or her life expectancy provided such
installments commence no later than the last day of the year
following the year in which you die. If your sole beneficiary
is your surviving spouse, commencement of such payments may
be further delayed until the date on which you would have
reached age 70 1/2. Under this alternative method, your
designated beneficiary's life expectancy is determined as of
his or her birthdate in the year payments commence. In
addition, if your designated beneficiary is your surviving
spouse, your spouse may elect to treat his or her share of
your death benefits as his or her own IRA subject to the
distribution requirements applicable to a Participant.
For more complete information on the distribution of
death benefits, please refer to Sections 4.4 and 4.5 of the
Plan and the Beneficiary Form.
Taxation of Distributions
In general, distributions from your IRA are taxed to the
recipient as ordinary income in the year of receipt and do
not receive the more favorable federal income tax treatment
afforded recipients of distributions from certain kinds of
tax-qualified retirement plans such as special income
averaging. However, recipients are eligible to utilize the
general income averaging provisions of the Internal Revenue
Code. In some instances, installment payments may reduce the
total tax paid by the recipient by extending taxation over a
number of years. If, however, the aggregate value of your
aggregate interest in all of your IRAs and tax-qualified
retirement plans that remains undistributed on your death
exceeds the present value of a life annuity with annual
payments of a specified amount, your federal estate tax on
the excess will be increased by 15%. The specified amount is
indexed for inflation. In 1996, it is $155,000.
If you have made nondeductible contributions to any IRA,
a portion of your distribution will be nontaxable. The
nontaxable amount is the portion of your distribution that
bears the same ratio to the distribution as (i) your
aggregate nondeductible contributions to all of your IRAs
bear to (ii) the aggregate balance in all of your IRAs on the
last day of the year in which you received your distribution
plus the amount of your distribution. For this purpose, the
balances in all IRAs that you maintain (including rollovers
and SEPs) and all distributions you receive during the year
must be aggregated.
Distributions are subject to withholding of federal
income tax at a rate of 10% unless you elect not to have
withholding apply.
Reporting to the Internal Revenue Service
Each year the Custodian will send you IRS Form 5498
reporting contributions made to your IRA for the prior year.
The Custodian also will report to you your prior year
distributions on IRS Form 1099-R. Copies of these reports are
also filed with the Internal Revenue Service ("IRS").
If you make a nondeductible contribution to your IRA,
you must report it to the IRS on IRS Form 8606 which must be
filed with your federal income tax return for the year for
which the contribution is made. If you owe additional taxes
on excess contributions, premature distributions or for
insufficient or excessive distributions, you must file IRS
Form 5329 with the IRS. IRS Form 5330 must be filed in
connection with a prohibited transaction.
Prohibited Transactions
If you engage in a "prohibited transaction" with your
IRA, your IRA will lose its tax exemption and you will be
treated as having received a distribution of your IRA as of
the first day of the year in which you engaged in the
prohibited transaction. Therefore, you would be subject to
income taxation and, if you are under age 59 1/2, to the
additional 10% tax on premature distributions on the balance
in your IRA. You may also be subject to the additional 15%
tax on excess distributions. Prohibited transactions include
such transactions as the selling to, buying from, leasing any
property to or from, lending to or borrowing from, furnishing
goods or services to or receiving goods or services from, or
using the income or assets of your IRA, or allowing certain
other "disqualified persons" to do so. However, a transfer of
all or a portion of your IRA pursuant to a "qualified
domestic relations order" such as a property settlement
agreement under a divorce decree is not considered a
prohibited transaction.
Further, your IRA may not be invested in life insurance
nor may any part of your IRA be pledged as security for a
loan. If you do pledge your IRA, you will be treated as if
you received a taxable distribution of the portion of your
IRA assets used as security for the loan. This portion of
your IRA would be subject to income taxation and, if you are
under age 59 1/2, the additional 10% tax on premature
distributions. It would also be subject to the additional 15%
tax on excess distributions.
The Custodian and the Plan Sponsor
The Custodian is named in the Application Form and is
responsible for the administration of the Plan in accordance
with the terms of the Application Form and Plan. The
Custodian has engaged SteinRoe Services Inc. ("SSI"), the
parent of the Plan Sponsor, Stein Roe & Farnham Incorporated,
to perform most of the ministerial functions in connection
with the maintenance of Stein Roe Fund accounts established
under the Plan. SSI also serves as transfer agent for each of
the Stein Roe Funds. Stein Roe & Farnham, as Plan Sponsor,
has the authority to amend the Plan on behalf of all
participants.
Investment of Contributions
The Plan provides a wide range of investment
alternatives from which you may construct a portfolio to suit
your own retirement planning needs. You may invest your IRA
in shares of one or any combination of the no-load Stein Roe
Funds listed on the Application Form. If you have at least
$250,000 in your IRA, you also may invest your IRA in other
investments in addition to (or in lieu of) the Stein Roe
Funds. However, at least 50% of your IRA must be invested in
the Stein Roe Funds and/or be subject to an investment
advisory agreement with Stein Roe & Farnham. Stein Roe &
Farnham may elect to reduce or waive these minimums.
The investment minimum required to establish an account
with any of the Funds is that which is specified in the
Application Form, unless Stein Roe & Farnham waives or
reduces this minimum. If your retirement investment
objectives change, you may change your portfolio by
exchanging shares of one Fund for those of another. This may
be done by instructing SSI in writing or, if you elect the
Telephone Exchange Privilege on the Application Form and the
exchange is for $1,000 or more, by calling SSI. The Stein Roe
Funds levy no sales commissions or 12b-1 charges.
In selecting a Stein Roe Fund for investment, it is
important that the investment objective of the Fund selected
be consistent with your retirement and investment objectives.
Important information concerning the Stein Roe Funds and
their investment objectives, policies and restrictions is
contained in their prospectuses and financial reports. Growth
in value is not guaranteed or projected. All income dividends
and capital gain distributions paid on Fund shares are
invested in accordance with the Fund's prospectus. For more
complete information on the Funds, including management fees
and expenses, obtain the Funds' prospectuses by calling toll
free 800-338-2550. Read the prospectuses carefully before you
invest or send money.
Charges and Fees
Custodial Fees--Currently, there are no Custodial fees
charged for your IRA assets invested in the Stein Roe Funds.
In the event that the Custodian is required to perform ser-
vices not ordinarily provided with respect to the Plan,
including making participant-directed investments of large
Custodial Accounts pursuant to Section 7.3 of the Plan, or
you make investments other than in the Stein Roe Funds, the
Custodian may charge such fees as are appropriate. The
Custodian reserves the right to charge additional fees for
assets invested in the Stein Roe Funds upon 45 days' written
notice to you, and to waive or reduce any of its charges or
fees as to any single IRA or group of IRAs.
Stein Roe Fund Fees - All of the Stein Roe Funds are
pure no-load investments. You pay no sales commissions or
12b-1 charges for purchasing, redeeming or exchanging Fund
shares. Each Fund does, however, pay certain operational
expenses, including advisory fees. For complete information
about Fund expenses and the method of calculating each Fund's
net asset value per share, please read the Fund prospectuses.
Simplified Employee Pension Plans
The Internal Revenue Code permits certain employers to
establish Simplified Employee Pension Plans ("SEPs") to which
contributions may be made on behalf of all employees meeting
certain eligibility requirements. Contributions may be made
by either the employer ("non-elective contributions") or at
the election of the employee through "pre-tax" salary
reduction contributions ("elective deferrals"). However,
elective deferrals may be made to a SEP only if you had no
more than 25 employees eligible to participate during the
prior calendar year and provided at least 50% of eligible
employees actually make elective deferrals.
You may establish a SEP either by designing your own SEP
or by executing IRS Form 5305-SEP (non-elective
contributions) or IRS Form 5305A-SEP (elective deferrals).
Copies of these forms are available directly from the
Internal Revenue Service or from the office of the Stein Roe
Funds. Before establishing a SEP, however, we suggest you
consult with your tax and legal advisers to determine whether
it is appropriate for your circumstances.
In general, except as otherwise specifically stated in
the Plan, the provisions of the Plan apply to IRAs to which
SEP contributions are made and each participant in the SEP
has all the rights described herein with respect to an
ordinary IRA including, for example, the right to select the
Funds in which contributions shall be invested.
Who May Establish a SEP
If you do not presently maintain any other qualified
plan (except another SEP) and you have never maintained a
defined benefit plan, you may establish a SEP by using either
IRS Form 5305-SEP or IRS Form 5305A-SEP. Neither of these
forms, however, may be used if you are a member of an
affiliated service group, or a controlled group of
corporations, trades or business (described in Internal
Revenue Code sections 414 (m), (b) and (c), respectively)
unless all eligible employees of the member employers
participate. In addition, you may not use IRS Form 5305A-SEP
if you only have "highly compensated" employees (described in
Internal Revenue Code section 414(q) ) or you are a state or
local government or tax-exempt employer. You also may not use
IRS Form 5305-SEP if you have any leased employees (described
in Internal Revenue Code section 414(n)). You may establish a
SEP up until your tax return due date (including extensions)
for the year for which contributions are first made.
If you decide to adopt a SEP, you must cover all
employees who have attained a minimum age requirement (which
cannot be more than 21 years) and performed services for you
for a minimum period (which cannot be more than any part of 3
of the preceding 5 calendar years). Except as described
below, for any year in which you make a non-elective employer
contribution, contributions must be made for each employee
who was eligible for any part of the year, including those
who are no longer employed by you as of the SEP contribution
date. In the case of elective deferrals, an elective deferral
is permitted in a given year only if at least 50% of all
eligible employees elect to make them. In addition, the
elective deferrals of certain highly compensated employees,
as a percentage of each employee's compensation, may not
exceed 125% of the average amount deferred as a percentage of
compensation by all other eligible employees.
Under a SEP, each eligible employee must establish an
IRA. If an eligible employee does not establish an IRA, you
must establish one for him. Otherwise, your other employees
may not participate and other adverse tax consequences may
result.
Excluded Employees
A contribution need not be made on behalf of any
eligible employee whose compensation is less than a specified
amount indexed for inflation for the calendar year. (For
1996, you need not make a contribution on behalf of an
individual whose compensation is less than $400.) The
following groups of persons may also be excluded:
1. Employees who are members of a collective bargaining
unit, represented by a collective bargaining agent, and
covered by a collective bargaining agreement where retirement
benefits were the subject of good faith bargaining; and
2. Employees who are non-resident aliens who receive no
earned income from the employer which constitutes income from
sources in the United States as defined by the Internal
Revenue Code.
SEP Contributions
Each year you may make deductible non-elective
contributions of up to the lesser of 15% of an employee's
compensation up to $150,000 (for 1996), or $30,000. Your
eligible employees may make elective deferrals of up to
$9,500 (for 1996), which reduce gross income but are included
in the overall $30,000 and 15% limits. All three of these
dollar limits are subject to adjustment each year for cost-
of-living increases.
Deductible non-elective contributions in excess of the
maximum allowable annual contribution limit are excess
contributions and are subject to the regular IRA excess
contribution rules. Elective deferrals in excess of the
maximum allowable annual deferral limit are excess elective
deferrals subject to special rules. For more information on
the treatment of excess elective deferrals, please refer to
Section 3.5 of the Plan. SEP contributions are in addition to
any regular IRA contributions your employees make as
individuals. Although you are not required to make non-
elective contributions each year nor make them at the same
percentage rate each year, for each year in which you make a
non-elective contribution, it must be made on behalf of each
eligible employee who has met the age and service requirement
of your SEP and you are responsible for allocating your
contributions among all eligible employees in proportion to
their respective compensation. Your non-elective
contributions may be made up to 3 1/2 months after the end of
the calendar year to which such contribution applies.
Miscellaneous
As employer, you are responsible for all aspects of the
interpretation, operation and administration of your SEP,
including the determination of contributions and their
allocation.
