Semiannual Report
December 31, 1995
Stein Roe
Bond Funds
Limited Maturity Income Fund
Government Income Fund
Intermediate Bond Fund
Income Fund
Photographic image of two men and girl on a bridge.
Graphic: Stein Roe Logo
Stein Roe Mutual Funds
Building Wealth for GenerationsSM
<PAGE>
Contents
From the President 1
Tim Armour's thoughts on the markets and investing
Performance 3
How the Stein Roe Bond Funds have done over time
Q&A
Limited Maturity Income Fund 7
Government Income Fund 10
Intermediate Bond Fund 12
Income Fund 16
Interviews with the portfolio managers and a
summary of major shifts in the Funds' investments
over the past six months
Investments 20
A complete list of each Fund's investments with
market values
Financial Statements 32
Balance sheets, statements of operations,
and changes in net assets
Notes to the Financial Statements 40
Financial Highlights 44
Selected per-share data
General Information 52
A guide to products and services
<PAGE>
From the President
To Our Shareholders
We are pleased to present this semiannual report for the Stein Roe Bond
Funds--Stein Roe Limited Maturity Income Fund, Stein Roe Government Income
Fund, Stein Roe Intermediate Bond Fund and Stein Roe Income Fund.
What a Difference a Year Makes
At this time last year, investors had just suffered through one of the worst
bond markets in history. Today, however, the market presents a much brighter
picture. Fueled largely by falling interest rates, fixed income securities
roared back in 1995, helping to make 1994's losses a distant memory.
Indeed, fixed income funds had one of their best years on record. At year end,
the yield on the benchmark 30-year Treasury bond hit 6 percent--compared with
more than 8 percent at this time last year. Adding fuel to the market rally
was the influx of Japanese money into the U.S. taxable bond market. Starting
last spring, Japanese investors--tired of poor returns and rock-bottom
interest rates--started sending their savings abroad, moving their money into
U.S. bonds that were paying as much as double what Japanese investors would be
receiving at home. The effect was magnified when low borrowing rates on
Japanese yen prompted large U.S. hedge funds to borrow yen and buy U.S.
dollars. According to the Wall Street Journal, this influx of Japanese money
may have helped long-term interest rates fall by as much as half a percentage
point in 1995.(1)
A Tough Act to Follow?
While back-to-back boom years in the bond market are rare, there may still be
some steam left in the rally. Growing investor sentiment that the equity
market can't sustain its current level of growth, or a deficit-cutting budget
deal, for example, could pave the way for a bond market rally. Moreover, if
the yen/dollar exchange remains stable, Japanese investors will most likely
continue reaching for yield in the U.S. Treasury markets, contributing further
to bond market gains. Finally, many investors continue to wager that signs of
weak economic growth and a benign rate of inflation will spur the Federal
Reserve to cut rates again in 1996.
We expect interest rates to trade around current levels, and even to reach
some lower levels in coming months. Still, as economic activity firms and the
prospect of additional rate cuts wanes, any potential lows in interest rates
may not be sustained. Furthermore, considering the current budget impasse and
tax reform issues--sure to be a key issue of campaign debates--bond investors
can expect some uncertainties in the market in coming months.
Photographic image of Tim Armour.
<PAGE>
The Basics
No one can predict what might happen to bond funds or the markets in the
future, but we believe investors must understand the factors that move the
markets, not just to profit from them, but to gain the patience to ride out
short-term volatility in their investments. As always, no matter what
direction you think the economy is heading, it is important to remember the
basics. Think long term and re-evaluate your investment portfolio from time to
time to make sure it continues to match your goals, risk tolerance and time
horizon. And try to follow a regular investment plan. By investing a certain
amount of money each month or quarter, you can take advantage of dollar-cost
averaging. Of course, not everyone is in a position to follow a regular
investment plan. And it neither ensures a profit nor protects against a loss
in a declining market. This simple strategy, however, can help you turn market
volatility to your advantage.
Please call us at 800-338-2550 with your comments and suggestions. As always,
we look forward to serving your investment needs.
Sincerely,
Timothy K. Armour
President
January 22, 1996
(1)Steiner, Robert, "Cash Flow: Tired of Poor Returns, Many Japanese Send
Their Savings Abroad." Wall Street Journal, December 26, 1995.
<PAGE>
<TABLE>
Fund Performance
There are several ways to evaluate a fund's historical performance. You can
look at the cumulative return percentage, the average annual return
percentage, or the growth of a hypothetical $10,000 investment. Each
performance figure includes changes in a fund's share price, plus reinvestment
of any dividends (net investment income) and capital gains (the profits the
fund earns when fixed income securities grow in value).
Average Annual Total Returns
Periods ended December 31, 1995
<CAPTION>
Past 1 Life
Year of Fund(1)
<S> <C> <C>
Limited Maturity Income Fund 9.91% 4.56%
Lehman 1- to 3-Year
Government Bond Index 10.84 5.19
<CAPTION>
Past 1 Past 3 Past 5 Past 10
Year Years Years Years(1)
<S> <C> <C> <C> <C>
Intermediate Bond Fund 16.82% 7.51% 9.02% 8.80%
Lehman Government/
Corporate Index 15.33 7.16 8.61 8.82
<CAPTION>
Past 1 Past 3 Past 5 Life
Year Years Years of Fund(1)
<S> <C> <C> <C> <C>
Government Income Fund 16.94% 6.72% 8.21% 8.01%
Lehman Government Bond Index 18.34 8.16 9.37 8.70
Income Fund 19.72 9.28 10.78 9.20
Lehman Intermediate
Corporate Bond Index 19.00 8.78 10.19 9.33
Lehman Corporate Bond Index2 22.25 9.62 11.15 9.86
<FN>
Past performance is no guarantee of future results. Share price and investment
return will vary, so you may have a gain or loss when you sell shares. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions.
(1)Inception dates: Limited Maturity Income Fund -- March 11, 1993;
Government Income Fund -- March 5, 1986; and Income Fund -- March 5, 1986.
Because index returns are calculated on a monthly basis, those marked "Life of
Fund" are calculated from the month-end results that fall closest to the
Funds' inception dates.
(2)In February 1996, Income Fund's benchmark index was changed from the Lehman
Corporate Bond Index to the Lehman Intermediate Corporate Bond Index. The new
index is more representative of the Fund's duration and maturity.
</TABLE>
<PAGE>
<TABLE>
Investment Comparison
These graphs compare the performance of Stein Roe's Funds to the Lehman 1- to
3-Year Government Index, Lehman Government Bond Index, Lehman
Government/Corporate Index, Lehman Intermediate Corporate Bond Index, and
Lehman Corporate Bond Index, each an unmanaged group of fixed income
securities that differs from the composition of each Stein Roe Fund; they are
not available for direct investment.
Comparison of change in value of a $10,000 investment for the quarters
indicated.
Limited Maturity Income Fund
Graph:
<CAPTION>
Year Ended Limited Maturity Lehman 1- to 3-Year
Income Fund Government Bond Index
<S> <C> <C>
3/31/93 10,000 10,000
6/30/93 10,071 10,111
9/30/93 10,178 10,250
12/31/93 10,222 10,315
3/31/94 10,197 10,265
6/30/94 10,137 10,265
9/30/94 10,222 10,367
12/31/94 10,234 10,368
3/31/95 10,540 10,712
6/30/95 10,843 11,052
9/30/95 10,991 11,217
12/31/95 11,248 11,493
Comparison of change in value of a $10,000 investment for the years ended June
30.
Government Income Fund
Graph:
<CAPTION>
Year Ended Government Lehman Government
Income Fund Bond Index
<S> <C> <C>
3/31/86 10,000 10,000
06/30/86 10,130 10,132
1987 10,326 10,549
1988 11,204 11,308
1989 12,391 12,674
1990 13,248 14,552
1991 14,527 16,926
1992 16,511 17,979
1993 18,098 19,169
1994 17,689 18,912
1995 19,624 21,193
12/31/95 20,878 22,556
</TABLE>
<PAGE>
<TABLE>
Investment Comparison
Comparison of change in value of a $10,000 investment for the years ended
June 30.
Intermediate Bond Fund
Graph:
<CAPTION>
Year Ended Intermediate Lehman Government/
Bond Fund Corporate Index
<S> <C> <C>
06/30/86 10,000 10,000
1986 12,208 11,621
1987 12,615 12,269
1988 13,473 13,208
1989 14,948 14,559
1990 15,744 15,697
1991 17,422 17,348
1992 19,827 19,632
1993 21,928 21,693
1994 21,824 21,638
1995 24,031 23,882
12/31/95 23,194 23,276
Income Fund
Graph:
<CAPTION>
Year Ended Income Lehman Intermediate Lehman Corporate
Fund Corporate Bond Index Bond Index
<S> <C> <C> <C>
3/31/86 10,000 10,000 10,000
6/30/86 10,179 10,207 10,131
1987 10,974 10,868 10,778
1988 11,995 11,769 11,673
1989 13,319 13,028 13,186
1990 13,646 14,069 14,187
1991 14,922 15,569 15,697
1992 17,191 17,812 18,101
1993 19,712 19,996 20,618
1994 19,576 19,884 20,230
1995 22,080 22,447 23,289
12/31/95 23,574 23,858 25,017
Total return performance includes changes in share price and reinvestment of
income and capital gains distributions. Past performance is no guarantee of
future results. Share price and investment return will vary, so you may have
a gain or loss when you sell shares.
</TABLE>
<PAGE>
Making the Most of Performance
The wide assortment of performance data available today can be a mixed
blessing. On one hand, a fund's performance results can be a valuable source
of information when considering an investment. On the other hand, even
seasoned investors may find the wide array of data and the different methods
of interpretation confusing.
That's why one of the most important pieces of advice we can give you is to
remember that a fund's past performance is just that--past. While a fund's
past performance is not a guarantee of how it will perform in the future, it
can help you make rational decisions about the funds you currently hold or
about funds you might be considering. Owning bond funds helps to provide
diversification, and, as a result, can help to reduce a portfolio's risks. And
because bond funds have an income component, bond portfolio returns tend to be
less volatile than stock funds. Nonetheless, bond fund returns and share
prices will fluctuate as interest rates change. The price and total return of
a mutual fund will change daily and if you sell your shares during a downturn
in the market, you might lose money. But, if you can ride out the market's ups
and downs, your fund might achieve a gain.
No one can make your financial decisions better than you. We hope this report
helps you to better understand and evaluate your fund's performance, and
serves as a helpful aid in making intelligent, appropriate investment
decisions. If you have any questions, please call a Stein Roe account
representative at 800-338-2550.
<PAGE>
Q&A
An Interview with Steve Luetger, Portfolio Manager of Limited Maturity Income
Fund
Photographic image of Steve Luetger.
Fund Data
Investment Objective:
Seeks high current income and capital preservation by investing primarily in
U.S. government and other high-quality debt securities. The Fund pursues a
higher level of income than is usually available from money market funds with
stable prices and shorter maturities. While the price will fluctuate, it is
expected to be less volatile than the price of longer-term funds with higher
yield potential.
Fund Inception:
March 11, 1993
Total Net Assets:
$36.7 million
Q: How did the Fund perform?
A: Limited Maturity Income Fund finished the six-month period with a 3.74
percent total return, versus a 3.98 percent return for the Lehman 1- to 3-Year
Government Bond Index.
Because investors tend to see this Fund as an alternative to a money market
fund rather than as a bond fund, we believe that they are looking for low
price volatility combined with a yield that compares favorably with the yield
of the two-year Treasury. We've continued to pursue this risk/return
combination by purchasing higher-yielding securities such as short-term
corporate and asset-backed securities--as of December 31, the Fund's 30-day
standardized yield was 5.29 percent, versus 5.15 percent for the two-year
Treasury. At the same time, we've also sought to keep our duration, a measure
of price volatility, in line with that of the Lehman Index.