If in any year an employee's account does not qualify as
an IRA or the SEP contribution is not properly made,
contributions to that employee's account may be treated as
compensation and any deduction for the contribution (plus any
regular IRA contributions the employee makes) may be subject
to the regular IRA contribution limitations and the regular
IRA excess contribution and premature distribution rules.
-------------------
This Disclosure Statement is not intended as a complete
or definitive explanation or interpretation of the laws and
regulations applicable to IRAs or the Stein Roe Funds
Individual Retirement Account Plan. Establishing an IRA for
retirement savings represents a decision which has
significant legal, financial and tax implications. If you are
considering adopting an IRA, we suggest that you consult with
counsel regarding the legal, financial and tax consequences
of doing so. Further information also can be obtained from
any district office of the Internal Revenue Service.
<PAGE>
STEIN ROE FUNDS
INDIVIDUAL RETIREMENT ACCOUNT PLAN
Section 1 - Introduction
The Custodian designated in the Application Form, by
separate agreement and by facsimile signature of its
authorized officer thereon, agrees that an individual
retirement account is established under section 408(a) of the
Code and the terms of this Plan pursuant to which it agrees
to serve as Custodian when it is appointed under a properly
executed Application Form sent to the custodian in accordance
with the terms of the Application Form and the Plan.
Section 2 - Definitions
As used herein:
2.1 "Beneficiary" means any person designated by a
Participant in accordance with Section 4.5 hereof to receive
any death benefits which shall be payable under the Plan.
2.2 "Code" means the Internal Revenue Code of 1986, as
from time to time amended, any regulations issued thereunder
and any subsequent Internal Revenue Code.
2.3 "Compensation" means the total compensation
received by a Participant for each Plan Year during which he
is a Participant, including wages, salary, professional fees,
or other amounts derived from or received for personal
service actually rendered (including, but not limited to,
salesmen's commissions, compensation for services on the
basis of a percentage of profits, commissions on insurance
premiums, tips and bonuses) and Earned Income (reduced by the
deduction, if any, taken for contributions by a self-employed
individual to a tax-qualified retirement plan covering such
self-employed individual). Compensation also includes any
amount includible in a Participant's gross income under
section 71 of the Code with respect to a divorce or
separation instrument described in section 71(b)(2)(A).
Compensation does not include amounts derived from or
received as earnings or profits from property (including, but
not limited to, interest and dividends) or amounts not
includible in gross income. Compensation also does not
include any amount received as a pension or annuity or as
deferred compensation.
2.4 "Custodial Account" means the individual retirement
account established for the Participant under the Plan.
2.5 "Custodian" means the financial institution named
in the Application Form and any successor thereto.
2.6 "Disabled" or "Disability" means the inability to
engage in any substantial gainful activity because of a
medically determinable physical or mental impairment which
can be expected to result in death or be of a long, continued
and indefinite duration.
2.7 "Earned Income" means Earned Income of a
Participant after deductions under section 404 of the Code
but before federal income taxes for each taxable year for
which a contribution is made to his Custodial Account by him
or on his behalf. Earned Income shall equal his net earnings
from self-employment to the extent that such net earnings
constitute compensation for personal services actually
rendered by him for such year; provided, however, that his
personal services must be a material income-producing factor
in his profession, trade or business. If a Participant
derives income from services as an author or inventor, the
term Earned Income includes gain (other than any gain from
the sale or exchange of a capital asset) and net earnings
derived from the sale or other disposition of, the transfer
of any interest in, or the licensing of the use of property
(other than goodwill) by the Participant if personal efforts
created such property.
2.8 "Excess Deferral" means, for any taxable year, the
amount of any excess contribution made under a cash or
deferral arrangement to an annuity plan described in section
403(a) of the Code, an annuity contract described in section
403(b) of the Code, a SEP, or a plan described in section
501(c)(18) of the Code.
2.9 "Mutual Fund" or "Mutual Funds" means the Mutual
Fund(s) specified in the Application Form in which assets of
the Custodial Account may be invested. No Mutual Fund shall
be available for investment under the Plan (i) prior to the
date the prospectus for such Mutual Fund discloses its
availability or (ii) with respect to any Participant who
resides in any state in which shares of the Mutual Fund are
not available for sale.
2.10 "Nonworking Spouse" means a Participant's spouse
who has no Compensation for a taxable year, or who has
Compensation of not more than $250 for the taxable year and
elects to be treated as having no Compensation for such year.
2.11 "Participant" means the person who executes the
Application Form effective on the date of execution.
2.12 "Plan" means the Individual Retirement Account
Plan as provided in this document and the Application Form
(the provisions of which are incorporated herein by
reference) and any amendments thereof.
2.13 "Rollover Contribution" means a rollover
contribution as described in section 402(a)(5), section
402(a)(6)(F), section 402(a)(7), section 403(a)(4), section
403(b)(8), section 408(d)(3), or, prior to their repeal,
sections 405(d)(3), 409(b)(3)(C) or 409(b)(D) of the Code.
2.14 "SEP Contribution" means a contribution made by
the employer of a Participant pursuant to section 408(k) of
the Code under a Simplified Employee Pension Plan ("SEP")
established by the use of Internal Revenue Service Form 5305-
SEP or Internal Revenue Service Form 5305A-SEP.
2.15 "Sponsor" means Stein Roe & Farnham Incorporated
("Stein Roe & Farnham"), or such other person qualified to
act as sponsor as from time to time designated by Stein Roe &
Farnham.
Section 3 - Contributions
3.1 Restriction on Contributions. Except for Rollover
Contributions under Section 5.2 hereof, all contributions
shall be made in cash. Each contribution must be accompanied
by written instructions on a form provided or permitted by
the Custodian specifying the Participant's Custodial Account
to which they are to be credited and the manner in which they
are to be invested. Except for Rollover Contributions and SEP
Contributions, no contributions may be made by or on behalf
of any Participant for any taxable year beginning in the year
the Participant attains age 70 1/2. The Custodian may accept
such contributions by or on behalf of the Participant as it
may receive from time to time, provided, however, that except
in the case of Rollover Contributions, the Custodian shall
not accept contributions made by or on behalf of a
Participant for any taxable year in excess of the maximum
dollar amount specified in Section 3.3 hereof (or such other
maximum dollar amount as may from time to time be permitted
under the Code).
3.2 Minimum Contribution Amounts. For each taxable year
for which a contribution is made, other than a SEP
Contribution, not less than $500 shall be contributed by or
on behalf of a Participant. Annual contributions may be made
in one or more payments provided that payments may not be
made more frequently than once each calendar month and the
amount of each such payment shall be not less than $50. These
minimums may be waived or reduced by Stein Roe & Farnham.
3.3 Maximum Contribution Amounts.
(a) Regular Contributions. Except as otherwise
expressly provided in this Section and Section 5 hereof, the
aggregate amount of contributions by or on behalf of a
Participant for the taxable year shall be not more than an
amount equal to or the lesser of one hundred percent (100%)
of the Compensation of the Participant within the taxable
year or $2,000.
(b) SEP Contributions. For any taxable year, the
aggregate amount of SEP Contributions made by an employer on
behalf of a Participant may not exceed the lesser of $30,000
(or such other amount as may from time to time be permitted
under the Code or regulations thereunder) or 15% of the
Participant's Compensation paid by the employer determined
without regard to such contribution or Compensation in excess
of the annual compensation limit set forth by the Omnibus
Budget Reconciliation Act of 1993 (OBRA'93). The OBRA'93
annual compensation limit is $150,000, as adjusted by the
Internal Revenue Commission for increases in the cost of
living in accordance with section 401(a) - (17)(b) of the
Code. The cost-of-living adjustment in effect for a calendar
year applies to any period, not exceeding 12 months, over
which compensation is determined (determination period)
beginning in such calendar year. If a determination period
consists of fewer than 12 months, the OBRA'93 annual
compensation limit will be multiplied by a fraction, the
numerator of which is the number of months in the
determination period, and the denominator of which is 12. SEP
Contributions made on behalf of a Participant pursuant to an
elective salary reduction arrangement shall not exceed $9,500
for 1996 (or such other amount as may from time to time be
permitted under the Code). SEP Contributions may be made in
addition to any other contributions made by or on behalf of
the Participant as described herein.
(c) Spousal Contributions. For any taxable year in
which a Participant is married (as described in section
143(a) of the Code) to a Nonworking Spouse with whom a joint
tax return is filed, the Participant may elect to make
contributions on behalf of the Nonworking Spouse to a
Custodial Account which the Nonworking Spouse has established
by executing an Application Form. Under this arrangement, the
aggregate contributions made to the Custodial Accounts of
both the Participant and his Nonworking Spouse for any
taxable year may not exceed the lesser of $2,250 or 100% of
the Participant's Compensation; provided, however, that the
contributions to either Custodial Account may not exceed
$2,000.
A Nonworking Spouse who establishes a Custodial Account
under this Subsection shall be treated as a Participant under
the Plan for all purposes and, for any taxable year in which
the Nonworking Spouse has Compensation, the Participant and
the Nonworking Spouse may make contributions to their
respective Custodial Accounts as provided in Section 3.3(a).
3.4 Contribution Corrections. If, for any taxable year,
aggregate contributions of a type specified in Section 3.3
hereof made by or on behalf of a Participant exceed the
maximum permissible amount, and provided no deduction is
allowed for the excess amount, then no later than April 15 of
the following year, the Custodian shall eliminate the excess
by (a) treating it as a contribution for the following year
to the maximum extent allowable an amount equal to the lesser
of (i) the balance in the Custodial Account of the
Participant or (ii) the excess amount (together with an
amount equal to the net income earned on the excess amount),
and (b) distributing the remainder, if any, to the
Participant. If a contribution (a) exceeds the maximum
permissible percentage amounts set forth in Section 3.3
hereof, (b) exceeds the amount permitted after application of
the special discrimination tests under section 408(k)(6) of
the Code or, in the case of a contribution intended to be a
Rollover Contribution, exceeds the amount qualifying as such
or (c) is an excess contribution within the meaning of
section 4973 of the Code, the Participant must direct the
Custodian in writing to either return the excess amount or
apply it as a contribution for the following year, and in the
absence of such direction, the Custodian shall take no
action.
3.5 Treatment of Excess Deferrals. If the Participant
directs the Custodian in writing, not later than the first
March 1 following the end of the year for which an Excess
Deferral was made, to distribute the amount of the Excess
Deferral contributed to the Plan and any earnings thereon,
then the Custodian shall distribute such amount and any
earnings thereon to the Participant no later than the first
April 15 following the end of the year for which the Excess
Deferral was made. In the absence of such notification and
direction, the Custodian shall take no action.
Section 4 - Distributions
4.1 General. The Custodian shall distribute the amount
credited to the Custodial Account of a Participant at such
times and in such amounts as the Participant shall direct on
a form provided or permitted by the Custodian and in a manner
consistent with the prospectus(es) of the Mutual Fund(s) in
which the Custodial Account is invested. Such distributions
to a Participant shall commence no later than April 1
following the close of the calendar year in which he attains
age 70 1/2. Distributions of Excess Contributions and Excess
Deferrals and returns of nondeductible contributions shall be
made in accordance with Sections 3.4, 3.5 and 3.6 hereof,
respectively. Except as provided above, if a distribution is
made from the Participant's Custodial Account prior to the
date the Participant attains age 59 1/2 for reasons other
than (i) Disability or death, (ii) as part of a series of
substantially equal periodic payments made over the life
expectancy of the Participant or the joint and last survivor
life expectancies of the Participant and the Participant's
Beneficiary, (iii) as a distribution to an alternate payee
under a qualified domestic relations order (within the
meaning of section 414(p) of the Code), or (iv) as a
distribution of the principal amount of an Excess Deferral
pursuant to Section 3.5 hereof, then the tax on such
distribution shall be increased by an amount equal to 10% of
the taxable portion thereof. The Participant may direct an
immediate distribution which shall be made or commence on the
date (or as near thereto as is practicable) the Custodian
receives the Participant's written request in proper form, or
a future distribution which shall commence on a date
specified in such request which shall be within a reasonable
time after the filing of such form. The Participant
represents and warrants that all distribution instructions
provided to the Custodian shall be in accordance with the
terms of the Plan.
If the Custodian does not receive instructions to effect
distribution to a Participant prior to the time the
distribution is required to commence, the Custodian will not
effect a distribution.
If any installment payment to a Participant or
Beneficiary is less than a minimum amount that may be
established from time to time by Stein Roe & Farnham or the
Custodian then, at the option of either of them, one or more
payments under such method may be paid less frequently or the
value of the Custodial Account may be paid in one sum to the
person then entitled to receive such payments, the contingent
interest of any Beneficiary notwithstanding.
4.2 Payment on Disability. If a Participant becomes
Disabled, the amount credited to the Custodial Account may be
distributed, in accordance with the distribution provision of
Sections 4.1 and 4.3 hereof, commencing on the date the
Custodian receives notification from the Participant of
Disability in a form acceptable to the Custodian. Before
making any distribution in the case of the Disability of a
Participant prior to the date the Participant attains age 59
1/2, the Custodian shall be furnished with proof of such
Disability. Proof of Disability shall mean either (1) proof
that such Participant's application for disability benefits
under the federal Social Security Act has been approved, or
(2) submission of a Certificate of Disability form provided
or permitted by the Custodian showing the same degree of
proof as would be required by such Participant in applying
for disability benefits under the federal Social Security
Act.
4.3 Method of Distribution.
(a) Distributions to a Participant made for any
reason other than the death of the Participant may be paid in
cash or in kind in one or a combination of the following
ways:
(i) in a lump sum; or
(ii) in annual or more frequent installments over a
period certain not to exceed the life expectancy of
the Participant, or the joint and last survivor
life expectancies, determined as provided in
Section 4.6 hereof, of the Participant and the
Participant's individual Beneficiary. Even if
installment payments have commenced pursuant to
this option, the Participant may receive a
distribution of the balance in his Custodial
Account, or any part thereof, upon written request
as described in Section 4.1 hereof to the
Custodian.
(b) If the Participant elects to receive installment
payments then (except as otherwise permitted under
regulations for distributions required to commence prior to
January 1, 1988), beginning with the year the Participant
reaches age 70 1/2, the minimum distribution required for
that year shall be at least equal to the lesser of the
balance in the Participant's Custodial Account or the
quotient obtained by dividing (i) the balance in the
Custodial Account as of the close of business on December 31
of the prior year [reduced, in the case of the year ("Second
Distribution Year") following the year in which the
Participant reached age 70 1/2, by any distribution made
during the Second Distribution Year on or prior to April 1 to
satisfy the minimum distribution requirement for the year the
Participant reached age 70 1/2] by the life expectancy of the
Participant (or, if applicable, the joint and last survivor
life expectancies of the Participant and the Participant's
Beneficiary, determined as provided in Section 4.6 hereof.
Distributions for the year in which a Participant reaches age
70 1/2 will be deemed timely made if made on or prior to
April 1 of the succeeding calendar year.
(c) For purposes of determining the minimum amount
required to be distributed under Section 4.3(b) hereof, the
balance in the Custodial Account as of December 31 of any
year shall be increased by the amount of any Rollover
Contribution from another individual retirement account or
tax-qualified retirement plan received after December 31
which was distributed from such other individual retirement
account or a tax-qualified retirement plan on or prior to
December 31.
(d) If the case of a Rollover Contribution or an
amount transferred to the Plan pursuant to Section 5 hereof
that was distributed (or transferred) from an individual
retirement account or tax-qualified retirement plan
("transferor plan") after the April 1 of the year following
the year in which the Participant reached age 70 1/2, such
assets must be held in a Custodial Account separate from any
other Custodial Account from which the Participant is
receiving installment payments in accordance with Section
4.3(b) hereof, which payments are being made over a period
longer than the period over which the Participant was
receiving installment payments from the transferor plan.
Distribution from such separate Custodial Account shall begin
no later than the year following the year of the rollover or
transfer with payments over a period established under the
transferor plan. The designated beneficiary under the
transferor plan shall be substituted for the Beneficiary
designated hereunder if the distribution period for such
separate Custodial Account period is determined based on the
joint and last survivor life expectancies of the Participant
and designated Beneficiary.
(e) Notwithstanding any other provisions in this
Plan, effective for distributions made before the
Participant's death, where the distribution period is longer
than the Participant's life expectancy and the Participant's
spouse is not the Beneficiary, the minimum amount required to
be distributed each year, beginning with the year the
Participant reaches age 70 1/2, shall be at least the
quotient obtained by dividing the balance in the Custodial
Account as of the close of business on December 31 of the
prior year [reduced, in the case of the year ("Second
Distribution Year") following the year in which the
Participant reached age 70 1/2, by any distribution made
during the Second Distribution Year on or prior to April 1 to
satisfy the minimum distribution requirement for the year the
Participant reached age 70 1/2] by the lesser of (i) the
joint and last survivor life expectancies of the Participant
and the Participant's Beneficiary determined as provided in
Section 4.6 hereof or (ii) the applicable divisor determined
from the table set forth in Q&A-4 of Prop. Treas. Reg.
Section 1.401(a)-2.
4.4 Distribution on Death of Participant.
(a) If the Participant dies after payment has
commenced under Section 4.3 hereof, and on or after the April
1 following the year in which the Participant reached age 70
1/2, the balance in his or her Custodial Account shall be
distributed to the Participant's Beneficiary, designated in
accordance with Section 4.5 hereof, at least as rapidly as
under the method of distribution by which payments were being
made to the Participant prior to death.
(b) If a Participant dies before the April 1
following the year in which the Participant reaches age 70
1/2, the balance in his or her Custodial Account shall be
distributed to the Participant's Beneficiary, designated in
accordance with Section 4.5 hereof, as the Beneficiary shall
elect:
(i) in a lump sum no later than December 31 of the year
that contains the fifth anniversary of the
Participant's death or, if later, if the
Participant's sole Beneficiary is the Participant's
surviving spouse, December 31 of the calendar year
in which the Participant would have attained age 70
1/2; or
(ii) in annual or more frequent installment payments over
a period certain not to exceed the life expectancy,
determined in accordance with Section 4.6 hereof, of
the Beneficiary. If the Participant's sole
Beneficiary is the Participant's surviving spouse,
payments shall commence no later than the later of
December 31 of the year following the year in which
the Participant died, or December 31 of the calendar
year in which the Participant would have attained
age 70 1/2. In all other cases, payments shall
commence no later than December 31 of the calendar
year immediately following the year in which the
Participant died. Even if installment payments have
commenced pursuant to this option, the Beneficiary
may receive a distribution of the balance in his
Custodial Account, or any part thereof, upon written
request as described in Section 4.1 hereof to the
Custodian.
(c) If a Participant's spouse is named as
Beneficiary in accordance with Section 4.5 hereof, then
notwithstanding the provisions of Sections 4.4(a) and (b)
hereof, the Participant's spouse may elect to treat the
interest in the Participant's Custodial Account to which the
spouse becomes entitled upon the Participant's death as the
spouse's own individual retirement account subject to the
distribution provisions of Section 4.3 hereof by execution of
a new Application Form establishing the spouse's own
Custodial Account not later than the date of filing the
Participant's federal estate tax return or, if earlier, the
due date (including any extensions) for such return. The
determination of whether an election has been made by a
Participant's spouse to treat the spouse's portion of death
benefits as his or her own individual retirement account will
be made in accordance with applicable rulings and
regulations.
(d) Before making any distribution in the case of
death of a Participant, the Custodian shall be furnished with
such certified death certificates, inheritance tax releases,
indemnity agreements and other documents as may be required
by the Custodian.
(e) If a Participant dies before the total amount in
the Custodial Account has been distributed, and the
Participant's Beneficiary is other than the Participant's
spouse, no additional cash contributions or Rollover
Contributions may be accepted by the Custodian.
(f) To the extent prescribed by regulation under the
Code, for purposes of this Section 4.4, any amount paid to a
child of the Participant will be treated as if it had been
paid to the surviving spouse provided the balance in the
Participant's Custodial Account when the child reaches the
age of majority (or when any other designated event permitted
under regulations occurs) will become payable to the
surviving spouse.
4.5 Beneficiary Designation. A Participant shall have
the right to designate, or to change, the Beneficiary to
receive the balance in the Custodial Account at the time of
the Participant's death. Such designation may include
contingent or successive Beneficiaries. A Beneficiary
designated by a Participant shall select the method by which
benefits payable to him or her shall be paid. Designations by
a Participant and selection of a distribution method by a
Beneficiary shall be subject to the provisions of Section 4.4
hereof and shall be made on a form provided or permitted by
the Custodian. A designation properly completed by a
Participant shall be effective upon receipt by the Custodian
no later than 30 days after the death of the Participant. If
no properly completed Beneficiary designation is received by
the Custodian within 30 days after the Participant's death,
the Custodial Account shall be distributed in cash or kind as
the Custodian directs in a lump sum to the Participant's
surviving spouse or, if there is no surviving spouse, to the
Participant's estate. A selection of distribution method
properly completed by a Beneficiary shall be effective upon
receipt by the Custodian no later than the earliest of (i)
the date the Custodian receives instructions to distribute
the Custodial Account of the deceased Participant, which
instructions it determines to be in good order, or (ii)
December 1 of the year that contains the fifth anniversary of
the Participant's death. If the Custodian fails to receive
from a Beneficiary a properly completed designation of
distribution method within the time prescribed above, the
Participant's Custodial Account shall be distributed over the
course of five (5) years in substantially equal installments
commencing no later than December 31 of the year of the
Participant's death.
The Custodian shall be responsible for determining the
identity of persons who qualify as the Beneficiaries entitled
to receive distributions upon the death of a Participant and
the identity of the person who qualifies as the executor or
administrator of the Participant's estate in accordance with
applicable regulations. If any person to whom all or a
portion of the Participant's interest is payable is a minor,
payment of such minor's interest shall be made on behalf of
such minor to the person designated by the Participant in his
Beneficiary Designation to receive such minor's interest as a
custodian under the Illinois Uniform Transfers Act or similar
statute. If the Participant does not designate a custodian to
receive the minor's interest on behalf of such minor or if
the person designated refuses or is unable to act, the
Custodian may in his sole discretion:
(a) distribute the interest to the legal guardian of
such minor; or
(b) designate an adult member of the minor's family,
a guardian or a trust company (including the
Custodian), as those terms are defined in the
Illinois Uniform Transfers Act, as custodian for
such minor under the Illinois Uniform Transfers Act
or similar statute and distribute such minor's
interest to the person so designated. The person
designated as custodian under the Illinois Uniform
Transfers Act, or similar statute, shall hold,
manage and distribute such property in accordance
with the provisions of such statute.
The Participant shall be responsible for determining the
Beneficiary whose life expectancy is to be used in
determining the maximum period of time over which the
Custodian Account may be distributed under Section 4.3 or 4.4
hereof. The designation of such Beneficiary shall be
irrevocable as of April 1 of the year following the year in
which the Participant attains age 70 1/2. If a Participant
designates more than one individual Beneficiary, the
Beneficiary (other than a Beneficiary whose receipt of
benefits is contingent on the death of a prior Beneficiary)
with the shortest life expectancy shall be the Beneficiary
whose life expectancy is used to determine the maximum period
over which installment distributions may be made from the
Custodial Account. If a Participant has a Beneficiary (other
than a trust described in the next sentence) that is not an
individual, then distributions from the Custodial Account
shall not be made under a method that takes into account the
life expectancy of a Beneficiary. If a Participant designates
a trust as a Beneficiary, and as of the later of the date on
which the trust is named as a beneficiary or April 1 of the
year following the year in which the Participant attains age
70 1/2, and as of all subsequent times, the following
requirements are met, the individual beneficiary of the trust
having the shortest life expectancy shall be the Beneficiary
considered in determining the appropriate Beneficiary life
expectancy to be used hereunder:
(a) There are no beneficiaries of the trust (other than
beneficiaries whose receipt of benefits is
contingent on the death of a prior beneficiary) who
are not individuals.