Q: What factors affected performance?
A: Performance was dampened by the portfolio's exposure to mortgages,
particularly collateralized mortgage obligations, or CMOs (as of December 31,
15.2 percent of total net assets). These securities have underperformed
Treasuries for much of the year.
In a lowering-rate environment, such as we have experienced in the last six
months, investors begin to expect that borrowers will refinance their
mortgages--refinancing shortens the average maturity of the pooled mortgages
that make up a mortgage-backed security. Reflecting these expectations, CMO
price appreciation was muted when compared to Treasury securities. And while
we significantly reduced our position in these securities during the last six
months, on December 31 mortgage-backed securities represented roughly 17.5
percent of total net assets.
<PAGE>
Q: On the other hand, the last six months have been a good period for
corporate bonds.
A: Right. The demand for corporate bonds has been high relative to supply. In
addition, the corporate market has been experiencing an improvement in overall
credit quality, which has boosted the value of corporate bonds.
During the last six months, we increased our weighting in corporate bonds to
31.6 percent of total net assets. We expect this market to remain strong over
the next several months.
Q: You've been adding some credit card-backed securities to the asset-backed
portion of the portfolio in the last year. With growth slowing, where are you
finding attractive opportunities?
A: We recently added Standard Credit Card Trust, a note securitized by credit
card receivables (2.8 percent of total net assets). We believe asset-backed
securities help provide us with high quality--AAA ratings by Standard & Poor's
or Aaa by Moody's--as well as cash flow certainty and a yield premium.
Q: What's your outlook?
A: The recent budget impasse has sparked some volatility in the market, but
market expectations are that a compromise will be reached in the first
quarter. Once Congress comes to an agreement, we believe that interest rates
will continue to drop and the yield curve--currently flat in the zero- to
three-year range--will steepen. We believe that we're currently well
positioned for that environment.
Portfolio holdings as of December 31, 1995; portfolio quality subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Adviser currently
limits expenses to 0.65 percent, subject to termination upon 30 days' notice
to the Fund. Prior to November 1, 1995, the expense limitation was 0.45
percent of average net assets. Absent past limits, the Fund's 30-day
standardized yield at December 31, 1995, would have been 4.53 percent and
total return would have been less. The Lehman 1- to 3-Year Government Bond
Index is an unmanaged group of short-term bonds that differs from the
composition of each Stein Roe Fund; it is not available for direct investment.
Past performance is no guarantee of future results. Share price and investment
return will vary, so you may have a gain or a loss when you sell shares.
<PAGE>
<TABLE>
Fund Highlights
Limited Maturity Income Fund
Securities Type Breakdown
<CAPTION>
Portfolio Portfolio
June 30, 1995 December 31, 1995
<S> <C> <C>
U.S. Treasury and Agency Securities 19.8% 25.5%
Corporate Bonds 28.9 31.6
Asset-Backed Securities 20.8 18.8
Mortgage-Backed Securities 27.1 17.5
Cash and Equivalents 3.4 6.6
Total 100% 100%
Average Life
Pie chart:
As of June 30, 1995 As of December 31, 1995
Less Than One Year 33.3% Less Than One Year 25.4%
1-3 Years 44.8% 1-3 Years 47.0%
Over 3 Years 21.9% Over 3 Years 27.6%
Portfolio Quality
Pie chart:
As of June 30, 1995 As of December 31, 1995
U.S. Treasury 16.0% U.S. Treasury 23.0%
AAA/Agency 47.0% AAA/Agency 36.6%
AA 13.0% AA 9.0%
A 11.0% A 18.5%
BBB 13.0% BBB 12.9%
</TABLE>
<PAGE>
Q&A
An Interview with Mike Kennedy, Portfolio Manager of Government Income Fund
and Intermediate Bond Fund
Photographic image of Mike Kennedy.
Fund Data
Investment Objective:
The Fund seeks high current income by investing primarily in securities issued
or guaranteed by the U.S. government or its agencies or instrumentalities.
Fund Inception:
March 5, 1986
Total Net Assets:
$36.8 Million
Government Income Fund Q&A
Q: How did the Fund perform?
A: At 6.38 percent for the six-month period, Government Income Fund outpaced
the 6.24 percent return of the Fund's Lipper peer group of U.S. government
funds and lagged the 6.42 percent return for the Lehman Government Bond Index.
At December 31, 1995, the Fund reported a 30-day standardized yield of 5.74
percent.
Q: What factors drove performance?
A: As a Fund that invests in mortgage-backed securities, we tend to be
affected strongly by the performance of the mortgage market as a whole. The
last six months brought a slowdown in economic activity, and with it, a
general expectation of an easing in interest rates by the Federal Reserve.
Falling rates sparked refinancing fears in the mortgage market, causing poor
price performance of mortgage-backed securities in the fourth quarter.
We anticipated the Federal Reserve easing move that occurred in late December
and kept our duration stable rather than shortening duration. As a result, we
were able to lock in higher rates, which boosted performance during the
six-month period and helped us outperform our peer group.
But our performance was dampened in the fourth quarter by mortgage-backed
securities. The Lehman Government Index contains no mortgages, which made it
tough to beat in the fourth quarter.
<PAGE>
Q: What are your plans for the portfolio's mortgage component?
A: In the last six months we've maintained a heavy emphasis on mortgage-backed
securities, which represented 61.4 percent of total net assets on December 31.
This is a tactical move designed to position the Fund to take full advantage
of favorable price movements stemming from the First Quarter Effect, a
cyclical pattern when mortgages typically outperform Treasuries early in the
year. As the First Quarter Effect abates, we expect to begin shifting assets,
on a strategic basis, from mortgage-backed securities into Treasury
securities.
Q: What are your expectations for the Fund?
A: We expect interest rates to continue to decline modestly, with short-term
rates falling more than long-term rates. But while sharply falling rates
recently have created a significant level of concern over mortgage prepayment,
we strongly believe that the mortgage market's long-term outlook is good. As a
result, we expect to hold a core position of mortgages in the portfolio.
Portfolio holdings as of December 31, 1995; portfolio quality subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Adviser currently
limits expenses to 1 percent of average net assets, subject to termination
upon 30 days' notice to the Fund. Absent past limits, the Fund's 30-day
standardized yield at December 31, 1995, would have been 5.69 percent and
total return would have been less. The Fund is neither insured nor guaranteed
by the U.S. government. Up to 20 percent of the Fund's assets may be invested
in other types of securities. The Lehman Government Bond Index represents an
unmanaged group of government securities that differs from the composition of
each Stein Roe Fund; it is not available for direct investment. According to
Lipper Analytical Services, Inc., an independent monitor of mutual fund
performance, the median returns for the Fund's general U.S. government fund
peer group for the one-year, five-year and Life of Fund periods ended December
31, 1995, were 16.8 percent, 8.36 percent and 7.81 percent, respectively.
Past performance is no guarantee of future results. Share price and investment
return will vary, so you may have a gain or a loss when you sell shares.
<PAGE>
Q&A Continued
Intermediate Bond Fund Q&A
Fund Data
Investment Objective:
Seeks high current income consistent with capital preservation by investing
primarily in a diversified portfolio of marketable debt securities. The
dollar-weighted average life of its portfolio is expected to be between three
and 10 years.
Fund Inception:
December 5, 1978
Total Net Assets:
$314.4 Million
Q: How did the Fund perform?
A: With a 6.54 percent return, Intermediate Bond Fund finished the six-month
period ahead of the Lipper Intermediate Investment Grade Debt peer group
median return of 5.78 percent. At December 31, 1995, the Fund reported a
30-day standardized yield of 5.91 percent.
The Fund outpaced the Lehman Government/Corporate Index return of 5.23
percent during the quarter, primarily because of the strength of the corporate
bond market and our customarily longer duration. The Index duration averages
around 3.2, while the Fund's adjusted duration tends to center around four.
This longer duration--which is maintained consistently by most funds in the
peer group--typically will allow Intermediate Bond Fund to outperform the
Index when interest rates are falling and to underperform the Index in a
rising-rate environment.
Q: How does duration affect performance?
A: Duration--or, more correctly, adjusted duration--is a measure of a bond
fund's sensitivity to interest rates. If a bond has a duration of five, for
example, and interest rates fall by 1 percent, then the bond's price should
rise by approximately 5 percent. The longer the duration, the more sensitive a
bond's price will be to changes in interest rates.
A bond fund's portfolio manager uses a weighted average adjusted duration to
reflect the durations of the fund's holdings, and adjusts the fund's duration
according to what he or she expects interest rates might do.
Q: Overall, the Fund has performed well. What, if anything, held you back?
A: During the fourth quarter, falling interest rates sparked some fears in the
marketplace that borrowers would begin to prepay their mortgages. As a result,
mortgages underperformed corporate bonds and Treasury securities. With a 30.5
percent weighting in mortgage-backed securities as of December 31, this
dampened our performance somewhat.
<PAGE>
Q: Corporate bonds, in contrast, are performing well.
A: Yes, the last six months have been a good period for corporate bonds, which
have been bolstered by improvements in credit quality as well as very strong
demand from investors. We saw such attractive opportunities in corporates
during the past six months that we boosted the portfolio's corporate component
from 36.4 percent of total net assets on June 30 to 62.6 percent on December
31. Some of these purchases include AT&T and Exxon, both high-quality
companies (1.7 percent and 0.8 percent of total net assets, respectively), and
some extremely attractive Yankee bonds--foreign issues of dollar-denominated
bonds.
Each year, the market becomes more receptive to foreign issuers and there are
more opportunities to buy foreign bonds. Right now, however, because foreign
bonds are less familiar to investors than domestic bonds, foreign issues offer
a yield premium. In time, we believe that yield premium will disappear and, if
it does, we hope to benefit significantly by having bought early. We believe
our holdings (27.4 percent of total net assets), which are in regions with
good growth and banking trends--primarily Europe and Asia--are well
diversified.
Portfolio holdings as of December 31, 1995; portfolio quality subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Adviser currently
limits expenses to 0.70 percent of average net assets, subject to termination
upon 30 days' notice to the Fund. Absent past limits, the Fund's 30-day
standardized yield at December 31, 1995, would have been 5.86 percent and
total return would have been less. The Lehman Government/Corporate Index
represents an unmanaged group of intermediate-term bonds that differs from the
composition of each Stein Roe Fund; it is not available for direct investment.
According to Lipper Analytical Services, Inc., an independent monitor of
mutual fund performance, the median returns for the Fund's intermediate
investment grade debt fund peer group for the one-year, five-year and 10-year
periods ended December 31, 1995, were 16.9 percent, 8.80 percent and 8.80
percent, respectively.
Foreign investments involve greater risks and potential rewards than U.S.
investments. These risks include political and economic uncertainties of
foreign countries.
Past performance is no guarantee of future results. Share price and investment
return will vary, so you may have a gain or a loss when you sell shares.