(b) The trust is a valid trust under state law, or would
be but for the fact that there is no corpus.
(c) The trust is irrevocable.
(d) The beneficiaries of the trust who are Beneficiaries
with respect to the Custodial Account are
identifiable from the trust instrument.
(e) A copy of the trust is provided to the Custodian.
The Custodian and its officers, employees, attorneys and
agents shall be fully discharged from all liability to any
and all persons making a claim to the Participant's Custodial
Account under the Plan in relying on evidence by affidavit or
otherwise as shall be satisfactory to the Custodian in
determining any questions of fact relative to payments under
the Plan, including the existence or identity of any
Beneficiary or trustee designated by the Participant, the
administrator or executor of the Participant's estate or any
person authorized to act on behalf of any such person.
Further, any amount paid to any such person in accordance
with the terms of the Plan shall fully discharge the
Custodian for the amount so paid.
4.6 Determination of Life Expectancies.
(a) General Rule. For purposes of this Section 4,
life expectancy and joint and last survivor life expectancies
shall be computed by the Participant (and, if applicable
after the Participant's death, by the Beneficiary) by using
the life return multiples in Regulation 1.72-9 under the
Code. The life expectancy of the Participant and a spouse
Beneficiary may be redetermined, but not more frequently than
annually. The Participant's election to determine life
expectancy will become irrevocable on April 1 of the year
following the year in which the Participant reaches age 70
1/2. In the case of distributions pursuant to Section
4.4(b)(ii) hereof, a spousal Beneficiary election to
redetermine life expectancy will become irrevocable on the
date distributions are required to commence thereunder. If no
election concerning redetermination of life expectancy is
made by the date such election would be irrevocable, life
expectancy will not be redetermined.
(b) Life Expectancy Not Recalculated. If the life
expectancy of the Participant and the Beneficiary are not
recalculated, then the following provisions apply to
determination of life expectancy. If distribution is being
made under Section 4.3(b) hereof, the life expectancy of the
Participant and the Beneficiary shall be determined as of
their respective attained ages as of their respective
birthdays in the calendar year in which the Participant
attained age 70 1/2, reduced by one for each year that has
elapsed since the year the Participant attained age 70 1/2.
If distribution is being made under Section 4.4(b)(ii)
hereof, the life expectancy of the Beneficiary shall be
determined as of the Beneficiary's attained age as of his
birthday in the calendar year in which distributions are
required to commence thereunder, reduced by one for each year
that has elapsed since such calendar year.
(c) If the life expectancy of the Participant and/or a
spouse Beneficiary is to be recalculated, then the following
provisions shall apply to determine life expectancy, and the
Participant (or, if applicable, the spouse Beneficiary) shall
be solely responsible for advising the Custodian of the
redetermined life expectancy annually, no later than 30 days
prior to the beginning of each calendar year in which an
installment payment is to be made.
If distribution is being made under Section 4.3(b)
hereof, the Participant's life expectancy (or the joint and
last survivor life expectancies of the Participant and his
spouse Beneficiary) each year beginning with the year in
which the Participant reached age 70 1/2, using the
Participant's (and, if applicable, the spouse Beneficiary's)
attained age as of the Participant's birthday (and, if
applicable, the spouse Beneficiary's birthday) in each such
year.
If distribution is being made under Section 4.3(b)
hereof and the life expectancy of the Participant but not his
Beneficiary is being recalculated, the applicable joint and
last survivor life expectancies shall be recalculated by
using an adjusted age of the Beneficiary. The adjusted age of
the Beneficiary shall be determined by reducing the life
expectancy of the Beneficiary (determined as of his attained
age on his birthday in the calendar year in which the
Participant reached age 70 1/2) by one for each year that has
elapsed since the calendar year in which the Participant
reached age 70 1/2, and locating the age that corresponds to
that life expectancy (rounded to the next highest integer, if
not a whole number of years) in Table V of Regulation 1.72-9
under the Code.
If distribution is being made pursuant to Section
4.4(b)(ii) hereof and the life expectancy of the
Participant's spouse Beneficiary is being recalculated, the
life expectancy of the spouse Beneficiary will be determined
based on her attained age as of her birthday in the calendar
year in which distributions are required to commence to her
under Section 4.4(b)(ii) hereof.
Upon the death of the Participant or the Beneficiary,
the recalculated life expectancy of the decedent will be
reduced to zero in the calendar year of death. The balance in
the Custodial Account must be distributed prior to the last
day of the calendar year in which the last applicable life
expectancy is reduced to zero.
4.7 Distributions in Accordance with Regulations. In
all cases, distributions hereunder are not permitted except
in accordance with applicable regulations promulgated by the
Secretary of the Treasury.
Section 5 - Transfers and Rollover Contributions
5.1 Transfers. Any person may adopt the Plan for the
sole purpose of transferring to the Custodian in cash, or
with the consent of the Custodian, in kind any part of the
assets of an individual retirement account held for the
person's benefit by another custodian, trustee or insurance
company; provided however, that the Custodian may elect not
to accept a transfer unless it is preceded by asset transfer
instructions satisfactory to the Custodian. In case of assets
transferred to the Plan and held in a separate Custodial
Account in the year the Participant reaches age 70 1/2 or in
any subsequent year as provided in Section 4.3(d) hereof, the
asset transfer instructions must be accompanied by a
Distribution Request Form and a Beneficiary Form applicable
to the transferred assets computed in accordance with the
distribution method in effect under the transferor individual
retirement account. Transfers from the Custodian to a
successor custodian or trustee shall be made in accordance
with Section 6.4 hereof.
5.2 Rollover Contributions to the Plan. Any person may
adopt the Plan for the sole purpose of making a Rollover
Contribution in cash, or with the consent of the Custodian,
in kind in an amount of not less than $500 (unless waived or
reduced by Stein Roe & Farnham); provided, however, that the
Custodian may elect not to accept a Rollover Contribution
unless rollover contribution instructions satisfactory to the
Custodian are provided at the time the Rollover Contribution
is made or at such later date as the Custodian may permit. A
person adopting the Plan for the sole purpose of making a
Rollover Contribution shall be treated as a Participant under
the Plan for all purposes. If the Rollover Contribution was
distributed from the distribution plan after April 1 of the
year following the year in which the Participant reaches ages
70 1/2 and the Rollover Contribution is held in a separate
Custodial Account as provided in Section 4.3(d) hereof, the
Rollover Contribution instructions must be accompanied by a
Distribution Request Form and a Beneficiary Form applicable
to the amount rolled over computed in accordance with the
distribution method in effect under the distribution plan.
5.3 Rollover Contributions from the Plan. On, or as
soon as reasonably possible after, the date the Custodian
receives from a Participant a Distribution Request Form
provided or permitted by the Custodian, or at a future date
specified in the Form which shall be within a reasonable time
after the date the Custodian receives it, stating that the
Participant wishes to make a Rollover Contribution from the
Plan, the Custodian shall distribute such amount from the
Participant's Custodial Account as the Participant shall
direct in a manner consistent with the prospectus(es) of the
Mutual Fund(s) in which the Custodial Account is invested.
The Custodian may make such distribution to the Participant
without inquiry as to whether the statements made by the
Participant in the Distribution Request Form are correct, and
in no event shall the Custodian or any officers, employees,
attorneys or agents of the Custodian be liable for any costs,
expenses, or income or excise taxes which might arise by
virtue of the Custodian's making such distribution. The
Participant represents and warrants that all directions
contained within the Distribution Request Form shall be and
are in accordance with the terms of the Plan.
Section 6 - Administration
6.1 General. Except as provided herein, the Plan shall
be administered by the Participant, who shall have sole
responsibility for the operation of the Plan in accordance
with its terms and shall determine all questions arising out
of the administration, interpretation, and application of the
Plan (which determination shall be conclusive and binding on
all persons). The Participant also shall have sole authority
on behalf of any and all persons having or claiming any
interest in the Participant's Custodial Account. The
Participant shall have the sole authority and responsibility
to determine the amount of the contributions (except for SEP
Contributions which shall be the responsibility of both the
Participant and the Participant's employer) and distributions
to be made under the Plan and neither the Custodian nor any
other person shall be responsible therefor, or for any
consequences to the Participant resulting from making of
contributions which are in excess of those permitted or the
failure to make distributions required, under the Plan or
Code. In no event shall the Custodian, or any of its
officers, employees, attorneys or agents be liable for any
such costs, expenses, income taxes or excise taxes which
might accrue by virtue of a failure to comply with the
requirements of the Plan or the Code.
The Participant intends that the Custodial Account under
the Plan shall qualify and be tax-exempt under section 408 of
the Code, but if it should ever not so qualify, all assets
held in the Custodial Account shall be distributed to the
Participant in accordance with the termination provisions of
Section 8 hereof. Until advised to the contrary, the
Custodian may assume the Custodial Account is so qualified
and tax-exempt.
6.2 Establishment of Custodial Account. The Custodian
shall establish and maintain a Custodial Account for the
Participant whose interest therein shall immediately become,
and at all times shall remain, nonforfeitable.
The Participant shall promptly notify the Custodian in
writing of any changes in the Participant's name or address.
The Participant warrants that at no time shall any part of
the assets of the Custodial Account, after deducting any
expenses properly chargeable to the Custodial Account, be
used for or diverted to purposes other than for the exclusive
benefit of the Participant and his or her Beneficiaries.
6.3 Reports of Custodian. The Custodian shall keep
accurate and detailed records of all receipts, disbursements
and other transactions relating to the Custodial Account. As
soon as practicable after the close of each taxable year (or
after the Custodian's resignation or removal pursuant to
Section 6.4 hereof) and whenever required by the Code, the
Custodian shall deliver to the Participant a written report
reflecting receipts, disbursements and other transactions
effected in the Custodial Account during such period and fair
market value of the assets and liabilities of the Custodial
Account as of the close of such period.
The Custodian shall keep such records, make such
identifications and file with the Internal Revenue Service
such returns and other information concerning the Custodial
Account as may be required of it under the Code or forms
adopted by the Treasury Department thereunder. Further, the
Participant and the Custodian shall furnish to each other
such information relevant to the Plan and Custodial Account
as may be required by the Code or such forms.
Unless the Participant sends the Custodian written
objection to a report within 60 days of delivery, the
Participant shall be deemed to have approved such report and
the Custodian and its officers, employees, attorneys and
agents shall be forever released and discharged from all
liability and accountability to anyone with respect to their
acts, transactions, duties and obligations or
responsibilities as shown on, or reflected by, such report.
Nothing in the Plan shall prevent the Custodian from having
its accounts judicially settled by a court of competent
jurisdiction.
6.4 Registration or Removal of Custodian. The Custodian
may resign at any time upon 30 days' notice in writing to the
Participant and to Stein Roe & Farnham and may be removed by
the Participant (or Stein Roe & Farnham as agent for the
Participant) at any time upon notice in writing to the
Custodian. Upon such resignation or removal, the Participant
(or Stein Roe & Farnham as agent for the Participant) shall
appoint a successor custodian, which successor shall be a
"bank" as defined in section 401(d) of the Code or such other
person who demonstrates to the satisfaction of the Secretary
of the Treasury or his delegate that the manner in which such
other person will administer the Custodial Account will be
consistent with the requirements of section 408 of the Code.
Upon receipt by the Custodian of written acceptance of such
appointment by the successor custodian, the Custodian shall
transfer and pay over to such successor the assets of the
Custodial Account and all records pertaining thereto.
However, the Custodian shall, if the transfer occurs in the
year the Participant reaches age 70 1/2 or any subsequent
year, distribute to the Participant any amount required to
satisfy the minimum distribution requirements for the year of
transfer, as provided in Section 4. Further, the Custodian is
authorized to reserve such sum of money as it may deem
advisable for payment of all its fees, compensation, costs
and expenses, or for payment of any other liabilities
constituting a charge on or against the assets of the
Custodial Account or on or against the Custodian, with any
balance of such reserve remaining after the payment of such
items to be paid over to the successor custodian. The
successor custodian shall hold the assets paid over to it
under terms similar to those of the Agreement that qualify
the Custodial Account under section 408(h) of the Code.
If, within 30 days after the Custodian's resignation or
removal the Participant (or Stein Roe & Farnham as agent for
the Participant) has not appointed a successor custodian
which has accepted the appointment, the Custodian shall,
unless it elects to terminate the Custodial Account pursuant
to Section 6.5, appoint such successor itself. The Custodian
shall not be liable for the acts or omissions of any
successor custodian whether or not the Custodian makes such
appointment itself.
6.5 Termination of Account. The Custodian may elect to
terminate the Custodial Account if, within 30 days after its
resignation or removal pursuant to Section 6.4, the
Participant (or Stein Roe & Farnham as agent for the
Participant) has not appointed a successor custodian which
has accepted such appointment. Termination of the Custodial
Account shall be effected by distributing all assets thereof
to the Participant pursuant to the written direction of the
Participant (who represents and warrants that such directions
shall be in accordance with the provisions of the Plan) or,
if the Participant fails or is unable to give such
directions, such distribution shall be effected in such
manner as is determined by the Custodian, in each instance in
accordance with and subject to the provisions and limitations
of the Plan. Upon the completion of such distribution, the
Custodian shall be relieved from all further liability with
respect to all amounts so paid.
6.6 Other Matters Concerning the Custodian. To the
extent permitted by federal law, the Custodian shall not be
responsible in any way for the collection of contributions
provided for under the Plan, the purpose or propriety of any
distribution made pursuant to Section 4 hereof, or any other
action taken at the Participant's direction. The Custodian
shall also not have any duty or responsibility to determine
whether information furnished to it by the Participant is
correct or whether amounts contributed to the Custodial
Account are tax-deductible or whether amounts distributed
from the Custodial Account are subject to income or excise
tax or any other tax whatsoever. To the extent permitted by
federal law, nothing contained in the Plan, either expressly
or by implication, shall be deemed to impose any powers,
duties or responsibilities on the Custodian other than those
set forth herein. The Custodian and its officers, employees,
attorneys and agents shall be indemnified and saved harmless
by the Participant (and the legal representatives, heirs,
successors or agents) and from the Custodial Account from and
against any and all personal liability arising from actions
taken at the Participant's direction, and from any and all
other liability whatsoever which may arise in connection with
the administration of the Plan, except the obligation of the
Custodian to perform in accordance with the provisions of the
Plan and with respect to the Custodial Account unless the
Participant shall furnish the Custodian with instruction in
proper form and such instruction shall have been specifically
agreed to by the Custodian. The Custodian shall be under no
duty to defend or engage in any suit with respect to the
Custodial Account unless the Custodian shall have first
agreed in writing to do so and shall have been fully
indemnified to the satisfaction of the Custodian. The
Custodian shall be protected in acting upon any order or
direction from a Participant (including any order or
direction permitted by and in accordance with and subject to
the terms and conditions of the Telephone Exchange Privilege,
if applicable) or any other notice, request, consent,
certificate, or other instrument on paper believed by it to
be genuine and to have been properly executed (including
Beneficiary Designations received from a Participant) and, so
long as it acts in good faith, in taking or omitting to take
any other action.
The Custodian is authorized to allocate fiduciary
responsibilities and duties between or among itself and any
other fiduciary or fiduciaries, if any, and to delegate any
of its ministerial, clerical or administrative functions to
or among such persons as it shall deem appropriate; provided
however, that in no event shall the Custodian either allocate
or delegate its responsibilities and duties for the
management of assets held in the Custodial Account except for
Participant-directed investments of large Custodial Accounts
under Section 7.3 hereof.
The Custodian may allocate or delegate any of its
responsibilities and duties hereunder by following a
procedure pursuant to which it shall (1) allocate or delegate
its responsibilities and duties in a written agreement
between it and each person to whom such responsibilities and
duties are allocated or delegated (which agreement shall
describe the nature and the extent of such allocation or
delegation), and (2) specify in writing to the Participant
the name of the person or persons to whom such
responsibilities and duties are allocated or delegated, the
nature and extent of the responsibilities and duties which
are allocated or delegated and the terms and conditions of
such allocation or delegation, including compensation
therefor (if any). The Custodian shall not be liable for any
act or omission of the person or persons to whom such
responsibilities and duties are allocated or delegated.
Section 7 - Investment of Plan Assets
7.1 General. Except as otherwise permitted under
Section 7.3 hereof, contributions by or on behalf of a
Participant shall be invested by the Custodian solely in the
Mutual Funds the Participant or the Beneficiary (or the duly
authorized agent of either of them) shall elect on a form
provided or permitted by the Custodian. At such times as the
Participant or the Beneficiary (or the duly authorized agent
of either of them) shall deem appropriate, changes of
investment may be made by written instruction to the
Custodian on such form as is provided or permitted by the
Custodian. If the Telephone Exchange Privilege has been
elected on the Application Form, such changes may be made by
telephone or such other means of communication permitted by,
and in accordance with, the terms and conditions of the
Telephone Exchange Privilege. No change shall be effective
until received by the Custodian and, once effective, shall
remain in effect until properly changed. If a Participant or
a Beneficiary (or duly authorized agent of either of them)
fails to properly direct the investment of the Custodial
Account, such Participant's Custodial Account shall be
invested in shares of the Mutual Fund specified in the
Application Form for such circumstances. Instructions
concerning the investment of the assets held in a Custodial
Account shall be executed by the Custodian on, or as soon as
reasonably practicable after, the date the Custodian receives
instructions in proper form.
The Participant warrants that no investment made
pursuant to his or her direction under this Section shall
cause the Custodial Account to lose its exemption as provided
in section 408(e)(2) of the Code.
The assets of a Custodial Account shall not be
commingled with other property except in a common trust fund
or a common investment fund and shall not be invested in life
insurance contracts or in "collectibles" as defined in
section 408(m) of the Code.
7.2 Mutual Fund Investments. Plan assets invested in
shares of the Mutual Fund(s) shall be made in accordance
with, and shall be subject to, the provisions of the
prospectus(es) of such Mutual Funds(s) and such shares shall
be registered in the name of the Custodian or its nominee
until distributed. The Participant for whom such shares are
acquired shall be beneficial owner of such shares.
Except as otherwise provided herein, all income
dividends and capital gain distributions paid on Mutual Fund
shares held in a Custodial Account shall be invested in
accordance with the Mutual Funds' prospectuses unless the
Participant instructs the Custodian to invest the income
dividends and capital gains distributions in another Mutual
Fund within the Participant's IRA. If any distribution may
be received in shares, cash or other property at the
election of the shareholder, the Custodian shall elect to
make such distribution in shares in accordance with the
Mutual Funds' prospectuses. If over age 59 1/2, a
Participant may elect to receive income dividends and capital
gain distributions in cash as part of a distribution from the
Custodial Account.
The Mutual Funds in which the assets held in the
Custodial Account are invested shall furnish to the
Custodian, and the Custodian shall promptly deliver to the
Participant, confirmation of all investments, changes of
investment and investments of distributions paid with respect
to Mutual Fund shares held in the Participant's Custodial
Account and all notices, prospectuses, financial statements,
proxies, and proxy soliciting materials relating to such
shares. To the extent required, the Custodian or its nominee
shall sign such proxies as record owner of such shares, but
shall not otherwise vote them except in accordance with the
written instructions of the Participant. Delivery by the
Custodian of any of these items to the Participant shall be
deemed to be on the date such items are mailed by the
Custodian to the Participant at the Participant's last
address of record (or to such other address as the
Participant shall direct); provided, however, that anything
herein to the contrary notwithstanding, such delivery by the
Custodian shall be in compliance with the minimum
requirements of applicable securities laws.
7.3 Investment of Large Custodial Accounts.
(a) Notwithstanding the provisions of the Plan to
the contrary, a Participant who has a Custodial Account with
a balance of not less than $250,000 (unless waived or reduced
by Stein Roe & Farnham) may, if so elected on a form
acceptable to the Custodian, direct the Custodian in writing
to invest such Custodial Account and income therefrom in such
stocks, bonds, notes, shares of other mutual funds registered
under the Investment Company Act of 1940, as amended, or
other property, real or personal, as the Participant deems
appropriate. However, if the value of the Custodial Account
shall at any time be less than $100,000 (unless waived or
reduced by Stein Roe & Farnham), the investment of the
Custodial Account shall be limited to the Mutual Funds.
Further, any amount invested pursuant to this Section in an
investment, other than securities traded on a national stock
exchange or in the over-the-counter market, shall be subject
to the prior written agreement of the Custodian, and not less
than 50% (unless waived or reduced by Stein Roe & Farnham) of
the Participant's Custodial Account shall be invested in the
Mutual Funds and/or be subject to an Investment Advisory
Agreement between the Participant and Stein Roe & Farnham.
(b) The Custodian may charge the Custodial Account
of the Participant who elects to invest the Custodial Account
pursuant to this Section such fees as the Custodian and the
Participant may from time to time agree in writing.
(c) Subject to the direction of the Participant,
the Custodian shall have the following powers with respect to
a Custodial Account invested pursuant to this Section:
(i) to invest all or any portion of the Custodial
Account in investment contracts issued by an
insurance company, including, but not limited to,
guaranteed income contracts, immediate participation
guarantee contracts, group annuity contracts and
deposit administration contracts, and to excise all
rights under such contracts in the manner directed
by the Participant; provided that, notwithstanding
the foregoing, no such investment shall be made in
life insurance contracts or in any other investment
which would cause the Participant's Custodial
Account to lose its exemption as provided in section
408(e)(2) of the Code;
(ii) to keep, in its sole discretion, such portion of
the Custodial Account in cash balances (regardless
of whether interest is paid on such balances) with a
bank or trust company (including the Custodian) as
the Custodian may from time to time deem to be in
the best interest of the Participant, and the
Custodian shall not be liable for any loss of
interest on cash so held; provided, however, that
any cash balances held by the Custodian shall bear a
reasonable rate of interest;
(iii) to sell, exchange, convey, transfer or otherwise
dispose of any property held by it by private sale
or contract or by public auction, and no person
dealing with the Custodian shall be bound to see to
the application of the purchase money or to inquire
into the validity, expediency or propriety of any
such sale or other disposition;
(iv) to vote (or refrain from voting), either in person
or by general or limited proxy, any securities; to
exercise any conversion privileges, subscription
rights or other options and to make any payments
incidental thereto; to consent to or otherwise
participate in reorganizations or other changes
affecting corporate securities and delegate
discretionary power and to pay any assessments or
charges in connection therewith; and to generally
exercise any powers of any owner with respect to
stocks, bonds, securities or other property (other
than shares of Mutual Funds) held in the account;
(v) to make, execute, acknowledge, and deliver any and
all documents of transfer and conveyance and any and
all other instruments that may be necessary or
appropriate to carry out the powers herein granted;
(vi) to register any investments made pursuant to this
Section in its own name or in the name of a nominee
and to hold any investment in bearer form, but the
books and records of the Custodian shall at all
times show that all such investments are part of the
Participant's Custodial Account;
(vii) to employ, and pay compensation to, suitable agents,
custodians, counsel and accountants as the Custodian
deems necessary or desirable to manage or protect
the Custodial Account, and if the Custodian shall
employ counsel, the Custodian shall be fully
protected in acting on the advice of such counsel;
and
(viii) to do all acts, whether or not expressly authorized,
which the Custodian may deem necessary or proper for
the protection of the property held hereunder.