<PAGE>
<TABLE>
Fund Highlights
Government Income Fund
Securities Type Breakdown
<CAPTION>
Portfolio Portfolio
June 30, 1995 December 31, 1995
<S> <C> <C>
Federal Agency Mortgage-
Backed Securities 59.8% 57.4%
U.S. Treasury Securities 25.8 34.4
AAA Mortgage-Backed Securities 3.7 4.0
Federal Agency Securities 2.7 2.9
Cash and Equivalents 8.0 1.3
Total 100% 100%
Maturity
Pie Chart:
As of June 30, 1995 As of December 31, 1995
Under 5 Years 5.3% Uncer 5 Years 1.0%
5-10 Years 16.3% 5-10 Years 14.0%
10-20 Years 22.0% 10-20 Years 26.0%
20-25 Years 30.2% 20-25 Years 37.0%
Over 25 Years 26.2% Over 25 Years 22.0%
Portfolio Quality
Pie chart:
As of June 30, 1995 As of December 31, 1995
Treasury 29.9% Treasury 34.8%
AAA/Agency 70.1% AAA/Agency 65.2%
</TABLE>
<PAGE>
<TABLE>
Fund Highlights
Intermediate Bond Fund
Securities Type Breakdown
<CAPTION>
Portfolio Portfolio
June 30, 1995 December 31, 1995
<S> <C> <C>
Corporate Bonds 32.1% 35.2%
Mortgage-Backed Securities 33.6 30.5
Yankee Bonds 4.3 27.4
Asset-Backed Securities 7.0 5.1
Federal Agency Securities 8.6 --
U.S. Treasury Securities 10.3 --
Cash and Equivalents 4.1 1.8
Total 100% 100%
Average Life
Pie chart:
As of June 30, 1995 As of December 31, 1995
Less Than 1 Year 9.0% Less Than 1 Year 2.0%
1-5 Years 40.0% 1-5 Years 37.0%
5-10 Years 49.0% 5-10 Years 58.0%
Over 10 Years 2.0% Over 10 Years 3.0%
Portfolio Quality
Pie chart:
As of June 30, 1995 As of December 31, 1995
AAA/Agency 44.0% AAA/Agency 27.0%
AA 4.0% AA 18.0%
A 16.0% A 24.0%%
BBB 28.0% BBB 21.0%
BB 8.0% BB 10.0%
</TABLE>
<PAGE>
Q&A
An Interview with Ann Benjamin, Portfolio Manager of Income Fund
Photographic image of Ann Benjamin.
Fund Data
Investment Objective:
Seeks high current income by investing principally in medium-quality debt
securities. The Fund also may invest in higher-quality securities and, to a
lesser extent, lower-quality securities which may involve greater credit and
other risk.
Fund Inception:
March 5, 1986
Total Net Assets:
$208.4 million
Q: How did the Fund perform during the last six months?
A: Income Fund, at 6.74 percent for the six-month period, outstripped the
Lehman Intermediate Corporate Bond Index return of 6.31 percent and lagged the
6.93 percent return of its Lipper Corporate Debt BBB peer group funds. At
December 31, 1995, the Fund reported a 30-day standardized yield of 6.35
percent.
Q: What drove performance?
A: Our six-month performance reflects a combination of factors. Income Fund
turned in strong performance during the third quarter, using a duration that,
for most of the quarter, was slightly longer than that of the Index. This
allowed us to take advantage of the slowing economy and declining interest
rates.
Q: What, if anything, hampered performance?
A: Performance was dampened during the fourth quarter by the fact that
high-yield bonds recently have lagged the Treasury market. This occurred for a
number of reasons: slowing economic trends and a resulting spike in default
rates for high-yield bonds; and the growing expectation that a lowering-rate
environment will encourage issuers to take callable bonds out of market,
hindering the upward price movement of those bonds.
Q: What were your best performers?
A: The Fund benefited significantly when a number of our holdings were
upgraded. These included the Republic of Colombia, Black & Decker, a global
manufacturer and marketer of products used in and around the home and for
commercial applications, and Meditrust, a medical real estate investment trust
(REIT). These represent 1.3 percent, 1.0 percent, and 1.0 percent of total net
assets, respectively.
<PAGE>
Q: The Fund also has benefited from its holdings in Yankee bonds.
A: Yes, Yankee bonds--dollar-denominated bonds of foreign issuers--have
performed extremely well throughout the past six months. Yankee bonds continue
to offer a yield premium, in part because they are foreign, which carries more
risk than a domestic issue. And, contrary to the current slowing economic
trends in the United States, we're still seeing a lot of growth potential in
Europe and Asia. In the last several months we added the State of Israel and
Hong Kong Mass Transit to the portfolio (1.4 percent and 1.3 percent of total
net assets, respectively), which have performed well.
Q: What are your criteria for investing abroad?
A: First, I try to keep international holdings--including Yankee bonds and
American Depositary Receipts (ADRs)--to no more than 30 percent of the
portfolio. Once we've identified regions that exhibit good growth trends, our
strategy for investing in foreign issues is no different from our strategy for
domestic investing: we focus on issuers that have positive trends or are of
higher quality and are recession-resistant.
Q: Early in the third quarter, one of your holdings was the target of a
takeover. How did that affect the Fund?
A: Two investors took a large stock position in the holding company of RJR and
Nabisco. It was a situation that we weren't comfortable with--a leveraged
takeover attempt can weaken a company's ability to service its debt and,
consequently, could threaten the value of its bonds. As a result, we quickly
eliminated our position--and we believe it was a good decision.
Q: Where are you finding opportunities now?
A: We continue to focus on defensive industries that we think perform well in
a slowing economy, as well as late-cyclical companies--capital spending
industries that are currently experiencing strong gains.
<PAGE>
Q: What are your expectations for Income Fund for the coming months?
A: Historically, the first quarter has been an extremely good period for
corporate bonds, particularly high yield bonds. This is primarily the result
of the "January Effect"--a cyclical period during which supply increases at
the end of December as dealers sell off inventory to avoid the expense of
carrying it into the new year, and as individuals liquidate holdings for tax
purposes. Spreads widen abnormally at the end of the year. When dealers
restock inventories and individuals and institutions increase their holdings,
the result is excessive demand occurring all at once that causes spreads to
tighten.
And while data suggest that the bond rally may have run its course, high-yield
bonds, which tend to perform better in a bear bond market than in a bull
market, should continue to perform well. As a result, we increased our
exposure to the high-yield market at the end of the fourth quarter of 1995,
and we expect to continue to add to our holdings into the first quarter of
1996.
Portfolio holdings as of December 31, 1995; portfolio quality subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Adviser currently
limits expenses to 0.82 percent of average net assets, effective through
October 31, 1998. Absent past limits, the Fund's 30-day standardized yield at
December 31, 1995, would have been 6.32 percent and total return would have
been less. The Lehman Intermediate Corporate Bond Index is an unmanaged group
of intermediate- and long-term bonds that differs from the composition of each
Stein Roe Fund; it is not available for direct investment. According to Lipper
Analytical Services, Inc., an independent monitor of mutual fund performance,
the median returns for the Fund's corporate debt BBB fund peer group for the
one-year, five-year and Life of Fund periods ended December 31, 1995, were
19.7 percent, 10.19 percent and 9.04 percent, respectively.
Foreign investments involve greater risks and potential rewards than U.S.
investments. These risks include political and economic uncertainties of
foreign countries.
Past performance is no guarantee of future results. Share price and investment
return will vary, so you may have a gain or a loss when you sell shares.
<PAGE>
<TABLE>
Fund Highlights
Income Fund
Securities Type Breakdown
<CAPTION>
Portfolio Portfolio
June 30, 1995 December 31, 1995
<S> <C> <C>
Industrial 34.6% 40.1%
Financial 16.1 17.3
Utilities 13.3 11.3
U.S. Government Securities 12.6 6.4
Foreign Government Bonds 3.7 6.2
Miscellaneous 19.7 18.7
Total
100% 100%
Maturity
Pie chart:
As of June 30, 1995 As of December 31, 1995
Less Than 1 Year 5.0% Less Than 1 Year 3.0%
1-5 Years 9.0% 1-5 Years 12.9%
5-10 Years 64.1% 5-10 Years 65.6%
10-20 Years 18.6% 10-20 Years 15.7%
Over 20 Years 3.3% Over 20 Years 2.8%
Portfolio Quality
Pie chart:
As of June 30, 1995 As of December 31, 1995
Treasury/AAA/Agency 16.1% Treasury/AAA/Agency 6.9%
AA 6.4% AA 5.2%
A 11.0% A 21.2%%
BBB 37.5% BBB 34.2%
BB 25.3% BB 25.6%
B/NR* 3.7% B/NR* 6.9%
<FN>
*Nonrated
</TABLE>
<PAGE>
<TABLE>
Limited Maturity Income Fund
Investments as of December 31, 1995
(Dollar Amounts In Thousands)
(Unaudited)
<CAPTION>
Principal Market
Long-Term Obligations (93.4%) Amount Value
<S> <C> <C>
U.S. Government and Agency Obligations (25.5%)
Federal Agricultural Mortgage Association Medium-Term Note
7.710% 7/16/01 $1,000 $1,094
U.S. Treasury Notes
7.625% 5/31/96 1,000 1,009
8.500% 7/15/97 1,000 1,048
7.250% 2/15/98 2,000 2,080
9.000% 5/15/98 1,000 1,083
7.750% 12/31/99 2,800 3,038
------
9,352
U.S. Government Agency Mortgage-Backed Securities (11.0%)
Federal Home Loan Mortgage Corporation Remic Trusts
4.750% 12/15/00 Series 1604-B 970 963
4.750% 11/15/01 Series 1565-B 726 723
5.000% 6/15/06 Series 1560-PB 682 680
Federal National Mortgage Association Remic Trust
7.688% 4/25/20 Series 1993-M1 Class A 775 798
Government National Mortgage Association
6.750% 4/20/23 ARM 841 857
------
4,021
Asset-Backed Obligations (18.8%)
First Deposit Master Trust Series 1993 Class 2A 5.750% 6/15/01 1,000 1,006
Greentree Financial Corp. Series 1994
6.550% 7/15/98 Class A1 598 602
5.600% 5/15/24 Class 1 507 501
Greentree Financial Corp. Manufactured Housing Series 1993-1
Class A-1 4.900% 4/15/18 60 60
Greentree Securities Net Interest Margin Series 1994-A
6.900% 2/15/04 167 169
Household Home Equity Trust 1993 Class A3 4.650% 12/20/08 487 473
Premier Auto Trust Series 1994-3 Class A-4 6.500% 11/02/97 750 754
Prime Credit Trust Series 1992-2-A2 7.450% 11/15/02 750 792
Signet Master Trust Services 1993-4 Class A 6.313% 5/15/02
Floating Rate 1,500 1,500
Standard Credit Card Trust 1995-6A 6.750% 6/07/00 1,0001,028
------
6,885
Commercial Bank (2.7%)
Corporacion Andina de Fomento 6.625% 10/14/98 1,000 997
Energy Services (1.4%)
YPF Sociedad Anonima 7.500% 10/26/02 491 497
<PAGE>
Limited Maturity Income Fund Continued
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Financial (18.4%)
American Express Credit Corp. 7.875% 12/01/96 $ 500 $ 510
American Reinsurance Corp. 10.875% 9/15/04 1,000 1,117
Ford Motor Credit Corp. 9.250% 6/15/98 1,000 1,081
General Motors Acceptance Corp. 8.625% 6/15/99 1,000 1,085
Health & Rehabilitation Property Trust
7.300% 7/13/99 Floating Rate 1,000 985
Lehman Brothers Note 5.040% 12/15/96
8.000% thereafter until maturity of 12/15/03 1,000 991
Salomon Brothers Mortgage Medium-Term Note
5.370% 12/17/96 1,000 992
-------
6,761
Food and Beverages (0.7%)
Philip Morris Companies Medium-Term Note 8.450% 5/24/96 250 253
Mortgage-Backed Securities (6.5%)
General Electric Capital Mortgage Services Series 1994
6.500% 7/25/18 Class A6 1,000 999
6.500% 8/25/24 Class A4 1,000 1,001
Salomon Brothers Mortgage Pass-Through Certificates
Series 1993-3 Class A-3 7.200% 7/25/23 400 402
-------
2,402
Retail (2.9%)
Sears Roebuck 9.250% 4/15/98 1,000 1,077
Supranational Bank (2.8%)
Korean Development Bank Medium-Term Note 7.950% 3/25/97 1,000 1,026
Utilities (2.7%)
New York State Electric & Gas 5.625% 1/01/97 975 974
-------
Total Long-Term Obligations
(Cost basis $34,267) 34,245
Short-Term Obligation - (4.4%)
Commercial Paper (4.4%)
Lehman Brothers Holding Inc. 6.100% 1/02/96
(Amortized Cost $1,619) 1,620 1,619
Total Investments (97.8%)
(Cost basis $35,886) 35,864
Other Assets, Less Liabilities (2.2%) 806
-------
Total Net Assets (100%) $36,670
=======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Government Income Fund
Investments as of December 31, 1995
(Dollar Amounts In Thousands)
(Unaudited)
<CAPTION>
Principal Market
Long-Term Obligations (98.7%) Amount Value
<S> <C> <C>
U.S. Government and Agency Obligations (37.3%)
Federal National Mortgage Association
8.000% 4/13/05 $1,000 $ 1,045
U.S. Treasury Bonds
7.500% 11/15/01 700 772
6.500% 8/15/05 2,500 2,399
12.750% 11/15/10 600 914
7.500% 11/15/16 2,000 2,349
8.875% 8/15/17 4,200 5,631
7.125% 2/15/23 500 572
-------
13,682
U.S. Government Agency Mortgage-Backed Securities (57.4%)
Federal Home Loan Mortgage Corporation
12.000% 7/01/13 310 346
Federal Home Loan Mortgage Corporation Gold
7.500% 3/01/08 1,825 1,881
12.000% 7/01/20 1,048 1,178
7.500% 11/01/23 1,279 1,316
Federal Home Loan Mortgage Corporation Remic Trust
9.500% 4/15/19 Series 11-C 168 174
Federal National Mortgage Association
8.000% 6/01/02 724 750
*7.000% 11/01/08 1,750 1,782
6.000% 4/01/09 818 809
6.000% 2/01/24 882 853
8.500% 7/01/24 1,280 1,335
8.000% 9/01/24 961 995
8.500% 11/01/24 38 39
8.500% 12/01/24 1,749 1,825
8.500% 3/01/25 15 16
8.000% 9/01/25 479 496
Federal National Mortgage Association Remic Trusts
Effective Yield 14.400% 7/25/98 Series 1991-91-SA 12 91
9.250% 3/25/18 Series 1988-4-Z 1,469 1,564
5.850% 1/25/19 Series 1993-183-GB 500 495
Government National Mortgage Association
8.000% 6/15/06 175 183
8.000% 3/15/08 1,039 1,086
8.000% 5/15/08 77 80
8.000% 6/15/08 976 1,017
8.000% 7/15/08 1,314 1,372
9.000% 6/15/16 431 461
8.000% 8/15/16 74 79
9.000% 11/15/16 224 240
9.000% 2/15/17 106 113
9.000% 3/15/21 184 195
9.000% 8/15/21 320 340
-------
21,111
<PAGE>
Government Income Fund Continued
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Mortgage-Backed Securities (4.0%)
Countrywide Mortgage Backed Securities Inc.