Section 8 - Amendment and Termination
The Participant may amend the Application Form or
terminate the Custodial Account and Stein Roe & Farnham may,
as agent for the Participant, amend the Plan (including
retroactive amendment of the Plan), by delivering to the
Custodian a signed copy of such amendment or a notice of
termination; provided that the Custodian's duties may not be
increased without its written consent. By mutual agreement,
Stein Roe & Farnham and the Custodian may change the
Custodial Fees set forth in the Application Form upon 45
days' written notice to the Participant.
In the event that the Participant amends the Plan, other
than by amending the Application Form, the Participant's Plan
shall no longer be considered as approved by the Internal
Revenue Service as adoption of this prototype IRA Plan.
No amendment or termination shall be effective if it
would cause or permit any part of the Custodial Account to be
diverted to purposes other than for the exclusive benefit of
the Participant (and the Participant's Beneficiaries) and no
retroactive amendment shall be effective if it deprives any
Participant of any benefit to which the Participant was
entitled under the Plan by reason of contributions made
before the amendment, unless such amendment is necessary to
conform the Plan to, or satisfy the requirements of, the
Code.
Section 9 - Miscellaneous
9.1 Status of Participants. Neither the Participant nor
any other person shall have any legal or equitable right
against the Custodian or Stein Roe & Farnham, except as
provided herein.
9.2 Loss of Exemption of Custodial Account. If the
Custodian receives notice that the Participant's Custodial
Account has lost its tax-exempt status under section
408(e)(2) of the Code for any reason, including by reason of
a transaction prohibited by section 4975 of the Code, the
Custodian shall distribute to the Participant the entire
balance in the Custodial Account, in cash or in kind, in the
sole discretion of the Custodian no later than 90 days after
the date the Custodian receives such notice.
9.3 Payment of Taxes, Expenses and Custodial Fees. The
Custodian shall pay out of the Custodial Account any income,
gift, estate or inheritance taxes or other tax of any kind
whatsoever that may be levied upon or assessed against or in
respect of the Custodial Account (other than transfer taxes),
and any expenses of investment management or investment
advisory services rendered to the Custodial Account, and at
its option, collect any amounts so charged from the amount of
any contribution or distribution to be credited to the
Custodial Account or by sale or liquidation of the assets
credited to such account. If the assets of the Custodial
Account are insufficient to satisfy such charges, the
Participant shall pay any deficit therein to the Custodian.
Any transfer taxes incurred by the Custodian in
connection with the investment and reinvestment or transfer
of the assets of the Custodial Account and all other
administrative expenses incurred by the Custodian in the
performance of its duties, including fees for legal service
rendered to the Custodian and such compensation to the
Custodian as may be established from time to time by the
Custodian, shall be collected by the Custodian from the
amount of any contribution credited to or distribution to be
made from the Custodial Account or by sale or liquidation of
the assets credited thereto.
Until otherwise changed in accordance with the terms of
Section 8 hereof, the Custodian shall receive fees for its
services with respect to a Participant's Custodial Account as
set forth in the Application Form and shall receive such
additional fees as my be agreed upon by it and the
Participant from time to time for its services in connection
with investments made pursuant to Section 7.3 hereof.
Payment of any taxes, expenses or Custodial fees
described in this Section may also be paid directly by, or on
behalf of, the Participant subject to agreement by the
Custodian.
9.4 Gender and Number. Except where the context
indicates to the contrary, when used herein, masculine terms
shall be deemed to include the feminine, and singular the
plural. In Section 3.3(c) and 4.4 hereof, feminine terms
shall be deemed to include the masculine.
9.5 Other Conditions. A Participant, by participating
in the Plan, expressly agrees that he shall look solely to
the assets of the Custodial Account for the payment of any
benefits to which he or she is entitled under the Plan. The
benefits provided under the Plan shall not be subject to
alienation, assignment, garnishment, attachment, execution or
levy of any kind, and any attempt to do so shall not be
recognized, except by the Custodian for the taxes, expenses
and Custodial fees described in Section 9.3 hereof and except
to such extent as may be required by law. The Plan and any
forms provide by the Custodian, including the Beneficiary
Designation filed pursuant to Section 4.5 and all property
rights of the Participant under the Plan, shall be construed,
administered, and enforced according to the laws of the State
of Illinois, other than its laws with respect to choice of
laws, except to the extent preempted by the Employee
Retirement Income Security Act of 1974, as amended.
<PAGE>
RECEIVED MAR 22 1990
Internal Revenue Service Department of the Treasury
Washington, DC 20224
Plan Name: IRA Custodial Account
FFN: 50153960000-001 Case: 8970313 EIN: 36-3447638
Letter Serial No. D100035c Person to Contact: Mr. Westry
Stein Roe & Farnham Inc Telephone Number (202) 535-4972
One South Wacker Street Refer Reply to E:EP:Q:4
Chicago, IL 60606 Date 03/21/90
Dear Applicant:
In our opinion, the amendment to the form of the prototype
trust, custodial account or annuity contract identified above
does not adversely affect its acceptability under section 408
of the Internal Revenue Code, as amended by the Tax Reform
Act of 1986.
Each individual who adopts this approved plan will be
considered to have a retirement savings program that
satisfies the requirements of Code section 408, provided they
follow the terms of the program and do not engage in certain
transactions specified in Code section 408(e). Please
provide a copy of this letter to each person affected.
The Internal Revenue Service has not evaluated the merits of
this savings program and does not guarantee contributions or
investments made under the savings program. Furthermore,
this letter does not express any opinion as to the
applicability of the Code section 4975, regarding prohibited
transactions.
Code section 408(i) and related regulations require that the
trustee, custodian or issuer of a contract provide a
disclosure statement to each participant in this program as
specified in the regulations Publication 590, Tax
Information on Individual Retirement Arrangements, gives
information about the items to be disclosed.
The trustee, custodian or issuer of a contract is also
required to provide each adopting individual with annual
reports of savings program transactions.
Your program may have to be amended to include or revise
provisions in order to comply with future changes in the law
or regulations.
If you have any questions concerning IRS processing of this
case, call us at the above telephone number Please refer to
the Letter Serial Number and File Folder Number shown in the
heading of this letter. Please provide those adopting this
plan with your phone number, and advise them to contact your
office if they have any questions about the operation of this
plan.
You should keep this letter as a permanent record. Please
notify us if you terminate the form of this plan.
Sincerely yours,
JOHN SWIECA
Chief, Employee Plans
Qualifications Branch
<PAGE>
[STIEN ROE MUTUAL FUNDS LOGO]
IRA
APPLICATION
Prototype Plan No. D100035C dated March 21, 1990
Use this application to establish an Individual Retirement
Account in a Stein Roe Mutual Fund or as a part of a Stein
Roe Counselor [SERVICE MARK] or Stein Roe Counselor Preferred
[SERVICE MARK] portfolio.
1 PARTICIPANT
Please complete a separate form for each type of IRA you wish
to establish.
_________________________________________________________
First Name Middle Initial Last Name
_________________________________________________________
Street Address
_________________________________________________________
City State Zip Code
_________________________________________________________
Daytime Telephone Evening Telephone
_________________________________________________________
Social Security Number Date of Birth
2 STEIN ROE COUNSELOR [SERVICE MARK] AND STEIN ROE
COUNSELOR PREFERRED [SERVICE MARK] PORTFOLIOS ONLY
If you are enrolled in one of these programs and want your
IRA invested as part of your Portfolio, check the appropriate
box. If you require assistance from your account executive
please call 800-322-8222.
A. Stein Roe Counselor [SERVICE MARK]
Please check one of the following:
[ ] 1. Please include my IRA in my Portfolio according to
my most recent Portfolio recommendation.
[ ] 2. I would like you to invest my IRA assets
differently than my Portfolio recommendation as
indicated in Section 4.
B. Stein Roe Counselor Preferred [SERVICE MARK]
[ ] 1. Please include my IRA in my Portfolio according to
my most recent Portfolio recommendation.
3 CONTRIBUTION TYPE
Please select your contribution type. The initial investment
minimum is $500 per fund account, except for a SEP-IRA.
Please refer to the Plan booklet for an explanation of each
contribution type. Enclose a check payable to SteinRoe
Services Inc. for at least $500, unless you are making an IRA
transfer.
[ ] A. Contribution
Contribution is for current year unless you
specify different year: 19__
[ ] B. SEP
[ ] C. Asset Transfer
Complete Asset Transfer Form on back page
[ ] D. Rollover
I have enclosed a check payable to SteinRoe
Services Inc. in the amount of $_____
This represents a rollover from:
[ ] IRA
[ ] SEP
[ ] Spousal IRA
[ ] 403(b) Plan
[ ] Transfer Incident to Divorce from IRA/Tax-qualified
Plan
[ ] Spousal Death Benefit
Distribution from Tax-qualified Plan
[ ] Direct Rollover
[ ] Other
Date qualifying distribution was made*: ____
Check this box if you would like to establish a Conduit/
Segregated IRA Rollover account.
*This may not be more than 60 days prior to date SteinRoe
Services Inc. receives your Rollover Contribution.
Stein Roe account representatives are available
Monday thru Friday from 7 a.m. to 8 p.m. and
Saturday and Sunday from 8 a.m. to 5 p.m.
(Central Time)
If you have any questions, please call us toll free at
800-338-2550
Please return this completed form to:
SteinRoe Services Inc.
Stein Roe Mutual Funds
P.O. Box 804058
Chicago, IL 60680-4058
4 INVESTMENT OF CONTRIBUTIONS
Please select your investments. If you do not choose a Fund,
all of your contributions will be invested in Stein Roe
Government Reserves Fund, a money market fund. Stein Roe
Counselor Preferred [SERVICE MARK] clients skip to Section 5.
Stein Roe Stein Roe
Stein Roe Fund IRA Counselor [SERVICE MARK]
Government Reserves Fund $______ ______
Cash Reserves Fund ______ ______
Limited Maturity Income Fund ______ ______
Government Income Fund ______ ______
Intermediate Bond Fund ______ ______
Income Fund ______ ______
Total Return Fund ______ ______
Growth & Income Fund ______ ______
Special Fund ______ ______
Growth Stock Fund ______ ______
Young Investor Fund ______ ______
International Fund ______ ______
Special Venture Fund ______ ______
Capital Opportunities Fund ______ ______
Total Contributions $______ $100%
------ ------
5 AUTOMATIC INVESTMENT PLAN
This option allows you to make current year contributions to
your IRA directly from your bank checking or savings account
by electronic transfer. Please be sure the amount you specify
does not exceed your maximum permissible annual contribution
amount. Please allow three weeks to establish your Automatic
Investment Plan.
_________________________________________________________
Fund Name Account Number Amount
(leave blank if new) ($50 minimum)
_________________________________________________________
Fund Name Account Number Amount
(leave blank if new) ($50 minimum)
_________________________________________________________
Fund Name Account Number Amount
(leave blank if new) ($50 minimum)
I authorize Stein Roe Mutual Funds to draw on my bank account
to purchase shares for the account(s) listed above (check one
period only):
[ ] Monthly [ ] Every 6 months [ ] Quarterly [ ] Annually
These purchases should be made on or about the:
[ ] 5th or [ ] 20th day of the month
Please begin: [ ] Immediately or ______ specify month
IRA contributions made through the Automatic Investment Plan
will be credited as a contribution for the year in which the
shares are purchased. You are solely responsible for adhering
to applicable contribution limitations.
Bank Information
_________________________________________________________
Name of Bank
_________________________________________________________
Street Address of Bank
_________________________________________________________
City State Zip Code
_________________________________________________________
Name(s) on Checking Account
_________________________________________________________
Checking Account Number______ ACH Routing Number
(Attach a voided check to this form and verify the above
information with your bank.)
6 AUTOMATIC EXCHANGE PLAN
With this option you can authorize Stein Roe to regularly
exchange shares from one Stein Roe Fund to another with the
same account registration. A $500 minimum applies to each new
account.
_________________________________________________________
Redeem Shares from (Fund Name) Account Number
(leave blank if new)
_________________________________________________________
Amount ($50 minimum)
_________________________________________________________
Purchase Shares in (Fund Name) Account Number
(leave blank if new)
Check one period below and fill in dates between the 1st and
28th of the month:
[ ] Twice monthly on the ___ and ___ beginning ______________
specify month
[ ] Monthly on the _____ beginning _________________
specify month
[ ] Quarterly on the ________ of ___________________
list four months
[ ] Twice yearly on the ______ of ___________________
list two months
[ ] Annually on the _________ of ___________________
list one month
7 TELEPHONE EXCHANGE
Unless you check the box below, you automatically have the
privilege to exchange shares between your IRA accounts.
_____ I do NOT want the telephone exchange privilege.
Anyone who is supplied with the proper account information
can make telephone exchanges on your behalf. You may make up
to four round trip telephone exchanges every 12 months. A
round trip is the exchange from one Fund to another, and back
again. Stein Roe reserves the right to discontinue or modify
the exchange privilege, and certain restrictions apply.
8 DIVIDEND DISTRIBUTION OPTION
Dividends and capital gains will automatically be reinvested
into your IRA fund account. If you would like to have your
income dividends and capital gains distributions invested in
a different Stein Roe Mutual Fund within your IRA, please
complete this section.
Note: The Fund into which you direct your dividends or
capital gains must be registered exactly the same as your
current account registration.
Reinvest my ___ dividends ___ capital gains ___ both into:
Fund name: ____________________________
Account number:________________________
(leave blank if new)
9 CUSTODIAL ACCOUNTS OF $250,000 OR MORE
If you are establishing an IRA by transfer or rollover of an
amount of at least $250,000, you may select investments other
than the Funds in accordance with the terms of the Plan by
checking the following box and attaching a separate letter of
investment instructions. [ ]
10 SIGNATURE
Sign exactly as your name is printed in Section 1.
I hereby adopt the Stein Roe Funds Individual Retirement
Account Plan and appoint First Bank, N.A. to serve as
Custodian as provided therein. I have read the Plan
documents, including the General Provisions on the reverse
side of this form, and agree to be bound by their terms. I
have received the current prospectus(es) of the Fund(s) in
which my initial contribution is to be invested and agree to
be bound by their terms.
(Signature continued)
Unless I have declined the Telephone Exchange Privilege in
Section 7, I have authorized any Fund the shares of which are
purchased for my IRA, and SteinRoe Services Inc., transfer
agent for the fund and agent for my IRA Custodian (the
"Stein Roe Parties") to act upon instructions received by
telephone to exchange them for shares of any other Stein Roe
Fund. I agree that no Stein Roe Parties will be liable for
any loss, injury, damage or expense as a result of action
upon, and will not be responsible for the authenticity of any
telephone instructions, and will hold the Stein Roe Parties
harmless from any loss, claims or liability arising from its
or their compliance with these instructions. Accordingly, I
understand that I will bear any risk of loss resulting from
unauthorized instructions. I understand that the Stein Roe
Parties employ reasonable procedures to confirm that
telephone instructions are genuine.
Signature:___________
Date:________________
11 CUSTODIAN ACCEPTANCE
The undersigned, First Bank, N.A., by separate agreement and
the below signature, offers to serve as Custodian in
accordance with the Stein Roe Funds Individual Retirement
Account Plan once this Application form has been properly
completed and delivered (or mailed) to the Custodian. If
relating to an asset transfer, the undersigned accepts the
appointment as successor Custodian of the above referenced
account(s) and directs the resigning custodian to liquidate
the assets and remit as described above.
OFFER TO SERVE AS CUSTODIAN:
First Bank National Association
By: TERRY S. RICHTER
If you have any questions, please call us toll free at
800-338-2550
Stein Roe account representatives are available
Monday thru Friday from 7 a.m. to 8 p.m. and
Saturday and Sunday from 8 a.m. to 5 p.m.
(Central Time)
Asset Transfer Form
Please complete this section only if you are making an asset
transfer. Please consult the resigning custodian to determine
if there are any special requirements (eg: signature
guarantee) you must meet before making an asset transfer.
A. Resigning Custodian Information
_________________________________________________________
Resigning Custodian
_________________________________________________________
Street Address or P.O. Box
_________________________________________________________
City State Zip Code
_________________________________________________________
Account Representative
_________________________________________________________
Daytime Telephone
_________________________________________________________
Account Name and Number to be Transferred
Type of IRA
[ ] Regular [ ] Rollover [ ]SEP
B. Transfer Instructions
If your IRA C.D. investment matures in less than 15 days,
please notify your custodian that we will be sending asset
transfer instructions. If your IRA C.D. investment matures in
more than 30 days, please check with your custodian to
determine if a penalty will apply for early liquidation.
Please liquidate all assets (or $ ___________) in the above-
referenced account on ____________ (if no date, liquidate
immediately) and remit proceeds payable to SteinRoe Services
Inc. for the IRA of the individual listed in Section 1 to the
following address:
Stein Roe Mutual Funds
P.O. Box 804058
Chicago, IL 60680-4058
Attention: SteinRoe Services Inc.
Your signature:_____________________________
(Sign here and in Section 10)
Signature Guarantee
(If required by resigning custodian)
Signature Guaranteed by:
_________________________________________________________
Name of Institution
_________________________________________________________
Name of Authorized Officer
_________________________________________________________
Signature of Authorized Officer
Guarantor's Stamp:
General Provisions
1. Plan Establishment.
Your IRA will be established when SteinRoe Services Inc.
receives your properly completed form. If you fail to
complete this form properly, the establishment of your IRA
may be delayed.
2. Custodial Fees.
Currently, there are no Custodial fees charged for your
IRA assets invested in the Stein Roe Funds. In the event the
Custodian is required to perform services not ordinarily
provided with respect to the Plan, including making
participant-directed investments of large Custodial Accounts
pursuant to Section 7.3 of the Plan, or you make investments
other than in the Stein Roe Funds, the Custodian may charge
such fees as are appropriate. The Custodian reserves the
right to charge additional fees for assets invested in the
Stein Roe Funds upon 45 days' written notice to you, and to
waive or reduce any of its charges or fees as to any single
IRA or group of IRAs.
3. Telephone Inquiry Responses.
The Funds in which contributions by you or on your
behalf are invested and SteinRoe Services Inc., as transfer
agent for the Funds and as agent for the Custodian of the
Plan, are authorized to respond to any written inquiries from
you and any telephonic inquiries (WHETHER FROM YOU OR ANY
PERSON) relating to the status of your IRA and none of the
Funds, SteinRoe Services Inc., or the Custodian shall be held
liable for any action taken or information communicated
pursuant to any such communication.
4. Terms of Privileges.
The following terms and conditions and those stated in
the prospectus as in effect from time to time apply to the
Fund Privileges you elect:
a. None of the Funds, the Funds' transfer agent, your IRA
Custodian nor their respective officers, trustees nor
directors, agents nor employees shall be liable for any loss,
liability, cost or expense for acting upon instructions
furnished under a Privilege.
b. You agree that any Privilege you elect shall continue
until five business days after any Fund, shares of which are
held in your IRA or its transfer agent, receive notice from
you of any change thereof. You also agree that any Fund
offering a Privilege, its transfer agent or your IRA
Custodian may suspend, limit or terminate any Privilege or
its use at any time without prior notice to you. You agree
that none of the Funds, their transfer agent, or your IRA
Custodian shall be held liable for any action taken or
information communicated pursuant to this authorization.
c. You authorize the Fund(s) and its transfer agent to
initiate any and all credit or debit entries (and reversals
thereof) to effect electronic transfers under any Privilege
and redeem shares of any Funds(s) you own equal to the amount
of any loss incurred by any of them in effecting any
electronic transfer and retain the proceeds.
d. You understand that the Funds or their transfer agent
will generally record (by electronic means or otherwise) any
telephonic instruction given pursuant to a Privilege and you
expressly authorize such recording. You also understand and
agree that the Funds and your transfer agent reserve the
right to refuse any telephonic instruction.
5. Transfers/Rollovers by Persons over age 70 1/2.
If you are making an asset transfer/rollover contribution
after the April 1 of the year following the year you reach
age 70 1/2 or a subsequent year, your assets transferred/
rolled over must be distributed over a period no longer than
the period over which they were scheduled to be distributed
from your transferor/distributing plan. If you already have a
Stein Roe IRA and are scheduled to receive distributions from
that IRA over a period longer than the period over which you
were scheduled to receive distributions from the
transferor/distributing plan, you must establish a new
Stein Roe IRA for your transfer/rollover. In addition, you
must complete and return with this form a Distribution
Request Form requesting that your transferred/rolled over
assets be distributed at least as rapidly as under the
distribution method in effect under your transferor/
distributing plan. If the distribution period for your
transferor/distributing plan is based on the joint and last
survivor life expectancies of you and a designated
beneficiary, you cannot extend the payment period under the
Stein Roe IRA into which your assets are transferred/rolled
over by naming a younger Beneficiary. You may designate a
different Beneficiary than under your transferor/distributing
plan, but if that Beneficiary has a shorter life expectancy
than the beneficiary designated under your transferor plan,
your maximum IRA payment period must be correspondingly
reduced. If that Beneficiary has a life expectancy longer
than the beneficiary designated under your transferor/
distributing plan, your maximum IRA payment period still must
be the same as under the transferor/distributing plan. In
either event, you must designate a Beneficiary for the Stein
Roe IRA into which your assets are transferred/rolled over by
completing and returning an IRA Beneficiary Form with your
Distribution Request Form. For other rollover provisions, see
Plan Booklet.
IRAAP 0296
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<INTEREST-INCOME> 7432
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<EXPENSES-NET> 752
<NET-INVESTMENT-INCOME> 6680
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<APPREC-INCREASE-CURRENT> 4133
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<EXPENSES-NET> 186
<NET-INVESTMENT-INCOME> 1124
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<NAME> STEIN ROE INTERMEDIATE BOND FUND
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<ACCUMULATED-NET-GAINS> (12132)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 8872
<NET-ASSETS> 314381
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11141
<OTHER-INCOME> 0
<EXPENSES-NET> 1069
<NET-INVESTMENT-INCOME> 10072
<REALIZED-GAINS-CURRENT> 5043
<APPREC-INCREASE-CURRENT> 4218
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<DISTRIBUTIONS-OF-INCOME> 10100
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<NAME> STEIN ROE LIMITED MATURITY INCOME FUND
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-END> DEC-31-1995
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<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 164
<TOTAL-LIABILITIES> 164
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37443
<SHARES-COMMON-STOCK> 3756
<SHARES-COMMON-PRIOR> 2877
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (751)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (22)
<NET-ASSETS> 36670
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1038
<OTHER-INCOME> 0
<EXPENSES-NET> 82
<NET-INVESTMENT-INCOME> 956
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 244
<NET-CHANGE-FROM-OPS> 1200
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 967
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1447
<NUMBER-OF-SHARES-REDEEMED> 643
<SHARES-REINVESTED> 75
<NET-CHANGE-IN-ASSETS> 8763
<ACCUMULATED-NII-PRIOR> 11
<ACCUMULATED-GAINS-PRIOR> (751)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 94
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 193
<AVERAGE-NET-ASSETS> 31502
<PER-SHARE-NAV-BEGIN> 9.7
<PER-SHARE-NII> .31
<PER-SHARE-GAIN-APPREC> .06
<PER-SHARE-DIVIDEND> .31
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
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<EXPENSE-RATIO> .52
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</TABLE>
EXHIBIT 19(a)
FUND APPLICATION Please do not remove label
[Stein Roe Mutual Funds logo]
.........
Mail to: P.O. Box 804058, Chicago, IL 60680-4058
This application is: [ ] New account [ ] Change to current account
(See Section 12)
_________________________
Account number
If you have questions, please call us toll-free
Weekdays--7 a.m. to 7 p.m.