Series 1994-F-Class A4 6.000% 4/25/09 $ 750 $ 737
Merrill Lynch Trust Series 20-D 8.000% 12/20/18 723 742
-------
1,479
Total Long-Term Obligations
(Cost basis $33,836) 36,272
Short-Term Obligations (4.9%)
U.S. Government Agency Obligation (4.6%)
Federal Home Loan Mortgage Corp. 5.550% 1/17/96 1,700 1,695
Repurchase Agreement (0.3%)
CIBC Wood Gundy Securities; 12/29/95 agreement collateralized by
Federal National Mortgage Association 7.400% due 7/01/04 125 125
-------
Total Short-Term Obligations
(Amortized cost $1,820) 1,820
Total Investments (103.6%)
(Cost basis $35,656) 38,092
Other Assets, Less Liabilities (-3.6%) (1,336)
-------
Total Net Assets (100%) $36,756
=======
<FN>
*Security purchased on a when-issued or delayed delivery basis for which the
Fund had not taken delivery as of December 31, 1995.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Intermediate Bond Fund
Investments as of December 31, 1995
(Dollar Amounts In Thousands)
(Unaudited)
<CAPTION>
Principal Market
Long-Term Obligations (98.2%) Amount Value
<S> <C> <C>
U.S. Government Agency Mortgage-Backed Securities (16.4%)
Federal Home Loan Mortgage Corporation
Remic Trust Series 11-C 9.500% 4/15/19 $ 401 $ 416
Federal Home Loan Mortgage Corporation Gold
12.000% 7/01/20 4,995 5,614
Federal National Mortgage Association
9.148% 6/01/97 (Multi Family Housing) Floating Rate 157 158
8.500% 4/01/01 3 3
8.500% 5/01/03 40 42
8.500% 9/01/03 119 124
8.500% 11/01/03 293 305
6.000% 4/01/09 13,605 13,467
11.250% 11/01/13 (FHA/VA guaranteed) 378 421
6.000% 1/01/24 962 931
6.000% 3/01/24 2,903 2,809
8.000% 9/01/24 961 995
8.500% 12/01/24 3,669 3,827
8.000% 8/01/25 3,498 3,622
Federal National Mortgage Association Remic Trusts
14.400% (Effective Yield) 7/25/98 Series 1991-91-SA 57 434
9.250% 3/25/18 Series 88-4-Z 4,966 5,284
Government National Mortgage Association
8.000% 1/15/08 752 786
8.000% 2/15/08 506 529
8.000% 4/15/08 600 627
8.000% 5/15/08 668 699
8.000% 6/15/08 3,050 3,182
8.000% 7/15/08 557 580
9.000% 6/15/16 188 201
9.000% 8/15/16 124 133
9.000% 10/15/16 267 285
6.500% 10/15/25 ARM 6,051 6,164
-------
51,638
Air Transportation (2.4%)
Federal Express Corporation 1994 Pass-Through
Certificates Series A310-A1 7.530% 9/23/06 4,720 4,996
United Airline Corporation Series 1991-A1 9.200% 3/22/08 2,323 2,597
-------
7,593
<PAGE>
Asset-Backed Obligations (5.1%)
ALPS Pass-Through Trust Series 1994-1 Class C2
9.350% 9/15/04 3,482 3,697
First Boston Home Equity Loan Pass-Through Certificates Series
1993-H1 Class A-IO 12.820% (Effective Yield) 9/28/13 32,988 1,114
Greentree Finance Manufactured Housing Series 1994-S-A3
7.600% 9/01/19 3,000 3,162
Greentree Home Improvement Loan Trust
Series 1994-A Class A 7.050% 3/15/14 3,365 3,417
Greentree Securitized Net Interest Margin
6.900% 2/15/04 Series 1994-A 2,311 2,329
6.900% 7/15/05 Series 1995-A 2,284 2,316
-------
16,035
Intermediate Bond Fund Continued
<PAGE>
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Business Services (2.3%)
Xerox Corp. 6.500% 6/29/00 $ 7,000 $ 7,164
Cable/Media (6.5%)
Le Groupe Videotron Ltee 10.625% 2/15/05 3,000 3,225
Lenfest Communications 8.375% 11/01/05 3,000 3,000
Rogers Cable Systems Senior Secured Second Priority Note
9.625% 8/01/02 3,000 3,143
Telecommunications Inc. 8.250% 1/15/03 6,570 7,098
Viacom 10.250% 9/15/01 3,500 4,032
-------
20,498
Commercial Banks (7.6%)
BBV International Finance Cayman Islands 6.875% 10/27/05 5,000 5,140
**Bangkok Bank Public Ltd. 7.250% 9/15/05 6,500 6,739
Kansallis Osake Panki 10.000% 5/01/02 5,500 6,568
Santander Financial Issuances 7.875% 4/15/05 5,000 5,520
-------
23,967
Consumer Products (0.8%)
Procter & Gamble 9.625% 1/14/01 2,300 2,667
Containers and Glass (1.1%)
Owens-Illinois, Inc. 11.000% 12/01/03 3,000 3,390
Drugs (2.0%)
Sandoz Corporation 6.625% 7/28/05 6,000 6,205
Energy Services (1.6%)
YPF Sociedad Anonima 7.500% 10/26/02 4,909 4,975
Financial (4.3%)
American International Group Zero Coupon (Effective
Yield 6.544%) 8/15/04 11,170 6,719
Greentree Financial Corp. 10.250% 6/01/02 5,500 6,660
-------
13,379
Financial Services (1.3%)
American Residential Mortgage Corp. 6.110% 2/03/99 4,000 4,046
Foreign Government Regional Bonds (6.5%)
**Corporacion Andina de Fomento 6.625% 10/14/98 5,500 5,483
Quebec 8.670% 3/12/98 4,000 4,250
The Republic of Italy 6.000% 1/10/01 5,000 4,997
The State of Israel 6.375% 12/15/05 5,650 5,701
-------
20,431
Hotel (1.9%)
Renaissance Hotel Group 8.875% 10/01/05 5,750 6,056
Insurance (3.7%)
Equitable Life Surplus Notes 6.950% 12/01/05 9,000 9,144
**John Hancock Surplus Notes 7.375% 2/15/24 2,500 2,507
-------
11,651
Major Chemicals (3.1%)
**Bayer Corp. 7.125% 10/01/15 4,000 4,247
Hanson Overseas 7.375% 1/15/03 5,000 5,359
-------
9,606
<PAGE>
Intermediate Bond Fund Continued
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Mining (2.2%)
PT Alatief Freeport Finance Co. B.V. 9.750% 4/15/01 $3,500 $ 3,927
Santa Fe Pacific Gold 8.375% 7/01/05 3,000 3,083
--------
7,010
Miscellaneous Transportation (1.7%)
Hong Kong Mass Transit Railway Corp. 7.250% 10/01/05 5,000 5,211
Mortgage-Backed Securities (14.1%)
American Mortgage Trust Series 1993-3 Class 3B 8.190% 9/27/22 2,941 2,949
Countrywide Mortgage Backed Securities Inc.
Series 1994-F Class A4 6.000% 4/25/09 3,250 3,193
Excel Credit Corporation Commercial Mortgage Pass-Through
Certificate Series 1994-1 Class A 6.432% 3/01/04
Floating Rate 2,027 2,044
Kidder Peabody Series 1994-C3-A2 8.500% 4/04/04 3,500 3,940
**Lennar Central Partners Limited Partnership Series 1994-1
Class C 8.120% 9/15/02 3,500 3,566
MDC Mortgage Funding Corporation Series Q
Class 5 8.850% 3/20/18 2,184 2,273
Merrill Lynch
8.000% 12/20/18 Series 20-D 5,127 5,267
8.227% 4/25/23 Series 1994-M1 Class C 1,300 1,371
7.093% 12/26/25 Series 1995-C3 Class A3 4,000 4,100
PS CMO Trust Series 1994-C1-A2 7.920% 8/15/02 4,250 4,487
**Prudential Home Mortgage Finance Corp.
Series 1992-A Class B2-2 7.900% 11/25/22 7,000 7,042
Resolution Trust Corporation Series 1992-5
Class A3 8.850% 5/25/26 2,660 2,750
**SKW Real Estate L.P. Commercial Mortgage Pass-Through
Certificates Class D 9.050% 4/15/04 1,330 1,357
--------
44,339
Paper (1.0%)
Riverwood International Corp. 10.750% 6/15/00 3,000 3,225
Petroleum (1.2%)
Exxon Capital Corp. Zero Coupon (Effective Yield 6.590%)
11/15/04 4,330 2,578
Gulf Canada 9.250% 1/15/04 1,000 1,030
--------
3,608
<PAGE>
Publishing & Broadcasting (1.9%)
Time Warner Inc.
6.835% 8/15/00 Floating Rate 1,437 1,437
7.975% 8/15/04 862 913
8.110% 8/15/06 1,725 1,844
8.180% 8/15/07 1,725 1,850
--------
6,044
Retail (1.7%)
Sears Roebuck & Co. 9.250% 4/15/98 5,000 5,383
Telecommunications (4.0%)
AT&T Corp. 8.250% 1/11/00 5,000 5,421
Telecom New Zealand 6.500% 10/11/01 7,000 7,195
--------
12,616
<PAGE>
Intermediate Bond Fund Continued
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Utilities (3.8%)
Commonwealth Edison 7.375% 9/15/02 $5,500 $ 5,805
Niagara Mohawk Power Corp. 7.375% 8/01/03 3,650 3,470
North Atlantic Energy Corporation
Series A First Mortgage 9.050% 6/01/02 2,548 2,646
--------
11,921
--------
Total Long-Term Obligations
(Cost basis $299,786) 308,658
Short-Term Obligation - (0.5%)
Commercial Paper (0.5%)
Lehman Brothers Holding Inc. 6.100% 1/02/96
(Amortized cost $1,729) 1,730 1,729
Total Investments (98.7%)
(Cost basis $301,515) 310,387
Other Assets, Less Liabilities (1.3%) 3,994
--------
Total Net Assets (100.0%) $314,381
========
<FN>
**These securities are subject to contractual or legal restrictions on their
resale. At December 31, 1995, the aggregate value of these securities
represented 9.8% of net assets.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Income Fund
Investments as of December 31, 1995
(Dollar Amounts In Thousands)
(Unaudited)
<CAPTION>
Principal Market
Long-Term Obligations (96.3%) Amount Value
<S> <C> <C>
U.S. Government Obligations (6.4%)
U.S Treasury Notes
7.500% 05/15/02 $1,750 $ 1,941
6.250% 02/15/03 1,500 1,566
5.875% 02/15/04 2,500 2,551
7.250% 05/15/04 3,200 3,554
6.500% 05/15/05 1,500 1,598
6.500% 08/15/05 2,000 2,132
-------
13,342
Airline (1.0%)
American Airlines Equipment Trust 9.710% 1/02/07 1,849 2,137
Asset-Backed Obligations (0.5%)
ALPS Pass-Through Trust Series 1994-1 Class C2
9.350% 9/15/04 995 1,056
Automotive (0.5%)
Masco Corp. 7.125% 8/15/13 1,000 1,017
Cable/Media (12.8%)
Continental Cablevision Inc. 8.875% 9/15/05 1,500 1,579
Cox Communications 6.500% 11/15/02 1,500 1,530
Le Groupe Videotron Ltee 10.625% 2/15/05 3,000 3,225
Lenfest Communications 8.375% 11/01/05 3,000 3,000
News America Holdings Inc. 8.625% 2/01/03 3,000 3,367
Rogers Cable Systems Senior Secured Second
Priority Note 9.625% 8/01/02 3,000 3,142
Telecommunications, Inc. Class A 9.800% 2/01/12 2,000 2,387
Time Warner Entertainment 8.875% 10/01/12 3,000 3,373
Viacom International Inc.
10.250% 9/15/01 2,000 2,304
7.750% 6/01/05 1,000 1,062
Young Broadcasting, Inc. 11.750% 11/15/04 1,500 1,678
-------
26,647
<PAGE>
Commercial Banks (8.0%)
Banca Commercial Italian 8.250% 7/15/07 3,000 3,348
*Banko del Estado de Chile (Caymen Islands) 8.390% 8/01/01 3,000 3,228
Banesto Delaware Inc. 8.250% 7/28/02 2,000 2,188
*Bangkok Bank Public Ltd. 7.250% 9/15/05 3,000 3,110
RBSG Capital Corp. 10.125% 3/01/04 2,000 2,471
Santander Financial Issuances 7.875% 4/15/05 2,000 2,208
-------
16,553
Containers & Glass (2.3%)
Coca-Cola Bottling Company Medium-Term Note
8.560% 2/26/02 2,000 2,245
Owens-Illinois, Inc. 11.000% 12/01/03 2,300 2,599
-------
4,844
Electronics (1.1%)
Philips Electronics N.V. 8.375% 9/15/06 2,000 2,304
<PAGE>
Income Fund Continued
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Financial (7.9%)
Ford Capital B.V. 9.875% 5/15/02 $2,000 $ 2,392
General Motors Acceptance Corp. 9.625% 12/15/01 2,000 2,350
*Goldman Sachs 7.125% 3/01/03 3,000 3,133
Greentree Acceptance Corp. 10.250% 6/01/02 2,000 2,422
Meditrust 7.375% 7/15/00 2,000 2,064
Navistar Financial Corp. Medium-Term Note 9.500% 6/01/96 2,000 2,012
Property Trust of America 6.875% 2/15/08 2,000 1,998
-------
16,371
Food, Beverages & Tobacco (3.3%)
Cott Corp. 9.375 7/01/05 1,500 1,493
Philip Morris Companies 7.250% 1/15/03 3,000 3,164
Ralcorp Holdings, Inc. 8.750% 9/15/04 2,000 2,254
-------
6,911
Foreign Government Regional Bonds (6.2%)
*Corporacion Andina de Fomento 6.625% 10/14/98 3,000 2,991
New Zealand Government Debentures 8.750% 12/15/06 2,000 2,431
The Republic of Columbia 8.750% 10/06/99 2,500 2,646
*The Republic of Poland 7.750% 7/13/00 2,000 2,069
The State of Israel 6.375% 12/15/05 2,800 2,825
-------
12,962
Health Services & Equipment (1.9%)
Columbia/HCA Health Care Corp. 8.850% 1/01/07 2,000 2,396
Quorum Health 8.250% 11/01/05 1,500 1,552
-------
3,948
Hospitals, Nursing Homes (1.4%)
Tenet Healthcare 9.625% 9/01/02 2,000 2,200
Universal Health Services, Inc. 8.750% 8/15/05 800 812
-------
3,012
Hotels and Entertainment (7.5%)
Caesars World Inc. 8.875% 8/15/02 1,000 1,060
Cal Hotel Finance Corp. 11.000% 12/01/02 2,000 2,120
Circus Circus Enterprises, Inc. 10.625% 6/15/97 2,000 2,129
Grand Casino, Inc. 10.125% 12/01/03 3,000 3,128
ITT Corp. 6.250% 11/15/00 3,000 3,029
MGM Grand Hotel 12.000% 5/01/02 2,000 2,195
Station Casinos 9.625% 6/01/03 2,000 1,970
-------
15,631
Machinery & Fabricated Metal Products (4.4%)
Black & Decker Inc. 7.000% 2/01/06 2,000 2,065
Cincinnati Milacron 8.375% 3/15/04 2,000 2,090
Giddings and Lewis 7.500% 10/01/05 3,000 3,132
Rexnord Corp. 10.750% 7/01/02 2,000 2,232
-------
9,519
<PAGE>
Major Chemicals (2.4%)
Bayer Corp. 6.500% 10/01/03 4,000 4,121
Buckeye Cellulose 8.500% 12/15/05 1,000 1,023
-------
5,144
Mining and Agriculture (3.1%)
PT Alatief Freeport Financial Co. B.V. 9.750% 4/15/07
3,000 3,366
Santa Fe Pacific Gold 8.375% 7/01/05 3,000 3,082
-------
6,448
Income Fund Continued
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Miscellaneous Transportation (1.3%)
Hong Kong Mass Transit Railway Corp. 7.250% 10/01/05 $2,500 $ 2,606
Mortgage-Backed Security (0.4%)
Resolution Trust Corporation Series 1992-C1 Class A1
8.800% 8/25/23 796 830
Natural Gas & Oil (4.6%)
Arkla Inc. 9.875% 4/15/97 3,000 3,137
Colorado Interstate Gas 10.000% 6/15/05 1,500 1,879
Texas Eastern Transmission Corporation 10.375% 11/15/00 2,000 2,360
Transco Energy Co. 9.125% 5/01/98 2,000 2,140
--------
9,516
Paper (1.0%)
PT Riau Andalan Pulp and Paper 11.500% 12/15/00 2,000 1,987
Petroleum (5.5%)
Gulf Canada 9.250% 1/15/04 1,500 1,545
*Lyondell Petroleum 9.750% 9/04/03 2,000 2,379
Occidental Petroleum Corporation 11.750% 3/15/11 2,000 2,119
Union Texas Petroleum 8.500% 4/15/07 2,000 2,295
Vintage Petroleum 9.000% 12/15/05 3,000 3,022
--------
11,360
Retail (1.6%)
Hook-SuperX, Inc. 10.125% 6/01/02 2,000 2,199
Kroger Company 9.750% 2/15/04 1,000 1,079
--------
3,278
Services (2.0%)
ARA Services, Inc. 10.625% 8/01/00 1,600 1,816
Aramark Services 8.150% 5/01/05 1,000 1,090
Service Corp. International 8.375% 12/15/04 1,000 1,134
--------
4,040
<PAGE>
Telephone (2.5%)
Rogers Cantel Mobile, Inc. 10.750% 11/01/01 3,000 3,161
Telewest Communications 9.625% 10/01/06 2,000 2,032
--------
5,193
Utilities (6.7%)
CTC Mansfield Funding Corporation 11.125% 9/30/16 1,5001,545
Kentucky Power First Mortgage Medium-Term Note
8.900% 5/21/01 2,000 2,250
Louisiana Power & Light Company Series A 10.670% 1/02/17 1,000 1,076
*National Power Corp. Medium-Term Note 9.000% 7/05/02 1,500 1,560
North Atlantic Energy Corporation Series A First Mortgage
9.050% 6/01/02 2,831 2,940
Texas Utilities Company 9.750% 5/01/21 2,000 2,352
Utilicorp United, Inc. 8.200% 1/15/07 2,000 2,236
--------
13,959
--------
Total Long-Term Obligations
(Cost basis $189,591) 200,615
<PAGE>
Income Fund Continued
<CAPTION>
Principal Market
Amount Value
<S> <C> <C>
Short-Term Obligation (1.9%)
Commercial Paper (1.9%)
Lehman Brothers Holding Inc. 6.100% 1/02/96
(Amortized Cost $4,068) $4,070 $ 4,068
Total Investments (98.2%)
(Cost basis $193,659) 204,683
Other Assets, Less Liabilities (1.8%) 3,715
--------
Total Net Assets (100.0%) $208,398
========
<FN>
*These securities are subject to contractual or legal restrictions on their
resale. At December 31, 1995, the aggregate value of these securities
represented 8.9% of net assets.
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Balance Sheets
Investments as of December 31, 1995
(Dollar Amounts In Thousands)
(Unaudited)
<CAPTION>
Limited
Maturity Government Intermediate
Income Income Bond Income
Fund Fund Fund Fund
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Assets
Investments, at market value $35,864 $38,092 $310,387 $204,683
Receivable for fund shares sold 443 -- 464 --
Accrued interest receivable 464 420 4,705 3,958
Receivable from investment adviser 6 -- -- --
Cash and other assets 57 176 99 706
------- ------- -------- --------
Total Assets $36,834 $38,688 $315,655 $209,347
======= ======= ======== ========
Liabilities
Payable for investments purchased $ -- $ 1,781 $ -- $ --
Payable for fund shares redeemed -- -- 692 324
Dividends payable 57 -- 390 444
Payable to investment adviser and transfer agent 6 17 144 152
Other liabilities 101 134 48 29
------- ------- -------- --------
Total Liabilities 164 1,932 1,274 949
------- ------- -------- --------
Capital
Paid-in capital 37,443 36,418 317,641 203,871
Net unrealized appreciation (depreciation) of investments (22) 2,436 8,872 11,024
Accumulated net realized losses on investments (751) (2,098) (12,132) (6,497)
------- ------- -------- --------
Total Capital (Net Assets) 36,670 36,756 314,381 208,398
------- ------- -------- --------
Total Liabilities and Capital $36,834 $38,688 $315,655 $209,347
======= ======= ======== ========
Shares Outstanding (Unlimited Number Authorized) 3,756 3,614 35,172 20,672
======= ======= ======== ========
Net Asset Value (Capital) Per Share $ 9.76 $ 10.17 $ 8.94 $ 10.08
======= ======= ======== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Statements of Operations
For the Six Months Ended
December 31, 1995
(All Amounts In Thousands)
(Unaudited)
<CAPTION>
Limited
Maturity Government Intermediate
Income Income Bond Income
Fund Fund Fund Fund
------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Investment Income
Interest income $1,038 $1,310 $11,141 $ 7,432
------ ------ ------- -------
Expenses
Management fees 94 112 764 579
Transfer agent fees 22 26 214 129
Printing and postage 15 12 34 20
Registration fees 14 11 12 14
Legal and audit fees 13 13 13 13
Accounting fees 13 12 15 14
Trustees' fees 6 6 9 6
Custodian fees 4 5 7 7
Amortization of organization expenses 1 -- -- --
Other expenses 11 12 55 29
------ ------ ------- -------
193 209 1,123 811
Reimbursement of expenses by investment advisor (111) (23) (54) (59)
------ ------ ------- -------
Total Expenses 82 186 1,069 752
------ ------ ------- -------
Net Investment Income 956 1,124 10,072 6,680
Realized and Unrealized Gains on Investments
Net realized gains on investments -- 163 5,043 1,551
Net change in unrealized appreciation or depreciation on investments 244 1,043 4,218 4,133
------ ------ ------- -------
Net Gains on Investments 244 1,206 9,261 5,684
------ ------ ------- -------
Net Increase in Net Assets Resulting from Operations $1,200 $2,330 $19,333 $12,364
====== ====== ======= =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Statements of Changes in Net Assets
(All Amounts In Thousands)
(Unaudited)
<CAPTION>
Limited Maturity Government
Income Fund Income Fund
Year Six Months Year Six Months
Ended Ended Ended Ended
June 30, Dec. 31, June 30, Dec. 31,
1995 1995 1995 1995
----------------------- ------------------------
<S> <C> <C> <C> <C>
Operations
Net investment income $ 1,673 $ 956 $ 2,770 $ 1,124
Net realized gains (losses) on investments (548) -- (1,162) 163
Net change in unrealized appreciation or depreciation of investments 736 244 2,629 1,043
------- ------- ------- -------
Net Increase in Net Assets Resulting from Operations 1,861 1,200 4,237 2,330
------- ------- ------- -------
Distributions To Shareholders
Dividends from net investment income (1,664) (967) (2,770) (1,124)
------- ------- ------- -------
Share Transactions
Subscriptions to fund shares 17,366 14,047 15,151 2,981
Investment income dividends reinvested 1,160 722 2,106 883
Redemptions of fund shares (26,199) (6,239) (27,280) (5,594)
------- ------- ------- -------
Net Increase (Decrease) from Share Transactions (7,673) 8,530 (10,023) (1,730)
------- ------- ------- -------
Net Increase (Decrease) in Net Assets (7,476) 8,763 (8,556) (524)
Total Net Assets
Beginning of Period 35,383 27,907 45,836 37,280
------- ------- ------- -------
End of Period $27,907 $36,670 $37,280 $36,756
======= ======= ======= =======
Accumulated Undistributed Net Investment Income at End of Period $ 11 $ -- $ -- $ --
======= ======= ======= =======
Analyses of Changes in Shares of Beneficial Interest
Subscriptions to fund shares 1,814 1,447 1,606 301
Investment income dividends reinvested 121 75 223 89
------- ------- ------- -------
1,935 1,522 1,829 390
Redemptions of fund shares (2,739) (643) (2,877) (562)
------- ------- ------- -------
Net increase (decrease) in fund shares (804) 879 (1,048) (172)
Shares outstanding at beginning of period 3,681 2,877 4,834 3,786
------- ------- ------- -------
Shares outstanding at end of period 2,877 3,756 3,786 3,614
======= ======= ======= =======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Statements of Changes in Net Assets
(All Amounts In Thousands)
(Unaudited)
<CAPTION>
Intermediate
Bond Fund Income Fund
Year Six Months Year Six Months
Ended Ended Ended Ended
June 30, Dec. 31, June 30, Dec. 31,
1995 1995 1995 1995
--------------------------- -------------------------
<S> <C> <C> <C> <C>
Operations
Net investment income $ 20,703 $ 10,072 $ 12,087 $ 6,680
Net realized gains (losses) on investments (11,716) 5,043 (2,294) 1,551
Net change in unrealized appreciation or depreciation of investments 18,957 4,218 10,187 4,133
-------- -------- -------- --------
Net Increase in Net Assets Resulting from Operations 27,944 19,333 19,980 12,364
-------- -------- -------- --------
Distributions To Shareholders
Dividends from net investment income (20,726) (10,100) (12,126) (6,686)
-------- -------- -------- --------
Share Transactions
Subscriptions to fund shares 109,708 44,275 62,511 55,172
Investment income dividends reinvested 16,092 8,615 7,966 4,822
Redemptions of fund shares (133,792) (49,475) (62,890) (31,601)
-------- -------- -------- --------
Net Increase (Decrease) from Share Transactions (7,992) 3,415 7,587 28,393
-------- -------- -------- --------
Net Increase (Decrease) in Net Assets (774) 12,648 15,441 34,071
Total Net Assets
Beginning of Period 302,507 301,733 158,886 174,327
-------- -------- -------- --------
End of Period $301,733 $314,381 $174,327 $208,398
======== ======== ======== ========
Accumulated Undistributed Net Investment Income at End of Period $ 28 $ -- $ 6 $ --
======== ======== ======== ========
Analyses of Changes in Shares of Beneficial Interest
Subscriptions to fund shares 13,047 5,068 6,703 5,589
Investment income dividends reinvested 1,920 984 853 488
-------- -------- -------- --------
14,967 6,052 7,556 6,077
Redemptions of fund shares (16,019) (5,667) (6,720) (3,212)
-------- -------- -------- --------
Net increase (decrease) in fund shares (1,052) 385 836 2,865
Shares outstanding at beginning of period 35,839 34,787 16,971 17,807
-------- -------- -------- --------
Shares outstanding at end of period 34,787 35,172 17,807 20,672
======== ======== ======== ========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to the Financial Statements
Note 1. Significant Accounting Policies
The following are the significant accounting policies of Stein Roe Limited
Maturity Income Fund, Stein Roe Government Income Fund, Stein Roe Intermediate
Bond Fund and Stein Roe Income Fund (the "Funds"), each a series of the Stein
Roe Income Trust (a Massachusetts business trust).
Security Valuations
All securities are valued as of December 29, 1995, the last business day of
the period. Long-term debt securities are valued using market quotations if
readily available at the time of valuation. If market quotations are not
readily available, they are valued at a fair value using a procedure
determined in good faith by the Board of Trustees, which has authorized the
use of market valuations provided by a pricing service. Short-term debt
securities with remaining maturities of 60 days or less are valued at their
amortized cost. Those with remaining maturities of more than 60 days for which
market quotations are not readily available are valued by use of a matrix,
prepared by the Adviser, based on quotations for comparable securities. Other
assets are valued by a method that the Board of Trustees believes represents a
fair value.
Futures Contracts
The Funds may enter into U.S. Treasury Bond futures contracts to either hedge
against expected declines of their portfolio securities or as a temporary
substitute for the purchase of individual bonds. Risks of entering into
futures contracts include the possibility that there may be an illiquid market
at the time the Fund seeks to close out a contract, and changes in the value
of the futures contract may not correlate with changes in the value of the
portfolio securities being hedged.
Upon entering into a futures contract, the Fund deposits cash or securities
with its custodian in an amount sufficient to meet the initial margin
requirement. Subsequent payments are made or received by the Fund equal to the
daily change in the contract value and are recorded as unrealized gains or
losses. The Fund recognizes a realized gain or loss when the contract is
closed or expires. None of the Funds entered into futures contracts during the
six months ended December 31, 1995.
Federal Income Taxes
No provision is made for federal income taxes, since the Funds elect to be
taxed as "regulated investment companies" and make such distributions to their
shareholders as to be relieved of all federal income taxes under provisions of
current federal tax law.
The Funds intend to utilize provisions of the federal income tax laws that
allow them to carry a realized capital loss forward for eight years following
the year of the loss and offset such losses against any future realized gains.
<PAGE>
<TABLE>
At June 30, 1995, the Funds had capital loss carryforwards as follows:
<CAPTION>
Year of
Fund Amount Expiration
<S> <C> <C>
Limited
Maturity
Income $ 655 2002-2003
Government
Income 2,106 2003
Intermediate
Bond 9,889 2003
Income 6,779 1999-2003
Distributions to Shareholders
Dividends from net investment income are declared daily and paid monthly.
Capital gain distributions, if any, are distributed annually. Distributions in
excess of tax basis earnings are reported in the financial statements as a
return of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings that result in temporary
over-distributions are classified as distributions in excess of net investment
income or net realized gains, and all permanent differences are reclassified
to paid-in capital.
None of the Funds had distributions in excess of net investment income or net
realized gains for the six months ended December 31, 1995.
Other Information
Realized gains or losses from sales of securities are determined on the
specific identified cost basis.
Securities purchased on a when-issued or delayed delivery basis may be settled
a month or more after the transaction date. These securities are subject to
market fluctuation during this period.
All amounts, except per-share amounts, are shown in thousands.
Note 2. Portfolio Composition
Limited Maturity Income Fund invests primarily in U.S. Government and other
high-quality debt securities. Government Income Fund invests primarily in
securities issued or guaranteed as to principal and interest by the U.S.
Government or by its agencies and instrumentalities. Intermediate Bond Fund
invests primarily in marketable debt securities and Income Fund in
medium-quality debt securities.
See each Fund's schedule of investments for information on individual
securities as well as industry diversification, and see Fund Highlights for
each Fund's portfolio quality.
</TABLE>
<PAGE>
Note 3. Trustees' Fees and Transactions with Affiliates
The Funds pay a monthly management fee, computed and accrued daily, to Stein
Roe & Farnham Incorporated (the "Adviser"), an indirect subsidiary of Liberty
Mutual Insurance Company, for its services as investment adviser and manager.
The management fee for Limited Maturity Income Fund is computed at an annual
rate of .60 of 1 percent of the first $100 million of average net assets, .55
of 1 percent of the next $100 million and .50 of 1 percent thereafter;
Government Income Fund is computed at an annual rate of .60 of 1 percent of
the first $100 million of average net assets and .55 of 1 percent thereafter;
Intermediate Bond Fund is computed at an annual rate of .50 of 1 percent of
average net assets; and Income Fund is computed at an annual rate of .65 of 1
percent of the first $100 million of average net assets and .60 of 1 percent
thereafter.
The investment advisory agreements of the Funds provide that the Adviser will
reimburse each Fund to the extent that its annual expenses, excluding certain
expenses, exceed the applicable limits prescribed by any state in which each
Fund's shares are offered for sale. In addition, the Adviser has agreed to
reimburse Government Income Fund and Income Fund to the extent that their
expenses exceed 1 percent and .82 percent of average net assets, respectively.
Effective November 1, 1995, the Adviser agreed to reimburse Limited Maturity
Income Fund to the extent that expenses exceed .65 percent of average net
assets. Prior to November 1, 1995, the expense limitation was .45 percent of
average net assets. Effective May 1, 1995, the Adviser agreed to reimburse
Intermediate Bond Fund to the extent that expenses incurred exceed .70 percent
of average net assets. The expense limitations for Limited Maturity Income
Fund, Government Income Fund and Intermediate Bond Fund expire October 31,
1996, subject to earlier termination by the Adviser on 30 days' notice. The
expense limitation for Income Fund commenced on October 29, 1993, and expires
October 31, 1998.
The transfer agent fees of the Funds are paid to SteinRoe Services Inc., an
indirect subsidiary of Liberty Mutual Insurance Company.
Pursuant to an agreement with the Funds, the Adviser provides certain
accounting services. For the six months ended December 31, 1995, Limited
Maturity Income Fund, Government Income Fund, Intermediate Bond Fund and
Income Fund incurred charges of $13, $12, $15 and $14, respectively.
Certain officers and trustees of the Trust are also officers of the Adviser.
The compensation of trustees not affiliated with the Adviser for Limited
Maturity Income Fund, Government Income Fund, Intermediate Bond Fund and
Income Fund for the six months ended December 31, 1995, was $6, $6, $9 and $6,
respectively. No remuneration was paid to any other trustee or officer of the
Trust.
Note 4. Short-Term Debt
To facilitate portfolio liquidity, the Funds maintain borrowing arrangements
under which they can borrow against portfolio securities. There were no
borrowings for any of the Funds during the six months ended December 31, 1995.
<PAGE>
<TABLE>
Note 5. Investment Transactions
The aggregate cost of purchases and proceeds from sales of securities other
than short-term obligations for the six months ended December 31, 1995, were:
<CAPTION>
Fund Purchases Sales
<S> <C> <C>
Limited Maturity Income Fund $ 12,315 $ 3,537
Government Income Fund 10,169 8,557
Intermediate Bond Fund 343,120 329,192
Income Fund 106,989 79,793
At December 31, 1995, unrealized appreciation and depreciation of investments
on a tax basis and the cost of investments for financial reporting purposes
and for federal income tax purposes were as follows:
<CAPTION>
Cost of Investments
Net Federal
Appreciation Financial Income
Fund Appreciation Depreciation (Depreciation) Reporting Tax
<S> <C> <C> <C> <C> <C>
Limited Maturity Income Fund $ 181 $203 $ (22) $ 35,886 $ 35,886
Government Income Fund 2,517 82 2,435 35,656 35,657
Intermediate Bond Fund 9,346 540 8,806 301,515 301,581
Income Fund 11,354 352 11,002 193,659 193,681
</TABLE>
<PAGE>
<TABLE>
Financial Highlights (Unaudited)
Limited Maturity Income Fund
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
<CAPTION>
Year Year Six Months
Period Ended Ended Ended Ended
June 30, June 30, June 30, Dec. 31,
1993(a) 1994 1995 1995
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $10.00 $ 10.01 $ 9.61 $ 9.70
------ ------- ------- -------
Income From Investment Operations
Net investment income .12 .47 .56 .31
Net realized and unrealized gains (losses) on investments .01 (.40) .09 .06
------ ------- ------- -------
Total from investment operations .13 .07 .65 .37
Distributions from net investment income (.12) (.47) (.56) (.31)
------ ------- ------- -------
Net Asset Value, End of Period $10.01 $ 9.61 $ 9.70 $ 9.76
====== ======= ======= =======
Ratio of net expenses to average net assets (b) 0.45%* 0.45% 0.45% 0.52%*
Ratio of net investment income to average net assets (c) 4.18%* 4.81% 5.83% 6.10%*
Portfolio turnover rate 20%** 122% 64% 12%**
Total return (c) 1.43%** 0.66% 6.96% 3.74%**
Net assets, end of period (000s) $7,619 $35,383 $27,907 $36,670
<FN>
*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 by the investment adviser, this ratio would have been 3.63
percent for the period ended June 30, 1993, 1.14, and 1.27 percent for the
years ended June 30, 1994 and 1995, respectively, and 1.23 percent for the six
months ended December 31, 1995.
(c) Computed giving effect to investment adviser's expense limitation
undertaking.
</TABLE>
<PAGE>
<TABLE>
Financial Highlights Continued (Unaudited)
Government Income Fund
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
<CAPTION>
Period
Ended
June 30, Years Ended June 30,
1986(a) 1987 1988 1989 1990
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 10.10 $ 9.79 $ 9.59 $ 9.77
------- ------- ------- ------- -------
Income From Investment Operations
Net investment income .24 .72 .74 .78 .76
Net realized and unrealized gains (losses)
on investments .10 (.31) (.15) .18 (.11)
------- ------- ------- ------- -------
Total from investment operations .34 .41 .59 .96 .65
------- ------- ------- ------- -------
Distributions
Distributions from net investment income (.24) (.72) (.74) (.78) (.76)
Net realized capital gains -- -- (.05) -- --
In excess of realized gains -- -- -- -- --
------- ------- ------- ------- -------
Total distributions (.24) (.72) (.79) (.78) (.76)
------- ------- ------- ------- -------
Net Asset Value, End of Period $ 10.10 $ 9.79 $ 9.59 $ 9.77 $ 9.66
======= ======= ======= ======= =======
Ratio of net expenses to average
net assets (b) 1.00%* 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average
net assets (c) 7.61%* 7.13% 7.68% 8.19% 7.90%
Portfolio turnover rate 91%** 205% 237% 239% 181%
Total return (c) 3.35%** 4.01% 6.35% 10.61% 6.92%
Net assets, end of period (000s) $11,970 $22,656 $26,859 $32,011 $46,853
<PAGE>
<CAPTION>
Six
Months
Ended
Years Ended June 30, Dec 31,
1991 1992 1993 1994 1995 1995
-------- ----- ----- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 9.66 $ 9.81 $ 10.40 $ 10.46 $ 9.48 $ 9.85
------- ------- ------- ------- ------- -------
Income From Investment Operations
Net investment income .75 .72 .64 .56 .62 .32
Net realized and unrealized gains (losses)
on investments .15 .59 .31 (.77) .37 .32
------- ------- ------- ------- ------- -------
Total from investment operations .90 1.31 .95 (.21) .99 .64
------- ------- ------- ------- ------- -------
Distributions
Distributions from net investment income (.75) (.72) (.64) (.56) (.62) (.32)
Net realized capital gains -- -- (.25) (.01) -- --
In excess of realized gains -- -- -- (.20) -- --
------- ------- ------- ------- ------- -------
Total distributions (.75) (.72) (.89) (.77) (.62) (.32)
------- ------- ------- ------- ------- -------
Net Asset Value, End of Period $ 9.81 $ 10.40 $ 10.46 $ 9.48 $ 9.85 $ 10.17
======= ======= ======= ======= ======= =======
Ratio of net expenses to average net assets (b) 1.00% 0.99% 0.95% 0.98% 1.00% 1.00%*
Ratio of net investment income to average
net assets (c) 7.65% 7.05% 6.25% 5.49% 6.56% 6.06%*
Portfolio turnover rate 136% 139% 170% 167% 225% 15%**
Total return (c) 9.61% 13.75% 9.60% (2.26%) 10.94% 6.38%**
Net assets, end of period (000s) $49,952 $58,978 $61,591 $45,836 $37,280 $36,756
<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 by the investment adviser, this ratio would have been 3.33
percent for the period ended June 30, 1986, 1.44, 1.37, 1.21, and 1.07 percent
for the years ended June 30, 1987 through 1990, respectively, and 1.09 percent
for the year ended June 30, 1995, and 1.12 percent for the six months ended
December 31, 1995.
(c) Computed giving effect to investment adviser's expense limitation
undertaking.
</TABLE>
<PAGE>
<TABLE>
Financial Highlights Continued (Unaudited)
Intermediate Bond Fund
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
<CAPTION>
Years Ended June 30,
1986 1987 1988 1989 1990 1991
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 8.89 $ 9.92 $ 8.77 $ 8.51 $ 8.65 $ 8.38
-------- -------- -------- -------- -------- --------
Income From Investment Operations
Net investment income .84 .74 .68 .74 .73 .69
Net realized and unrealized gains
(losses) on investments 1.03 (.41) (.12) .14 (.28) .16
-------- -------- -------- -------- -------- --------
Total from investment operations 1.87 .33 .56 .88 .45 .85
-------- -------- -------- -------- -------- --------
Distributions
Net investment income (.84) (.74) (.68) (.74) (.72) (.70)
Net realized capital gains -- (.74) (.14) -- -- --
In excess of realized gains -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total distributions (.84) (1.48) (.82) (.74) (.72) (.70)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.92 $ 8.77 $ 8.51 $ 8.65 $ 8.38 $ 8.53
======== ======== ======== ======== ======== ========
Ratio of net expenses to average
net assets (a) 0.69% 0.68% 0.73% 0.73% 0.74% 0.73%
Ratio of net investment income to
average net assets (b) 9.03% 7.94% 7.97% 8.71% 8.60% 8.17%
Portfolio turnover rate 334% 230% 273% 197% 296% 239%
Total return (b) 21.90% 3.40% 6.92% 10.97% 5.33% 10.62%
Net assets, end of period (000s) $183,440 $188,674 $162,225 $165,056 $161,439 $184,444
<PAGE>
<CAPTION>
Six
Months
Ended
Years Ended June 30, Dec. 31,
1992 1993 1994 1995 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 8.53 $ 8.99 $ 9.26 $ 8.44 $8.67
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income .69 .65 .56 .58 .30
Net realized and unrealized gains
(losses) on investments .46 .27 (.59) .23 .27
-------- -------- -------- -------- --------
Total from investment operations 1.15 .92 (.03) .81 .57
-------- -------- -------- -------- --------
Distributions
Net investment income (.69) (.65) (.56) (.58) (.30)
Net realized capital gains -- -- (.08) -- --
In excess of realized gains -- -- (.15) -- --
-------- -------- -------- -------- --------
Total distributions (.69) (.65) (.79) (.58) (.30)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ 8.99 $ 9.26 $ 8.44 $ 8.67 $ 8.94
======== ======== ======== ======== ========
Ratio of net expenses to average
net assets (a) 0.70% 0.67% 0.70% 0.70% 0.70%*
Ratio of net investment income to
average net assets (b) 7.87% 7.22% 6.20% 6.94% 6.57%*
Portfolio turnover rate 202% 214% 206% 162% 107%**
Total return (b) 14.02% 10.59% (0.47%) 10.11% 6.54%**
Net assets, end of period (000s) $242,948 $311,728 $302,507 $301,733 $314,381
<FN>
*Annualized
**Not annualized
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have been 0.71
percent for the year ended June 30, 1995, and 0.73 percent for the period
ended December 31, 1995.
(b) Computed giving effect to investment adviser's expense limitation
undertaking.
</TABLE>
<PAGE>
<TABLE>
Financial Highlights Continued (Unaudited)
Income Fund
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
<CAPTION>
Period
Ended
June 30, Years Ended June 30,
1986(a) 1987 1988 1989 1990 1991
------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 10.00 $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95
------- ------- ------- -------- ------- -------
Income From Investment Operations
Net investment income .30 .98 .95 .95 .92 .80
Net realized and unrealized gains
(losses) on investments (.06) (.23) (.11) .05 (.70) --
------- ------- ------- -------- ------- -------
Total from investment operations .24 .75 .84 1.00 .22 .80
Distributions from net investment income (.30) (.98) (.95) (.95) (.92) (.80)
------- ------- ------- -------- ------- -------
Net Asset Value, End of Period $ 9.94 $ 9.71 $ 9.60 $ 9.65 $ 8.95 $ 8.95
======= ======= ======= ======== ======= =======
Ratio of net expenses to average
net assets (b) 1.00%* 0.96% 0.91% 0.90% 0.93% 0.95%
Ratio of net investment income to
average net assets (c) 10.07%* 9.90% 10.08% 9.97% 10.02% 8.98%
Portfolio turnover rate 84%** 153% 158% 94% 90% 77%
Total return (c) 2.42%** 7.70% 9.38% 11.06% 2.48% 9.30%
Net assets, end of period (000s) $32,034 $91,916 $96,611 $110,376 $89,023 $93,952
<PAGE>
<CAPTION>
Six
Months
Ended
Years Ended June 30, Dec 31,
1992 1993 1994 1995 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 8.95 $ 9.51 $ 10.10 $ 9.36 $ 9.79
-------- -------- -------- -------- --------
Income From Investment Operations
Net investment income .76 .75 .69 .71 .37
Net realized and unrealized gains
(losses) on investments .56 .59 (.74) .43 .29
-------- -------- -------- -------- --------
Total from investment operations 1.32 1.34 (.05) 1.13 .66
Distributions from net investment income (.76) (.75) (.69) (.71) (.37)
-------- -------- -------- -------- --------
Net Asset Value, End of Period $ 9.51 $ 10.10 $ 9.36 $ 9.79 $ 10.08
======== ======== ======== ======== ========
Ratio of net expenses to average
net assets (b) 0.90% 0.82% 0.82% 0.82% 0.82%*
Ratio of net investment income to
average net assets (c) 8.20% 7.62% 6.94% 7.55% 7.24%*
Portfolio turnover rate 76% 39% 53% 64% 45%**
Total return (c) 15.30% 14.64% (0.69%) 12.79% 6.74%**
Net assets, end of period (000s) $112,706 $151,594 $158,886 $174,327 $208,398
<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 by the investment adviser, this ratio would have been 2.01
percent for the period ended June 30, 1986, 0.83 and 0.85 percent for the
years ended June 30, 1994, and June 30, 1995,
respectively, and 0.88 for the six months ended December 31, 1995.
(c) Computed giving effect to investment adviser's expense limitation
undertaking.
</TABLE>
<PAGE>
A Guide to Stein Roe Services
We encourage you to take advantage of our free shareholder services. If you
would like additional information about how to establish or use a Stein Roe
service, just call us at 800-338-2550.
Purchases
In addition to sending us a check or wire to purchase additional fund shares,
you can take advantage of these convenient automatic services:
* Automatic Investment Plan -- Make regular investments ($50 minimum) in your
Stein Roe account directly from your bank checking account. You select
monthly, quarterly, semiannual or annual purchases.
* Special Investments -- Purchase shares by telephone and pay for them by
electronic transfer from your bank checking account.
Exchanges
* Telephone Exchange -- Call us to exchange $50 or more from your existing
account in one Stein Roe Fund to an identically registered existing account in
another Stein Roe Fund. You receive this service when you open a Stein Roe
Fund account, unless you elect not to.*
* Automatic Exchange -- Stein Roe will regularly exchange shares
from your account in one Stein Roe Fund to your account in another. You select
twice-monthly, monthly, quarterly, semiannual or annual exchanges.
Redemptions
* Telephone Redemption by Check -- Call to redeem $1,000 or more from your
account. A check will be sent to your registered address. You automatically
receive this service when you open a Stein Roe account, unless you elect not
to.
* Telephone Redemption by Wire -- Redeem shares by phone from your account
($1,000 minimum) and wire the proceeds to your bank checking account. A small
fee for wiring proceeds will be deducted from the amount wired.
* Special Redemption Option -- If you do not want to pre-schedule your
redemptions, you can redeem shares by telephone ($50 minimum/ $100,000
maximum) and have
the proceeds sent directly to your bank checking account.
* Automatic Redemption Plan -- Redeem either a fixed dollar or
share amount, or a fixed percentage of your account automatically on a
schedule you establish. You select monthly, quarterly, semiannual or annual
withdrawals ($50 minimum/ $100,000 maximum), and the proceeds are sent either
to your bank checking account or to an address you specify.
* Money Market Fund Check
Writing -- Write checks for $50
or more on your Money Market Fund account.
*Stein Roe reserves the right to discontinue
or modify the exchange privilege, and certain restrictions apply. Please refer
to your prospectus for details.
<PAGE>
Distributions
Most investors like to reinvest their dividends and capital gains
distributions and put them back to work. If, however, you do not want them
reinvested, consider these alternatives:
* Dividend Purchase Option -- Use the distributions from one Stein Roe Fund
account ($25 minimum) to automatically purchase shares in your account with
another Stein Roe Fund.
* Automatic Dividend Deposit -- Instead of receiving your dividends by check,
your distributions are deposited automatically into your bank checking
account.
Recordkeeping
* Summary of Investments -- Consolidates quarterly transaction and
investment information for any or all of your household's Stein Roe accounts
on one easy-to-read statement. At year end, Stein Roe provides a complete
summary of all account activity for the year.
<PAGE>
Funds for Every Investment Objective
The Stein Roe family of 100 percent no-load mutual funds offers a variety of
funds so you can select the right fund, or combination of funds, to meet your
investment objectives. Call us at 800-338-2550 for a prospectus and more
complete information on any of the funds, including management fees and
expenses. Please read the prospectus carefully before you invest or send
money.
Money Market Funds
Money market funds seek to provide income while preserving principal and
maintaining liquidity. These funds offer free check writing.
* Government Reserves Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies and instrumentalities.*
* Cash Reserves Fund -- Invests in high-quality, short-term money market
securities such as certificates of deposit, banker's acceptances and
commercial paper.*
Bond Funds
Bond funds seek high current income by investing primarily in fixed income
securities.
* Limited Maturity Income Fund -- Invests 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 -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies.*
* Intermediate Bond Fund -- Invests primarily in marketable debt securities
with an average life of three to 10 years.
* Income Fund -- Pursues a higher level of current income by investing
primarily in medium- and lower-quality bonds.
Tax-Exempt Funds
These funds help investors keep more of their earnings by investing in
instruments that earn income free from federal income tax. Income may be
subject to federal alternative minimum tax and state and local taxes; capital
gains are subject to state, local and federal taxes.
* Municipal Money Market Fund -- Seeks to provide the liquidity and stability
of a money market fund plus current tax-free income. Free check writing
available.*
*Money market mutual funds strive to maintain a $1 per share net asset value,
but there is no assurance that the fund will be able to maintain a stable net
asset value. The net asset value of a fund that invests in securities issued
or guaranteed by the U.S. government is not guaranteed.
<PAGE>
* Intermediate Municipals Fund -- Seeks high current yield through
investments primarily in the three highest grades of intermediate-term
municipal securities.
* Managed Municipals Fund -- Pursues high tax-free income by investing in a
quality-conscious portfolio of long-term municipal bonds.
* High-Yield Municipals Fund -- Seeks a higher level of tax-free income from
long-term municipal securities, primarily of medium or lower quality.
Growth and Income Funds
These funds seek to provide a conservative investment that is well positioned
for long-term growth and current income. Each fund's approach is designed to
limit the effects of market volatility.
* Total Return Fund -- Strives for maximum total return consistent with
reasonable investment risk by investing in stocks, bonds and convertible
securities.
* Growth & Income Fund ** -- Pursues income and long-term capital growth by
investing primarily in large, well-established companies.
Growth Funds
Growth funds offer long-term capital appreciation potential by investing
primarily in various types of stocks.
* Growth Stock Fund -- Pursues long-term capital appreciation from stocks
with strong growth potential.
* Special Fund -- Invests in securities believed to have limited downside
risk relative to their potential for above-average growth, including
securities of undervalued, underfollowed or out-of-favor companies.
* Special Venture Fund -- Seeks capital appreciation through equity
securities of entrepreneurially managed companies.
* Young Investor Fund -- Invests in securities of companies that affect the
lives of children or teenagers.
* Capital Opportunities Fund -- Takes a long-term approach to emerging growth
by selecting quality companies with the potential to generate high levels of
earnings growth over a three- to five-year period.
* International Fund -- Invests
in a diversified portfolio of foreign securities.
**Formerly Prime Equities; name change effective February 1, 1996.
<PAGE>
To Contact Us. . .
By Phone 800-338-2550
You can discuss your investment questions with a Stein Roe account
representative by calling us toll free. We'll be happy to answer questions
about your current account, or to provide you with information about opening a
Stein Roe Fund account, including Stein Roe IRAs. We're available seven days a
week, from 7 a.m. to 8 p.m. weekdays and from 8 a.m. to 5 p.m. Saturday and
Sunday (central time).
Stein Roe's Funds-on-Call(R)
24-Hour Service Line
Using a touch-tone phone, call our toll-free number, day or night, for your
current account balance, the latest Stein Roe Fund prices and yields, and
other information. In addition, if you have a Personal Identification Number
(PIN), you may place orders for the following transactions 24 hours a day:
* Exchange shares between your Stein Roe accounts;
* Purchase Fund shares by electronic transfer;
* Order additional account statements and Money Market Fund checks;
* Redeem shares by check, wire or electronic transfer.
Please contact an account representative if you would like to apply for a PIN.
Retirement Plan Accounts
Call us for information about how we can assist you with your defined
contribution plan, including 401(k) plans. You can reach us toll free at
800-322-1130.
By Mail
If you prefer to contact us by mail, please address all correspondence to:
P.O. Box 804058, Chicago, IL 60680.
You also may contact us by e-mail at our Internet
site--http://www.steinroe.com
In Person
If you are in the Chicago area, please visit our Investor Center located in
downtown Chicago at One South Wacker Drive, 32nd Floor. Our account
representatives can answer questions about your current Fund investments or
provide you information about any of the Stein Roe Funds and retirement plans.
Stop by weekdays between 8 a.m. and 5:15 p.m.
This report must be preceded or accompanied by a prospectus.
<PAGE>
Income Trust
Trustees
Timothy K. Armour
President, Mutual Fund Division and Director, Stein Roe & Farnham Incorporated
Kenneth L. Block
Chairman Emeritus, A. T. Kearney, Inc.
William W. Boyd
Chairman and Director, Sterling
Plumbing Group, Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Francis W. Morley
Chairman, Employer Plan Administrators
and Consultants Co.
Charles R. Nelson
Van Voorhis Professor of Political Economy, University of Washington
Gordon R. Worley
Private investor
Officers
Timothy K. Armour, President
Jilaine H. Bauer, Executive Vice President,
Secretary
N. Bruce Callow, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Ann H. Benjamin, Vice President
Thomas W. Butch, 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
Nicolette D. Parrish, Vice President,
Assistant Secretary
Thomas P. Sorbo, Vice President
Sharon R. Robertson, Controller
Margaret O. Zwick, Treasurer
Janet B. Rysz, Assistant Secretary
Agents and Advisers
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
SteinRoe Services Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
<PAGE>
The Stein Roe 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 Growth & Income Fund
Stein Roe Young Investor Fund
Stein Roe Growth Stock Fund
Stein Roe Special Fund
Stein Roe Special Venture Fund
Stein Roe Capital Opportunities Fund
Stein Roe International 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
Member, SIPC 2/96
BD12A