Saturday and Sunday--8 a.m. to 5 p.m.
Central Time
800-338-2550
Liberty Securities Corporation, Distributor
Member SIPC
For office use only ______________________
1 YOUR ACCOUNT REGISTRATION
[ ] INDIVIDUAL OR JOINT* ACCOUNT
_______________________________________________
Owner's name (First, middle initial, last)
_______________________________________________
Joint owner's name (First, middle initial, last)
______________________________ ____________________________________
Owner's Social Security number Joint owner's Social Security number
*Joint tenants with right of survivorship, unless indicated otherwise.
[ ] GIFTS (TRANSEFRS) TO MINORS ACCOUNT
_________________________________________ as custodian for:
Name of one custodian only
_________________________________________ under the
Name of one minor only
__________________ Uniform Gifts (Transfers) to Minors Act.
State of residence
_______________________________ ___________________
Minor's Social Security Number Minor's birth date
[ ] TRUST OR RETIREMENT ACCOUNT
(For Stein Roe IRA or other Defined Contribution plan, please call us
for a separate application.)
_________________________________________
Name of trustee(s)
_________________________________________
_________________________________________
Name of trust
______________ _____________________
Date of trust Trust's tax ID number
_________________________________________
Trust beneficiary
[ ] ORGANIZATION OR OTHER ACCOUNT
Please complete and return the Certificate of Authorization on the
last page of the prospectus.
_______________________________________________
Name of corporation, partnership, estate, etc.
_________________________________________
Tax identification number
2 YOUR ADDRESS
_________________________________________
Street or P.O. box
_________________________________________
_________________________________________
City State Zip code
_________________________________________
Daytime telephone Evening telephone
_____________________________ _________________________
Owner's citizenship Joint owner's citizenship
3 YOUR FUND SELECTION
The initial minimum is $2,500; for UGMAs the minimum is $1,000. If you
elect an automatic investment option, the minimum is $1,000 ($500 for
UGMAs). If you do not specify a Fund, your investment will be in
Stein Roe Cash Reserves, a money market fund.
MONEY MARKET FUNDS GROWTH AND INCOME FUNDS
- ------------------ ------------------------
Government Reserves Fund _____ Balanced Fund _____
Cash Reserves Fund _____ Growth & Income Fund _____
TAX-EXEMPT FUNDS GROWTH FUNDS
- ---------------- -------------
Municipal Money Market Fund _____ Special Fund _____
Intermediate Municipals Fund _____ Growth Stock Fund _____
Managed Municipals Fund _____ Young Investor Fund _____
High-Yield Municipals Fund _____ International Fund _____
Special Venture Fund _____
BOND FUNDS Capital Opportunities
- ---------- Fund _____
Government Income Fund _____
Intermediate Bond Fund _____
Income Fund _____
Limited Maturity Income Fund _____
4 INVESTMENT METHOD
[ ] BY CHECK: Payable to Stein Roe Funds
[ ] BY EXCHANGE FROM:
__________________________
Name of Stein Roe Fund
___________________________ ____________________________
Account number Number of shares or $ amount
[ ] BY WIRE: Call us for instructions at 800-338-2550
5 DISTRIBUTION OPTIONS
We will automatically reinvest all distributions for you. If you want
this option, you do not need to fill out this section. Please check
below if you prefer another option. Distributions may be (A) invested in
shares of another Stein Roe Fund with the same account registration (a
$1,000 minimum applies to the account in which you are investing), (B)
deposited into your checking account, or (C) sent by check to your
address.
Dividends Capital gains
(check one or both)
[ ] (A) Distribution Purchase
Invest into _______________ [ ] [ ]
Fund name
___________________________
Account number
from: _____________________
Fund name
___________________________
Account number
[ ] (B) Automatic Deposit direct to my [ ] [ ]
checking account (Also complete
Section 9)
[ ] (C) Send check to my address [ ] [ ]
6 MONEY MARKET FUND OPTIONS
[ ] FREE CHECK WRITING(Available for Government Reserves, Cash Reserves
and Municipal Money Market Fund only.)
Check this box and complete the signature card below if you wish
to write checks ($50 minimum) on your Money Market Fund account
You must also complete Section 11.
- ------------------------------------------------------------------
*DO NOT DETACH*
State Street Bank and Trust Company Check Writing Signature Card
Check Fund: [ ] Cash Reserves [ ] Government [ ] Municipal Money
Fund Reserves Fund Market Fund
Account name(s) as registered: ____________________________
By signing this card, I authorize State Street Bank and Trust Company to
honor any check drawn by me on an account with the bank and to redeem
and pay to bank shares in my Fund account having a redemption price equal
to the amount of such check. I agree to be subject to the rules
governing the Check Writing Redemption option as in effect from time to
time.
Signature (Sign as you will on checks) Signature guarantee*
_____________________________________ ________________________________
_____________________________________ ________________________________
Number of signatures on each check**: __________
(Office use only) Account no. _________________ Date: ______________
*Required if you are adding these options to an existing account; or if
you are requesting checkwriting for a Trust, Corporation or other
Organization account, guarantee required for any person signing these
cards who has not signed in Section 11. Otherwise a signature guarantee
is not required.
**If left blank, only one signature is required for joint tenant
accounts, but all signatures are required for all other types of
accounts.
(OVER)
*DO NOT DETACH*
You are subject to the Fund and bank rules pertaining to checking
accounts under the privilege as in effect from time to time. For a
joint tenancy account with rights of survivorship, each owner appoints
each other owner as attorney-in-fact with power to authorize redemptions
on his behalf by signing checks under the privilege unless the reverse
side indicates all owners must sign checks.
You agree to hold Fund and its transfer agent free from any liability
resulting from payment of any forged, altered, lost or stolen check
unless you notify Fund and bank of such misappropriation no later than 14
days after the earliest of the date on which you (a) discover the
misappropriation or (b) receive a copy of the check cancelled by bank. A
copy of a cancelled check paid during a calendar month is deemed
received 6 days after posting in the U.S. mail to your registered address
with Fund unless you notify Fund of non-receipt by certified mail within
20 days after the close of such month.
You agree to hold Fund and its transfer agent free from any liability for
any other check misappropriated by the same wrongdoer and paid from
proceeds of a redemption made in good faith on or after the date you
notify Fund of the first misappropriated check.
- -----------------------------------------------------------------------
7 TELEPHONE REDEMPTION OPTIONS
A. Telephone Redemption Options. You can redeem shares two ways: with
Telephone Redemption, a check is mailed to your address; with Telephone
Exchange, redemption proceeds are used to purchase shares in another
Stein Roe Fund. Most shareholders prefer these conveniences. They apply
unless you check the boxes below:
I DO NOT WANT:
[ ] Telephone Redemption [ ] Telephone Exchange
[ ] B. ACH Redemption Option. This allows you to redeem shares at
any time and have the proceeds sent to your bank checking account.
Check the box and complete Section 9 for this option. ($50
minimum; $100,000 maximum.)
[ ] C. Telephone Redemption by wire. Check this box if you wish to
redeem shares in your account and wire the proceeds to your bank
account designated in Section 9. $1,000 minimum for all funds;
$100,000 maximum for all funds except Money Market Funds.)
If you decide to add these options at a later date, you will be required
to obtain a signature guarantee.
8 AUTOMATIC INVESTMENT PLAN
A. Regular Investments. This option allows you to make scheduled
investments into your accent(s) directly from your bank checking account
by electronic transfer. To establish a new account with this service, a
$1,000 minimum applies to each account except for a $500 minimum which
applies to a Uniform Gift to Minors account. Please also complete
Section 9.
________________________________________________________________
Fund name Account number Amount ($50 minimum)
________________________________________________________________
Fund name Account number Amount ($50 minimum)
I authorize Stein Roe Mutual Funds to draw on my bank account to purchase
shares for the account(s) listed above: (check one period)
[ ] Monthly [ ] Quarterly [ ] Every 6 months [ ] Annually
These purchases should be made on or about the:
[ ] 5th or [ ] 20th day of the month
Please begin: Immediately or _______ (specify month)
[ ] B. Special Investments. You can also purchase shares by telephone
and pay for them by electronic transfer from your bank checking account
on request. Check the box above for this option, which saves you the
trouble and expense of arranging for a wire transfer or writing a check.
(Also complete Section 9.)
9 BANK INFORMATION
Complete this section if you have selected options from Sections 5B,
7B, 7C, 8A or 8B. You must use the same bank checking account for these
options.
________________________________________________________________
Name of bank
________________________________________________________________
Street address of bank
________________________________________________________________
City State Zip code
________________________________________________________________
Name(s) on checking account
______________________________ ________________________________
Checking account number ACH Routing number
(Attach a voided check to this form and verify the above information with
your bank.)
Attach voided check here.
10 AUTOMATIC EXCHANGE PLAN
With this option you can authorize Stein Roe to regularly exchange shares
from one Stein Roe Fund account to another with the same account
registration. A $1,000 minimum applies to each new account.
________________________________________________________________
Redeem shares from (Fund name) Account number (or "new" if a
new account)
________________________________________________________________
Amount ($50 minimum)
________________________________________________________________
Purchase shares from (Fund name) Account number (or "new" if a
new account)
Check one period below and fill in dates between the 1st and 28th of the
month:
[ ] Twice monthly on the ___ and ___ beginning ______ (specify month)
[ ] Monthly on the ______ beginning __________ (specify month)
[ ] Quarterly on the ______ of _______________ (list four months)
[ ] Twice yearly on the _____ of _____________ (list two months)
[ ] Annually on the _____ of _________________ (list one month)
11 YOUR SIGNATURES
By signing this form, I certify that:
- -I have received the current Fund prospectus and Terms and Conditions
of services and agree to be bound by their terms as governed by Illinois
law. I have full authority and legal capacity to purchase Fund shares
and establish and use any related privileges.
- -By signing below, I certify under penalties or perjury that:
-All information and certifications on this application are true and
correct, including the Social Security or other tax identification
number (TIN) in Section 1.
-If I have not provided a TIN, I have not been issued a number but have
applied (or will apply) for one and understand that if I do not
provide the Fund(s) a TIN within 60 days, the Fund(s) will withhold
31% from all my dividend, capital gain and redemption payments until I
provide one.
-Check one of the following only if applicable:
[ ] The IRS has informed me I am subject to backup withholding as a
result of a failure to report all interest or dividend income.
[ ] I am a trust or organization that qualifies for the IRS backup
withholding exemption.
- -Unless I have declined the Telephone Redemption and Telephone Exchange
privileges in Section 7A, I have authorized the Fund and its agents to
act upon instructions received by telephone to redeem my shares of the
Fund or to exchange them for shares of another Stein Roe Fund, and I
agree that, subject to the Funds employing reasonable procedures to
confirm that such telephone instructions are genuine, neither the Fund,
nor any of its agents will be liable for any loss, injury, damage, or
expense as a result of acting upon, and will not be responsible for the
authenticity of, any telephone instructions, and will hold the Fund and
its agents harmless from any loss, claims or liability arising from its
or their compliance with these instructions. Accordingly, I understand
that I will bear any risk of loss resulting from unauthorized
instructions.
Sign below exactly as your name(s) appears in Section 1.
________________________________________________________________
Signature Date
________________________________________________________________
Title (if owner is an organization)
________________________________________________________________
Signature Date
________________________________________________________________
Title (if owner is an organization)
12 SIGNATURE GUARANTEE (IF REQUIRED)
A signature guarantee is not required if you are establishing a new
account. For existing accounts, a signature guarantee is required if
you are adding or making changes to options listed in Sections 5B, 6, 7,
8 or 9. We are unable to accept notarizations.
Signature(s) Guaranteed by:
________________________________________________________________
Name of institution
________________________________________________________________
Name of authorized officer
________________________________________________________________
Signature of authorized officer
Guarantor's stamp: