1933 Act Registration No. 33-02633
1940 Act File No. 811-4552
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 31 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 32 [X]
STEIN ROE INCOME TRUST
One South Wacker Drive, Chicago, Illinois 60606
Telephone Number: 1-800-338-2550
Jilaine Hummel Bauer Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd
& Secretary Three First National Plaza
Stein Roe Income Trust Suite 3300
One South Wacker Drive 70 W. Madison Street
Chicago, Illinois 60606 Chicago, Illinois 60602
(Agents for Service)
It is proposed that this filing will become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[X] on February 19, 1997 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
Registrant has previously elected to register pursuant to Rule
24f-2 an indefinite number of shares of beneficial interest of
the following series: Stein Roe Income Fund, Stein Roe Cash
Reserves Fund, Stein Roe Government Reserves Fund, Stein Roe
Government Income Fund, Stein Roe Intermediate Bond Fund, and
Stein Roe High Yield Fund. The Rule 24f-2 Notice for the fiscal
year ended June 30, 1996 was filed on August 14, 1996.
This amendment to the Registration Statement has also been signed
by SR&F Base Trust as it relates to Stein Roe High Yield Fund.
<PAGE>
STEIN ROE INCOME TRUST
CROSS REFERENCE SHEET
ITEM
NO. CAPTION
- ----- -------
PART A (MONEY MARKET FUNDS PROSPECTUS
AND BOND FUNDS PROSPECTUS)
1 Front cover
2 Fee Table; Summary
3 (a) Financial Highlights
(b) Inapplicable
(c) [Money Market Funds] The Funds; [Bond Funds] Investment
Return
(d) [Money Market Funds] Inapplicable; [Bond Funds] Financial
Highlights
4 Organization and Description of Shares; The Funds; How the
Funds Invest; Restrictions on the Funds' Investments; Risks
and Investment Considerations; Summary--Investment Risks;
[Bond Funds] Portfolio Investments and Strategies
5 (a) Management of the Funds--Trustees and Investment Adviser
(b) Management of the Funds--Trustees and Investment Adviser,
Fees and Expenses
(c) [Money Market Funds] Inapplicable; [Bond Funds] Management
of the Funds--Portfolio Managers
(d) Inapplicable
(e) Management of the Funds--Transfer Agent
(f) Management of the Funds--Fees and Expenses; Financial
Highlights
(g) Inapplicable
5A Inapplicable
6 (a) Organization and Description of Shares; see statement of
additional information: General Information and History
(b) Inapplicable
(c) Organization and Description of Shares
(d) Organization and Description of Shares
(e) Summary
(f) Shareholder Services; Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) [Bond Funds] Organization and Description of Shares--Special
Considerations Regarding Master Fund/Feeder Fund Structure
7 How to Purchase Shares
(a) Management of the Funds--Distributor
(b) How to Purchase Shares--Purchase Price and Effective Date;
Net Asset Value
(c) Inapplicable
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
8 (a) How to Redeem Shares; Shareholder Services
(b) How to Purchase Shares--Purchases Through Third Parties
(c) How to Redeem Shares--General Redemption Policies
(d) How to Redeem Shares--General Redemption Policies
9 Inapplicable
PART A (DEFINED CONTRIBUTION PLAN PROSPECTUSES)
1 Front cover
2 Fee Table
3 (a) Financial Highlights
(b) Inapplicable
(c) [Cash Reserves and Government Reserves] The Funds;
[Government Income Fund, Intermediate Bond Fund, and Income
Fund] Investment Return
(d) [Cash Reserves and Government Reserves] Inapplicable;
[Government Income Fund, Intermediate Bond Fund, and Income
Fund] Financial
Highlights
4 Organization and Description of Shares; The Fund; How the
Fund Invests; Restrictions on the Fund's Investments; Risks
and Investment Considerations; [Government Income Fund,
Intermediate Bond Fund, and Income Fund] Portfolio
Investments and Strategies
5 (a) Management of the Fund--Trustees and Investment Adviser
(b) Management of the Fund--Trustees and Investment Adviser,
Fees and Expenses
(c) [Cash Reserves and Government Reserves] Inapplicable;
[Government Income Fund, Intermediate Bond Fund, Income
Fund] Management of the Fund--Portfolio Managers
(d) Inapplicable
(e) Management of the Fund--Transfer Agent
(f) Management of the Fund--Fees and Expenses; Financial
Highlights
(g) Inapplicable
5A Inapplicable
6 (a) Organization and Description of Shares; see statement of
additional information: General Information and History
(b) Inapplicable
(c) Organization and Description of Shares
(d) Organization and Description of Shares
(e) For More Information
(f) Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) Inapplicable
7 How to Purchase Shares
(a) Management of the Fund--Distributor
(b) How to Purchase Shares; Net Asset Value
(c) Inapplicable
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
8 (a) How to Redeem Shares
(b) Inapplicable
(c) Inapplicable
(d) Inapplicable
9 Inapplicable
PART B. STATEMENT OF ADDITIONAL INFORMATION
10 Cover page
11 Table of Contents
12 General Information and History
13 Investment Policies; Portfolio Investments and Strategies;
Investment Restrictions
14 Management
15(a) Inapplicable
(b) Principal Shareholders
(c) Principal Shareholders
16(a) Investment Advisory Services; Management; see prospectus:
Management of the Funds
(b) Investment Advisory Services
(c) Inapplicable
(d) Investment Advisory Services
(e) Inapplicable
(f) Inapplicable
(g) Inapplicable
(h) Custodian; Independent Auditors
(i) Transfer Agent
17(a) Portfolio Transactions
(b) Inapplicable
(c) Portfolio Transactions
(d) Portfolio Transactions
(e) Portfolio Transactions
18 General Information and History
19(a) Purchases and Redemptions; see prospectus: How to Purchase
Shares, How to Redeem Shares, Shareholder Services
(b) Purchases and Redemptions; Additional Information on the
Determination of Net Asset Value of the Money Market Funds;
see prospectus: Net Asset Value
(c) Purchases and Redemptions
20 Additional Income Tax Considerations; Portfolio Investments
and Strategies--Taxation of Options and Futures
21(a) Distributor
(b) Inapplicable
(c) Inapplicable
22 Investment Performance
23 Financial Statements
PART C
24 Financial Statements and Exhibits
25 Persons Controlled By or Under Common Control with
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriters
30 Location of Accounts and Records
31 Management Services
32 Undertakings
<PAGE>
The Prospectuses relating to Stein Roe Income Fund, Stein Roe
Government Income Fund, Stein Roe Intermediate Bond Fund, Stein
Roe Cash Reserves Fund, Stein Roe Government Reserves Fund, and
Stein Roe High Yield Fund, each a series of Stein Roe Income
Trust, are not affected by the filing of this post-effective
amendment No. 31.
<PAGE> 1
Statement of Additional Information Dated November 1, 1996
as revised and supplemented through February 19, 1997
STEIN ROE INCOME TRUST
MONEY MARKET FUNDS
STEIN ROE CASH RESERVES FUND
STEIN ROE GOVERNMENT RESERVES FUND
BOND FUNDS
STEIN ROE GOVERNMENT INCOME FUND
STEIN ROE INTERMEDIATE BOND FUND
STEIN ROE INCOME FUND
STEIN ROE HIGH YIELD FUND
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
800-338-2550
This Statement of Additional Information is not a
prospectus but provides additional information that should be
read in conjunction with the Money Market Funds' Prospectus and
the Bond Funds' Prospectus dated November 1, 1996 and any
supplements thereto. A Prospectus may be obtained at no charge
by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History.......................2
Investment Policies...................................3
Cash Reserves.....................................4
Government Reserves...............................6
Government Income Fund............................7
Intermediate Bond Fund............................8
Income Fund.......................................9
High Yield Fund..................................10
Portfolio Investments and Strategies.................11
Investment Restrictions..............................29
Additional Investment Considerations.................32
Purchases and Redemptions............................33
Management...........................................34
Financial Statements.................................37
Principal Shareholders...............................38
Investment Advisory Services.........................39
Distributor..........................................41
Transfer Agent.......................................42
Custodian............................................42
Independent Auditors.................................43
Portfolio Transactions...............................43
Additional Income Tax Considerations.................45
Additional Information on the Determination of Net
Asset Value of the Money Market Funds..............46
Investment Performance...............................47
Appendix--Ratings....................................54
<PAGE>
GENERAL INFORMATION AND HISTORY
Stein Roe Cash Reserves Fund, Stein Roe Government Reserves
Fund, Stein Roe Government Income Fund, Stein Roe Intermediate
Bond Fund, Stein Roe Income Fund, and Stein Roe High Yield Fund
are series of the Stein Roe Income Trust ("Income Trust"). Each
series of Income Trust other than Stein Roe High Yield Fund
("High Yield Fund") invests in a separate portfolio of
securities and other assets, with its own objectives and
policies. High Yield Fund invests all of its net investable
assets in SR&F High Yield Portfolio ("High Yield Portfolio"),
which is a series of SR&F Base Trust ("Base Trust"). High Yield
Fund and High Yield Portfolio have identical investment
objectives and substantially identical investment policies.
As used herein, "Cash Reserves" refers to the series of
Income Trust designated Stein Roe Cash Reserves Fund,
"Government Reserves" refers to the series of the Trust
designated Stein Roe Government Reserves Fund, "Government
Income Fund" refers to the series of the Trust designated Stein
Roe Government Income Fund, "Intermediate Bond Fund" refers to
the series of the Trust designated Stein Roe Intermediate Bond
Fund, and "Income Fund" refers to the series of the Trust
designated Stein Roe Income Fund. The term "Money Market Funds"
refers to Cash Reserves and Government Reserves, and the term
"Bond Funds" refers to Income Fund, Government Income Fund,
Intermediate Bond Fund, Income Fund, High Yield Fund, and High
Yield Portfolio. The series of Income Trust are referred to
collectively as "the Funds."
On November 1, 1995, the name of Income Trust was changed
from SteinRoe Income Trust to Stein Roe Income Trust. Prior to
November 1, 1995, Cash Reserves, Government Reserves, Government
Income Fund, Intermediate Bond Fund and Income Fund were named
SteinRoe Cash Reserves, SteinRoe Government Reserves, SteinRoe
Government Income Fund, SteinRoe Intermediate Bond Fund and
SteinRoe Income Fund, respectively. Prior to April 2, 1990,
SteinRoe Government Income Fund was named SteinRoe Governments
Plus and SteinRoe Intermediate Bond Fund was named SteinRoe
Managed Bonds. SteinRoe Income Fund was named SteinRoe High-
Yield Bonds prior to November 1, 1989.
Currently six series of Income Trust are authorized and
outstanding. Each share of a series, without par value, is
entitled to participate pro rata in any dividends and other
distributions declared by the Board on shares of that series,
and all shares of a series have equal rights in the event of
liquidation of that series. Each whole share (or fractional
share) outstanding on the record date established in accordance
with the By-Laws shall be entitled to a number of votes on any
matter on which it is entitled to vote equal to the net asset
value of the share (or fractional share) in United States
dollars determined at the close of business on the record date
(for example, a share having a net asset value of $10.50 would
be entitled to 10.5 votes). As a business trust, Income Trust
is not required to hold annual shareholder meetings. However,
special meetings may be called for purposes such as electing or
removing trustees, changing fundamental policies, or approving
an investment advisory contract. If requested to do so by the
holders of at least 10% of Income Trust's outstanding shares,
Income Trust will call a special meeting for the purpose of
voting upon the question of removal of a trustee or trustees and
will assist in the communications with other shareholders as
required by Section 16(c) of the Investment Company Act of 1940.
All shares of Income Trust are voted together in the election of
trustees. On any other matter submitted to a vote of
shareholders, shares are voted by individual series and not in
the aggregate, except that shares are voted in the aggregate
when required by the Investment Company Act of 1940 or other
applicable law. When the Board of Trustees determines that the
matter affects only the interests of one or more series,
shareholders of the unaffected series are not entitled to vote
on such matters.
Stein Roe & Farnham Incorporated (the "Adviser") provides
administrative and accounting and recordkeeping services to the
Funds and High Yield Portfolio and provides investment advisory
services to Cash Reserves, Government Reserves, Income Fund,
Government Income Fund, Intermediate Bond Fund, Income Fund, and
High Yield Portfolio.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND
STRUCTURE
Rather than invest in securities directly, each Fund may
seek to achieve its objective by pooling its assets with assets
of other investment companies for investment in another mutual
fund having the same investment objective and substantially the
same investment policies as the Fund. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. The Adviser is expected to manage any such mutual
fund in which a Fund would invest. Such investment would be
subject to determination by the Trustees that it was in the best
interests of the Fund and its shareholders, and shareholders
would receive advance notice of any such change. The only Fund
currently operating under the Master Fund/Feeder Fund structure
is High Yield Fund, which commenced operations on November 1,
1996, as a feeder fund. For more information, please refer to
the Prospectus under the caption Organization and Description of
Shares--Special Considerations Regarding the Master Fund/Feeder
Fund Structure.
INVESTMENT POLICIES
The following information supplements the discussion of the
Funds' and High Yield Portfolio's respective investment
objectives and policies described in the Prospectus. In
pursuing its objective, each Fund will invest as described below
and may employ the investment techniques described in the
Prospectus and elsewhere in this Statement of Additional
Information. Investments and strategies that are common to two
or more Funds are described under Portfolio Investments and
Strategies. The investment objective of each Fund and High
Yield Portfolio is a non-fundamental policy and may be changed
by the Board of Trustees without the approval of a "majority of
the outstanding voting securities" /1/ of that Fund or
Portfolio.
- -----------------
/1/ A "majority of the outstanding voting securities" means the
approval of the lesser of (i) 67% or more of the shares at a
meeting if the holders of more than 50% of the outstanding
shares of the Fund are present or represented by proxy or (ii)
more than 50% of the outstanding shares of the Fund.
- ----------------
CASH RESERVES
This Fund seeks to obtain maximum current income consistent
with the preservation of capital and the maintenance of
liquidity by investing all of its assets in U.S. dollar-
denominated money market instruments maturing in thirteen months
or less from time of investment. Each security must be rated
(or be issued by an issuer that is rated with respect to its
short-term debt) within the highest rating category for short-
term debt by at least two nationally recognized statistical
rating organizations ("NRSRO") (or, if rated by only one NRSRO,
by that rating agency) or, if unrated, determined by or under
the direction of the Board of Trustees to be of comparable
quality. These securities may include:
(1) Securities issued or guaranteed by the U.S. Government or by
its agencies or instrumentalities ("U.S. Government
Securities");
(2) Securities issued or guaranteed by the government of any
foreign country that are rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets
in excess of $1 billion, or the equivalent in other
currencies (as of the date of the most recent available
financial statements) or of any branches, agencies or
subsidiaries (U.S. or foreign) of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term debt obligations.
- ---------------
/2/ A repurchase agreement involves the sale of securities to
the Fund, with the concurrent agreement of the seller to
repurchase the securities at the same price plus an amount equal
to an agreed-upon interest rate, within a specified time. In
the event of a bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in
liquidating the underlying securities and losses.
- ---------------
The Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable
net asset value per share and not in excess of 90 days. It is a
fundamental policy which may not be changed without the approval
of a majority of the outstanding voting securities, that the
maturity of any instrument that grants the holder the right to
redeem at par plus interest and without penalty will be deemed
at any time to be the next date provided for payment on exercise
of such optional redemption right.
It is the Fund's intention, as a general policy, to hold
securities to maturity. However, the Fund may attempt, from
time to time, to increase its yield by trading to take advantage
of variations in the markets for short-term money market
instruments. In addition, redemptions of the Fund's shares
could necessitate the sale of portfolio securities and these
sales may occur when such sales would not otherwise be
desirable. While the Fund seeks to invest in high-quality money
market instruments, these investments are not entirely without
risk. An increase in interest rates will generally reduce the
market value of the Fund's portfolio investments and a decline
in interest rates will generally increase the market value of
the Fund's portfolio investments. Investments in instruments
other than U.S. Government Securities are also subject to
default by the issuer.
Because the Fund's investment policy permits it to invest
in: securities of foreign branches of U.S. banks (Eurodollars),
U.S. branches of foreign banks (Yankee dollars), and foreign
banks and their foreign branches, such as negotiable
certificates of deposit; securities of foreign governments; and
securities of foreign issuers, such as commercial paper and
corporate notes, bonds and debentures, investment in that Fund
might involve risks that are different in some respects from an
investment in a fund that invests only in debt obligations of
U.S. domestic issuers. Such risks may include future political
and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on securities held
in the portfolio, possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls, or
the adoption of other foreign governmental restrictions that
might adversely affect the payment of principal and interest on
securities in the Fund's portfolio. Additionally, there may be
less public information available about foreign banks and their
branches. Foreign banks and foreign branches of foreign banks
are not regulated by U.S. banking authorities, and generally are
not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
The Fund may invest in notes and bonds that bear floating
or variable rates of interest, and that ordinarily have stated
maturities in excess of thirteen months, but permit the holder
to demand earlier payment of principal and accrued interest,
upon not more than 30 days' advance notice, at any time or after
stated intervals not exceeding thirteen months. Such
instruments are commonly referred to as "demand" obligations.
Variable rate demand notes include master demand notes, which
are obligations that permit the Fund to invest fluctuating
amounts, which may change daily without penalty, pursuant to
direct arrangements between the Fund, as lender, and the
borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations normally has a right,
after a given period, to prepay the outstanding principal amount
of the obligations plus accrued interest upon a specified number
of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a
known lending rate, such as a bank's prime rate, and is adjusted
automatically each time the rate changes. The interest rate on
a variable rate obligation is adjusted automatically at the end
of specified intervals. Frequently, such obligations are
secured by letters of credit or other credit support
arrangements provided by banks. Because these obligations are
direct lending arrangements between the lender and borrower, it
is not contemplated that such instruments will generally be
traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face
value. Accordingly, where these obligations are not secured by
letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the
borrower to pay principal and interest on demand. Such
obligations frequently are not rated by credit rating agencies
and the Fund may invest in obligations that are not so rated
only if the Board of Trustees determines that the obligations
are of comparable quality to the other obligations in which the
Fund may invest.
The Fund may purchase from financial institutions
participation interests in securities. A participation interest
gives the Fund an undivided interest in the security in the
proportion that the Fund's participation interest bears to the
total principal amount of the security. The Fund may also
purchase certificates of participation, such as participations
in a pool of mortgages or credit card receivables.
Participation interests and certificates of participation both
may have fixed, floating or variable rates of interest with
remaining maturities of one year or less. If these instruments
are unrated, or have been given a rating below that which is
permissible for purchase by the Fund, they will be backed by an
irrevocable letter of credit or guarantee of a bank, or the
payment obligation otherwise will be collateralized by U.S.
Government Securities, or, in the case of unrated participation
interests, the Board of Trustees must have determined that the
instrument is of comparable quality to those instruments in
which the Fund may invest.
Under normal market conditions, the Fund will invest at
least 25% of its assets in securities of issuers in the
financial services industry. This policy may cause the Fund to
be more adversely affected by changes in market or economic
conditions and other circumstances affecting the financial
services industry. The financial services industry includes
issuers that, according to the Directory of Companies Required
to File Annual Reports with the Securities and Exchange
Commission, are in the following categories: State banks;
national banks; savings and loan holding companies; personal
credit institutions; business credit institutions; mortgage-
backed securities; financial services; security and commodity
brokers, dealers and services; life, accident and health
insurance carriers; fire, marine, casualty and surety insurance
carriers; insurance agents, brokers and services.
GOVERNMENT RESERVES
This Fund seeks to obtain maximum current income consistent
with safety of capital and maintenance of liquidity by
investment in U.S. Government Securities maturing in thirteen
months or less from the date of purchase. These securities
include:
(1) Securities issued by the U.S. Treasury;
(2) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are backed by the full faith and credit guarantee of the
U.S. Government;
(3) Securities issued or guaranteed as to principal and interest
by agencies or instrumentalities of the U.S. Government that
are not backed by the full faith and credit guarantee of the
U.S. Government;
(4) Repurchase agreements for securities listed in (1), (2), and
(3) above, regardless of the maturities of such underlying
securities.
U.S. Government Securities include: (i) bills, notes,
bonds, and other debt securities, differing as to maturity and
rates of interest, that are issued by and are direct obligations
of the U.S. Treasury; and (ii) other securities that are issued
or guaranteed as to principal and interest by agencies or
instrumentalities of the U.S. Government and that include, but
are not limited to, Federal Farm Credit Banks, Federal Home Loan
Banks, Government National Mortgage Association, Farmers Home
Administration, Federal Home Loan Mortgage Corporation, and
Federal National Mortgage Association.
Because the Fund's investment policy permits it to invest
in U.S. Government Securities that are not backed by the full
faith and credit of the U.S. Treasury, investment in the Fund
may involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and
interest on the securities in the Fund's portfolio that are
supported only by the issuing or guaranteeing agency or
instrumentality and, accordingly, the Fund must look principally
or solely to that entity for ultimate repayment.
The Fund will not enter into a repurchase agreement
maturing in more than seven days if as a result thereof more
than 10% of its net assets (taken at market value at the time of
the investment) would be invested in illiquid securities,
including repurchase agreements maturing in more than seven
days; however, there is otherwise no limitation on the
percentage of the Fund's assets that may be invested in
repurchase agreements. The Fund will enter into repurchase
agreements only where (i) the underlying securities are U.S.
Government Securities and (ii) the seller agrees that the value
of the underlying U.S. Government Securities, including accrued
interest (if purchased), will at all times be equal to or exceed
the value of the repurchase agreement.
The Fund will maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining a stable
net asset value per share, and, in any case, not in excess of 90
days.
It is the Fund's intention, in general, to hold securities
to maturity. However, the Fund may attempt, from time to time,
to increase its yield by trading to take advantage of variations
in the markets for U.S. Government Securities. In addition,
redemptions of the Fund's shares could necessitate the sale of
portfolio securities, and such sales may occur at times when
sales would not otherwise be desirable. An increase in
prevailing interest rates will generally reduce the value of the
Fund's portfolio investments, and a decline in prevailing
interest rates will generally increase the market value of the
Fund's portfolio investments.
GOVERNMENT INCOME FUND
This Fund's investment objective is to provide a high level
of current income. It invests primarily in U.S. Government
Securities.
Because the Fund's investment policy permits it to invest
in U.S. Government Securities that are not backed by the full
faith and credit of the U.S. Treasury, investment in the Fund
may involve risks that are different in some respects from an
investment in a fund that invests only in securities that are
backed by the full faith and credit of the U.S. Treasury. Such
risks may include a greater risk of loss of principal and
interest on the securities in the Fund's portfolio that are
supported only by the issuing or guaranteeing U.S. Government
agency or instrumentality since the Fund must look principally
or solely to that entity for ultimate repayment.
Depending on market conditions, the Fund may invest a
substantial portion of its assets in mortgage-backed debt
securities issued by GNMA, FNMA, and FHLMC.
Under normal market conditions, the Fund will invest at
least 80% of its assets in U.S. Government Securities. The Fund
may also invest up to 20% of its assets in other types of debt
securities, including debt securities of domestic issuers and of
foreign issuers payable in U.S. dollars, collateralized mortgage
obligations ("CMOs") and in principal portions or coupon
portions of U.S. Government Securities that have been separated
(stripped) by banks, brokerage firms, or other entities. CMOs
are securities collateralized by mortgages and mortgage-backed
securities. CMOs are not guaranteed by either the U.S.
Government or by its agencies or instrumentalities. Stripped
securities are usually sold separately in the form of receipts
or certificates representing undivided interests in the stripped
portion. Stripped securities may be more volatile than non-
stripped securities. The staff of the Securities and Exchange
Commission believes that stripped securities are illiquid. The
Fund has temporarily agreed to treat stripped securities as
subject to the Fund's restriction on investment in illiquid
securities. The Fund will invest in debt securities rated at
least investment grade or, if unrated, deemed by the Adviser to
be of comparable quality. Securities rated in the fourth grade
are neither highly protected nor poorly secured. Such
securities have some speculative characteristics, and changes in
economic conditions or other circumstances are more likely to
lead to a weakened capacity of the issuers of such securities to
make principal and interest payments than is the case for
issuers of higher grade securities. If the rating of a security
held by the Fund is lost or reduced below investment grade, the
Fund is not required to dispose of the security, but the Adviser
will consider that fact in determining whether the Fund should
continue to hold the security.
INTERMEDIATE BOND FUND
This Fund's investment objective is to provide a high level
of current income, consistent with the preservation of capital,
by investing primarily in marketable debt securities. Under
normal market conditions, the Fund will invest at least 65% of
the value of its total assets (taken at market value at the time
of investment) in convertible and non-convertible bonds and
debentures, and at least 60% of its assets will be invested in
the following:
(1) Marketable straight-debt securities of domestic issuers, and
of foreign issuers payable in U.S. dollars, rated at time of
purchase within the three highest grades assigned by Moody's
Investors Service, Inc. ("Moody's") (Aaa, Aa, or A) or by
Standard & Poor's Corporation ("S&P") (AAA, AA, or A);
(2) U.S. Government Securities;
(3) Commercial paper rated Prime-1 by Moody's or A-1 by S&P at
time of purchase, or, if unrated, issued or guaranteed by a
corporation with any outstanding debt rated Aa or better by
Moody's or AA or better by S&P; and
(4) Bank obligations, including repurchase agreements, of banks
having total assets in excess of $1 billion.
Under normal market conditions, the Fund invests at least
65% of its assets in securities with an average life of between
three and ten years, and expects that the dollar-weighted
average life of its portfolio will be between three and ten
years. Average life is the weighted average period over which
the Adviser expects the principal to be paid, and differs from
stated maturity in that it estimates the effect of expected
principal prepayments and call provisions. With respect to GNMA
securities and other mortgage-backed securities, average life is
likely to be substantially less than the stated maturity of the
mortgages in the underlying pools. With respect to obligations
with call provisions, average life is typically the next call
date on which the obligation reasonably may be expected to be
called. Securities without prepayment or call provisions
generally have an average life equal to their stated maturity.
During periods of rising interest rates, the average life of
mortgage-backed securities and callable obligations may increase
substantially because they are not likely to be prepaid, which
may result in greater net asset value fluctuation.
The Fund also may invest in other debt securities
(including those convertible into, or carrying warrants to
purchase, common stocks or other equity interests, and privately
placed debt securities); preferred stocks (including those
convertible into, or carrying warrants to purchase, common
stocks or other equity interests); and marketable common stocks
that the Adviser considers likely to yield relatively high
income in relation to cost.
The Fund may invest up to 35% of its total assets in debt
securities that are rated below investment grade (with no
minimum permitted rating) and that, on balance, are considered
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal according to the terms of
the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy.
(See Portfolio Investments and Strategies for more information
on the risks associated with investing in debt securities rated
below investment grade.)
INCOME FUND
The Income Fund attempts to achieve its objective by
investing principally in medium-quality debt securities, which
are obligations of issuers that the Adviser believes possess
adequate, but not outstanding, capacities to service their debt
securities, such as securities rated A or Baa by Moody's or A or
BBB by S&P. The Adviser generally attributes to medium-quality
securities the same characteristics as do rating services.
Although the Income Fund will invest at least 60% of its
assets in medium- or higher-quality debt securities, the Income
Fund may also invest to a lesser extent in debt securities of
lower quality (in the case of rated securities, having a rating
by Moody's or S&P of not less than C). Although the Fund can
invest up to 40% of its assets in lower-quality securities, it
does not intend to invest more than 35% in lower-quality
securities. Lower-quality debt securities are obligations of
issuers that are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal. The
Income Fund may invest in lower-quality debt securities; for
example, if the Adviser believes the financial condition of the
issuers or the protection offered to the particular obligations
is stronger than is indicated by low ratings or otherwise. (See
Portfolio Investments and Strategies for more information on the
risks associated with investing in debt securities rated below
investment grade.) The Income Fund may invest in higher-quality
securities; for example, under extraordinary economic or
financial market conditions, or when the spreads between the
yields on medium- and high-quality securities are relatively
narrow.
Some issuers of debt securities choose not to have their
securities rated by a rating service, and the Income Fund may
invest in unrated securities that the Adviser believes are
suitable for investment.
Under normal market conditions, the Income Fund will invest
at least 65% of the value of its total assets (taken at market
value) in convertible and non-convertible bonds and debentures.
Such securities may be accompanied by the right to acquire
equity securities evidenced by warrants attached to the security
or acquired as part of a unit with the security. Equity
securities acquired by conversion or exercise of such a right
may be retained by the Income Fund for a sufficient time to
permit orderly disposition thereof or to establish long-term
holding periods for federal income tax purposes.
The Income Fund may invest up to 35% of its total assets in
other debt securities, marketable preferred and common stocks,
and foreign and municipal securities that the Adviser considers
likely to yield relatively high income in relation to costs, and
rights to acquire such securities. (Municipal securities are
securities issued by or on behalf of state and local
governments, the interest on which is generally exempt from
federal income tax.) Any assets not otherwise invested may be
invested in money market instruments.
HIGH YIELD FUND
High Yield Fund seeks to achieve its objective by investing
all of its assets in High Yield Portfolio. The investment
policies of High Yield Portfolio are identical to those of the
Fund. High Yield Portfolio seeks total return by investing for
a high level of current income and capital growth.
High Yield Portfolio invests principally in high-yield,
high-risk medium- and lower-quality debt securities. The
medium- and lower-quality debt securities in which High Yield
Portfolio will invest normally offer a current yield or yield to
maturity that is significantly higher than the yield from
securities rated in the three highest categories assigned by
rating services such as S&P or Moody's.
Under normal circumstances, at least 65% of High Yield
Portfolio's assets will be invested in high-yield, high-risk
medium- and lower-quality debt securities rated lower than Baa
by Moody's or lower than BBB by S&P, or equivalent ratings as
determined by other rating agencies or unrated securities that
the Adviser determines to be of comparable quality. Medium-
quality debt securities, although considered investment grade,
have some speculative characteristics. Lower-quality debt
securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal according to the terms of
the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy, and
are commonly referred to as "junk bonds." Some issuers of debt
securities choose not to have their securities rated by a rating
service, and High Yield Portfolio may invest in unrated
securities that the Adviser has researched thoroughly and
believes are suitable for investment. High Yield Portfolio may
invest in debt obligations that are in default, but such
obligations are not expected to exceed 10% of High Yield
Portfolio's assets. (See Portfolio Investments and Strategies
for more information on the risks associated with investing in
debt securities rated below investment grade.)
High Yield Portfolio may invest up to 35% of its total
assets in other securities including, but not limited to, pay-
in-kind bonds, securities issued in private placements, bank
loans, zero coupon bonds, foreign securities, convertible
securities, futures, and options. High Yield Portfolio may also
invest in higher-quality debt securities. Under normal market
conditions, however, High Yield Portfolio is unlikely to
emphasize higher-quality debt securities since generally they
offer lower yields than medium- and lower-quality debt
securities with similar maturities. High Yield Portfolio may
also invest in common stocks and securities that are convertible
into common stocks, such as warrants.
PORTFOLIO INVESTMENTS AND STRATEGIES
For purposes of discussion under Portfolio Investments and
Strategies, the term "Fund" refers to Cash Reserves, Government
Reserves, Government Income Fund, Intermediate Bond Fund, Income
Fund, High Yield Fund, and High Yield Portfolio.
DERIVATIVES
Consistent with its objective, each Bond Fund may invest in
a broad array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security
index, an interest rate, or a currency ("Derivatives").
Derivatives are most often used to manage investment risk
or to create an investment position indirectly because it is
more efficient or less costly than direct investment that cannot
be readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and
directions of movements in security prices, interest rates and
other market factors affecting the Derivative itself or the
value of the underlying asset or benchmark. In addition,
correlations in the performance of an underlying asset to a
Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well
regulated and may be less marketable than exchange-traded
Derivatives.
High Yield Portfolio does not currently intend to invest
more than 5% of its net assets in any types of Derivatives
except options, futures contracts, and futures options. Income
Fund does not currently intend to invest, nor has the Fund
during its past fiscal year invested, more than 5% of its net
assets in any type of Derivative, except options, futures
contracts, and futures options. Each of Government Income Fund
and Intermediate Bond Fund does not currently intend to invest,
nor has such Fund during its past fiscal year invested, more
than 5% of its net assets in any type of Derivative except
options, futures contracts, futures options and obligations
collateralized by either mortgages or other assets. (See
Mortgage and Other Asset-Backed Securities, Variable and
Floating Rate Instruments, and Options and Futures below.)
MEDIUM- AND LOWER-QUALITY DEBT SECURITIES
Intermediate Bond Fund, Income Fund, High Yield Fund, and
High Yield Portfolio may invest in medium- and lower-quality
debt securities. Medium-quality debt securities, although
considered investment grade, have some speculative
characteristics. Lower-quality securities, commonly referred to
as "junk bonds," are those rated below the fourth highest rating
category or bond of comparable quality.
Investment in medium- or lower-quality debt securities
involves greater investment risk, including the possibility of
issuer default or bankruptcy. A Fund seeks to reduce investment
risk through diversification, credit analysis, and evaluation of
developments in both the economy and financial markets.
An economic downturn could severely disrupt the high-yield
market and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest. In
addition, lower-quality bonds are less sensitive to interest
rate changes than higher-quality instruments and generally are
more sensitive to adverse economic changes or individual
corporate developments. During a period of adverse economic
changes, including a period of rising interest rates, issuers of
such bonds may experience difficulty in servicing their
principal and interest payment obligations.
Lower-quality debt securities are obligations of issuers
that are considered predominantly speculative with respect to
the issuer's capacity to pay interest and repay principal
according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk
bonds." The lowest rating assigned by Moody's is for bonds that
can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Achievement of the investment objective will be more
dependent on the Adviser's credit analysis than would be the
case if a Fund or High Yield Portfolio were investing in higher-
quality debt securities. Since the ratings of rating services
(which evaluate the safety of principal and interest payments,
not market risks) are used only as preliminary indicators of
investment quality, the Adviser employs its own credit research
and analysis, from which it has developed a proprietary credit
rating system based upon comparative credit analyses of issuers
within the same industry. These analyses may take into
consideration such quantitative factors as an issuer's present
and potential liquidity, profitability, internal capability to
generate funds, debt/equity ratio and debt servicing
capabilities, and such qualitative factors as an assessment of
management, industry characteristics, accounting methodology,
and foreign business exposure.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the
market for them is less broad. The market for unrated debt
securities is even narrower. During periods of thin trading in
these markets, the spread between bid and asked prices is likely
to increase significantly, and a Fund or High Yield Portfolio
may have greater difficulty selling its portfolio securities.
The market value of these securities and their liquidity may be
affected by adverse publicity and investor perceptions.
MORTGAGE AND OTHER ASSET-BACKED SECURITIES
Each Bond Fund may invest in securities secured by
mortgages or other assets such as automobile or home improvement
loans and credit card receivables. These instruments may be
issued or guaranteed by the U.S. Government or by its agencies
or instrumentalities or by private entities such as commercial,
mortgage and investment banks and financial companies or
financial subsidiaries of industrial companies.
Mortgage-backed securities provide either a pro rata
interest in underlying mortgages or an interest in
collateralized mortgage obligations ("CMOs") which represent a
right to interest and/or principal payments from an underlying
mortgage pool. CMOs are not guaranteed by either the U.S.
Government or by its agencies or instrumentalities, and are
usually issued in multiple classes each of which has different
payment rights, pre-payment risks and yield characteristics.
Mortgage-backed securities involve the risk of pre-payment on
the underlying mortgages at a faster or slower rate than the
established schedule. Pre-payments generally increase with
falling interest rates and decrease with rising rates but they
also are influenced by economic, social and market factors. If
mortgages are pre-paid during periods of declining interest
rates, there would be a resulting loss of the full-term benefit
of any premium paid by the Fund on purchase of the CMO, and the
proceeds of pre-payment would likely be invested at lower
interest rates. The Funds tend to invest in CMOs of classes
known as planned amortization classes ("PACs") which have pre-
payment protection features tending to make them less
susceptible to price volatility.
Non-mortgage asset-backed securities usually have less pre-
payment risk than mortgage-backed securities, but have the risk
that the collateral will not be available to support payments on
the underlying loans which finance payments on the securities
themselves. Therefore, greater emphasis is placed on the credit
quality of the security issuer and the guarantor, if any.
VARIABLE AND FLOATING RATE INSTRUMENTS
Each Bond Fund may also invest in floating rate instruments
which provide for periodic adjustments in coupon interest rates
that are automatically reset based on changes in amount and
direction of specified market interest rates. In addition, the
adjusted duration of some of these instruments may be materially
shorter than their stated maturities. To the extent such
instruments are subject to lifetime or periodic interest rate
caps or floors, such instruments may experience greater price
volatility than debt instruments without such features.
Adjusted duration is an inverse relationship between market
price and interest rates and refers to the approximate
percentage change in price for a 100 basis point change in
yield. For example, if interest rates decrease by 100 basis
points, a market price of a security with an adjusted duration
of 2 would increase by approximately 2%. Neither Income Fund
nor High Yield Portfolio intends to invest more than 5% of its
net assets in floating rate instruments. Neither Government
Income Fund nor Intermediate Bond Fund intends to invest more
than 10% of its net assets in floating rate instruments.
In accordance with its investment objective and policies,
each Money Market Fund may invest in variable and floating rate
money market instruments which provide for periodic or automatic
adjustments in coupon interest rates that are reset based on
changes in amount and direction of specified short-term interest
rates. Neither Money Market Fund will invest in a variable or
floating rate instrument unless the Adviser determines that as
of any reset date the market value of the instrument can
reasonably be expected to approximate its par value.
LENDING OF PORTFOLIO SECURITIES
Subject to restriction (7) under Investment Restrictions,
each Bond Fund may lend its portfolio securities to broker-
dealers and banks. Any such loan must be continuously secured
by collateral in cash or cash equivalents maintained on a
current basis in an amount at least equal to the market value of
the securities loaned by a Fund. The Fund would continue to
receive the equivalent of the interest or dividends paid by the
issuer on the securities loaned, and would also receive an
additional return that may be in the form of a fixed fee or a
percentage of the collateral. The Fund would have the right to
call the loan and obtain the securities loaned at any time on
notice of not more than five business days. In the event of
bankruptcy or other default of the borrower, the Fund could
experience both delays in liquidating the loan collateral or
recovering the loaned securities and losses including (a)
possible decline in the value of the collateral or in the value
of the securities loaned during the period while the Fund seeks
to enforce its rights thereto, (b) possible subnormal levels of
income and lack of access to income during this period, and (c)
expenses of enforcing its rights.
None of the Bond Funds has loaned portfolio securities
during its last fiscal year, nor does it intend to loan more
than 5% of its net assets.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements, provided
that it will not invest more than 15% of net assets in
repurchase agreements maturing in more than seven days and any
other illiquid securities. A repurchase agreement is a sale of
securities to a Fund in which the seller agrees to repurchase
the securities at a higher price, which includes an amount
representing interest on the purchase price, within a specified
time. In the event of bankruptcy of the seller, a Fund could
experience both losses and delays in liquidating its collateral.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES; REVERSE REPURCHASE
AGREEMENTS; STANDBY COMMITMENTS
Each Money Market Fund may purchase instruments on a when-
issued or delayed-delivery basis. Although the payment terms
are established at the time the Fund enters into the commitment,
the instruments may be delivered and paid for some time after
the date of purchase, when their value may have changed and the
yields available in the market may be greater. The Funds will
make such commitments only with the intention of actually
acquiring the instruments, but may sell them before settlement
date if it is deemed advisable for investment reasons.
Securities purchased in this manner involve risk of loss if the
value of the security purchased declines before settlement date.
Each of the Bond Funds may purchase securities on a when-
issued or delayed-delivery basis, as described in the
Prospectus. A Bond Fund makes such commitments only with the
intention of actually acquiring the securities, but may sell the
securities before settlement date if the Adviser deems it
advisable for investment reasons. Securities purchased on a
when-issued or delayed-delivery basis are sometimes done on a
"dollar roll" basis. Dollar roll transactions consist of the
sale by a Fund of securities with a commitment to purchase
similar but not identical securities, generally at a lower price
at a future date. A dollar roll may be renewed after cash
settlement and initially may involve only a firm commitment
agreement by a Fund to buy a security. A dollar roll
transaction involves the following risks: if the broker-dealer
to whom a Fund sells the security becomes insolvent, the Fund's
right to purchase or repurchase the security may be restricted;
the value of the security may change adversely over the term of
the dollar roll; the security which a Fund is required to
repurchase may be worth less than a security which the Fund
originally held; and the return earned by a Fund with the
proceeds of a dollar roll may not exceed transaction costs.
Each of the Bond Funds may enter into reverse repurchase
agreements with banks and securities dealers. A reverse
repurchase agreement is a repurchase agreement in which the Fund
is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of securities because it avoids
certain market risks and transaction costs.
At the time a Fund enters into a binding obligation to
purchase securities on a when-issued basis or enters into a
reverse repurchase agreement, liquid assets (cash, U.S.
Government or other "high grade" debt obligations) of the Fund
having a value at least as great as the purchase price of the
securities to be purchased will be segregated on the books of
the Fund and held by the custodian throughout the period of the
obligation. The use of these investment strategies, as well as
borrowing under a line of credit as described below, may
increase net asset value fluctuation.
Standby commitment agreements create an additional risk for
each Fund because the other party to the standby agreement
generally will not be obligated to deliver the security, but the
Fund will be obligated to accept it if delivered. Depending on
market conditions, the Fund may receive a commitment fee for
assuming this obligation. If prevailing market interest rates
increase during the period between the date of the agreement and
the settlement date, the other party can be expected to deliver
the security and, in effect, pass any decline in value to the
Fund. If the value of the security increases after the
agreement is made, however, the other party is unlikely to
deliver the security. In other words, a decrease in the value
of the securities to be purchased under the terms of a standby
commitment agreement will likely result in the delivery of the
security, and, therefore, such decrease will be reflected in the
Fund's net asset value. However, any increase in the value of
the securities to be purchased will likely result in the non-
delivery of the security and, therefore, such increase will not
affect the net asset value unless and until the Fund actually
obtains the security.
SHORT SALES AGAINST THE BOX
Each Fund may sell securities short against the box; that
is, enter into short sales of securities that it currently owns
or has the right to acquire through the conversion or exchange
of other securities that it owns at no additional cost. A Fund
may make short sales of securities only if at all times when a
short position is open the Fund owns at least an equal amount of
such securities or securities convertible into or exchangeable
for securities of the same issue as, and equal in amount to, the
securities sold short, at no additional cost.
In a short sale against the box, a Fund does not deliver
from its portfolio the securities sold. Instead, the Fund
borrows the securities sold short from a broker-dealer through
which the short sale is executed, and the broker-dealer delivers
such securities, on behalf of the Fund, to the purchaser of such
securities. The Fund is required to pay to the broker-dealer
the amount of any dividends paid on shares sold short. Finally,
to secure its obligation to deliver to such broker-dealer the
securities sold short, the Fund must deposit and continuously
maintain in a separate account with the Fund's custodian an
equivalent amount of the securities sold short or securities
convertible into or exchangeable for such securities at no
additional cost. A Fund is said to have a short position in the
securities sold until it delivers to the broker-dealer the
securities sold. A Fund may close out a short position by
purchasing on the open market and delivering to the broker-
dealer an equal amount of the securities sold short, rather than
by delivering portfolio securities.
Short sales may protect a Fund against the risk of losses
in the value of its portfolio securities because any unrealized
losses with respect to such portfolio securities should be
wholly or partially offset by a corresponding gain in the short
position. However, any potential gains in such portfolio
securities should be wholly or partially offset by a
corresponding loss in the short position. The extent to which
such gains or losses are offset will depend upon the amount of
securities sold short relative to the amount the Fund owns,
either directly or indirectly, and, in the case where the Fund
owns convertible securities, changes in the conversion premium.
Short sale transactions involve certain risks. If the
price of the security sold short increases between the time of
the short sale and the time a Fund replaces the borrowed
security, the Fund will incur a loss and if the price declines
during this period, the Fund will realize a short-term capital
gain. Any realized short-term capital gain will be decreased,
and any incurred loss increased, by the amount of transaction
costs and any premium, dividend or interest which the Fund may
have to pay in connection with such short sale. Certain
provisions of the Internal Revenue Code may limit the degree to
which a Fund is able to enter into short sales. There is no
limitation on the amount of each Fund's assets that, in the
aggregate, may be deposited as collateral for the obligation to
replace securities borrowed to effect short sales and allocated
to segregated accounts in connection with short sales. No Fund
currently expects that more than 5% of its total assets would be
involved in short sales against the box.
LINE OF CREDIT
Subject to restriction (8) under Investment Restrictions,
each Fund may establish and maintain a line of credit with a
major bank in order to permit borrowing on a temporary basis to
meet share redemption requests in circumstances in which
temporary borrowing may be preferable to liquidation of
portfolio securities.
INTERFUND BORROWING AND LENDING PROGRAM
Pursuant to an exemptive order issued by the Securities and
Exchange Commission, the Funds have received permission to lend
money to, and borrow money from, other mutual funds advised by
the Adviser. A Fund will borrow through the program when
borrowing is necessary and appropriate and the costs are equal
to or lower than the costs of bank loans.
PIK AND ZERO COUPON BONDS
Each Bond Fund may invest in both zero coupon bonds and
bonds the interest on which is payable in kind ("PIK bonds"). A
zero coupon bond is a bond that does not pay interest for its
entire life. A PIK bond pays interest in the form of additional
securities. The market prices of both zero coupon and PIK bonds
are affected to a greater extent by changes in prevailing levels
of interest rates and thereby tend to be more volatile in price
than securities that pay interest periodically and in cash. In
addition, because a Fund accrues income with respect to these
securities prior to the receipt of such interest in cash, it may
have to dispose of portfolio securities under disadvantageous
circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax
consequences. High Yield Portfolio may invest up to 20% of its
total assets in PIK and zero coupon bonds.
RATED SECURITIES
For a description of the ratings applied by Moody's and S&P
(two of the approved NRSROs) to debt securities, please refer to
the Appendix. The rated debt securities described under
Investment Policies above for each Fund include securities given
a rating conditionally by Moody's or provisionally by S&P. If
the rating of a security held by a Fund is withdrawn or reduced,
the Fund is not required to sell the security, but the Adviser
will consider such fact in determining whether that Fund should
continue to hold the security. To the extent that the ratings
accorded by a NRSRO for debt securities may change as a result
of changes in such organizations, or changes in their rating
systems, each Fund will attempt to use comparable ratings as
standards for its investments in debt securities in accordance
with its investment policies.
FOREIGN SECURITIES
Intermediate Bond Fund, Income Fund, High Yield Fund, and
High Yield Portfolio each may invest up to 25% of total assets
(taken at market value at the time of investment) in securities
of foreign issuers that are not publicly traded in the United
States ("foreign securities"). For purposes of these limits,
foreign securities do not include securities represented by
American Depositary Receipts ("ADRs"), securities denominated in
U.S. dollars, or securities guaranteed by U.S. persons.
Investment in foreign securities may involve a greater degree of
risk (including risks relating to exchange fluctuations, tax
provisions, or expropriation of assets) than does investment in
securities of domestic issuers.
Such Funds may invest in both "sponsored" and "unsponsored"
ADRs. In a sponsored ADR, the issuer typically pays some or all
of the expenses of the depositary and agrees to provide its
regular shareholder communications to ADR holders. An
unsponsored ADR is created independently of the issuer of the
underlying security. The ADR holders generally pay the expenses
of the depositary and do not have an undertaking from the issuer
of the underlying security to furnish shareholder
communications. No Fund expects to invest as much as 5% of its
total assets in unsponsored ADRs.
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, the Funds'
investment performance is affected by the strength or weakness
of the U.S. dollar against these currencies. For example, if
the dollar falls in value relative to the Japanese yen, the
dollar value of a yen-denominated stock held in the portfolio
will rise even though the price of the stock remains unchanged.
Conversely, if the dollar rises in value relative to the yen,
the dollar value of the yen-denominated stock will fall. (See
discussion of transaction hedging and portfolio hedging under
Currency Exchange Transactions.)
Investors should understand and consider carefully the
risks involved in foreign investing. Investing in foreign
securities, positions in which are generally denominated in
foreign currencies, and utilization of forward foreign currency
exchange contracts involve certain considerations comprising
both risks and opportunities not typically associated with
investing in U.S. securities. These considerations include:
fluctuations in exchange rates of foreign currencies; possible
imposition of exchange control regulation or currency
restrictions that would prevent cash from being brought back to
the United States; less public information with respect to
issuers of securities; less governmental supervision of stock
exchanges, securities brokers, and issuers of securities; lack
of uniform accounting, auditing, and financial reporting
standards; lack of uniform settlement periods and trading
practices; less liquidity and frequently greater price
volatility in foreign markets than in the United States;
possible imposition of foreign taxes; possible investment in
securities of companies in developing as well as developed
countries; and sometimes less advantageous legal, operational,
and financial protections applicable to foreign sub-custodial
arrangements.
Although the Funds will try to invest in companies and
governments of countries having stable political environments,
there is the possibility of expropriation or confiscatory
taxation, seizure or nationalization of foreign bank deposits or
other assets, establishment of exchange controls, the adoption
of foreign government restrictions, or other adverse political,
social or diplomatic developments that could affect investment
in these nations.
Currency Exchange Transactions. Currency exchange
transactions may be conducted either on a spot (i.e., cash)
basis at the spot rate for purchasing or selling currency
prevailing in the foreign exchange market or through forward
currency exchange contracts ("forward contracts"). Forward
contracts are contractual agreements to purchase or sell a
specified currency at a specified future date (or within a
specified time period) and price set at the time of the
contract. Forward contracts are usually entered into with banks
and broker-dealers, are not exchange traded, and are usually for
less than one year, but may be renewed.
The Funds' foreign currency exchange transactions are
limited to transaction and portfolio hedging involving either
specific transactions or portfolio positions, except to the
extent described below under Synthetic Foreign Positions.
Transaction hedging is the purchase or sale of forward contracts
with respect to specific receivables or payables of a Fund
arising in connection with the purchase and sale of its
portfolio securities. Portfolio hedging is the use of forward
contracts with respect to portfolio security positions
denominated or quoted in a particular foreign currency.
Portfolio hedging allows the Fund to limit or reduce its
exposure in a foreign currency by entering into a forward
contract to sell such foreign currency (or another foreign
currency that acts as a proxy for that currency) at a future
date for a price payable in U.S. dollars so that the value of
the foreign-denominated portfolio securities can be
approximately matched by a foreign-denominated liability. A
Fund may not engage in portfolio hedging with respect to the
currency of a particular country to an extent greater than the
aggregate market value (at the time of making such sale) of the
securities held in its portfolio denominated or quoted in that
particular currency, except that a Fund may hedge all or part of
its foreign currency exposure through the use of a basket of
currencies or a proxy currency where such currencies or currency
act as an effective proxy for other currencies. In such a case,
a Fund may enter into a forward contract where the amount of the
foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging
technique may be more efficient and economical than entering
into separate forward contracts for each currency held in a
Fund. No Fund may engage in "speculative" currency exchange
transactions.
At the maturity of a forward contract to deliver a
particular currency, a Fund may either sell the portfolio
security related to such contract and make delivery of the
currency, or it may retain the security and either acquire the
currency on the spot market or terminate its contractual
obligation to deliver the currency by purchasing an offsetting
contract with the same currency trader obligating it to purchase
on the same maturity date the same amount of the currency.
It is impossible to forecast with absolute precision the
market value of portfolio securities at the expiration of a
forward contract. Accordingly, it may be necessary for a Fund
to purchase additional currency on the spot market (and bear the
expense of such purchase) if the market value of the security is
less than the amount of currency the Fund is obligated to
deliver and if a decision is made to sell the security and make
delivery of the currency. Conversely, it may be necessary to
sell on the spot market some of the currency received upon the
sale of the portfolio security if its market value exceeds the
amount of currency the Fund is obligated to deliver.
If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss to
the extent that there has been movement in forward contract
prices. If a Fund engages in an offsetting transaction, it may
subsequently enter into a new forward contract to sell the
currency. Should forward prices decline during the period
between a Fund's entering into a forward contract for the sale
of a currency and the date it enters into an offsetting contract
for the purchase of the currency, the Fund will realize a gain
to the extent the price of the currency it has agreed to sell
exceeds the price of the currency it has agreed to purchase.
Should forward prices increase, a Fund will suffer a loss to the
extent the price of the currency it has agreed to purchase
exceeds the price of the currency it has agreed to sell. A
default on the contract would deprive a Fund of unrealized
profits or force the Fund to cover its commitments for purchase
or sale of currency, if any, at the current market price.
Hedging against a decline in the value of a currency does
not eliminate fluctuations in the prices of portfolio securities
or prevent losses if the prices of such securities decline.
Such transactions also preclude the opportunity for gain if the
value of the hedged currency should rise. Moreover, it may not
be possible for a Fund to hedge against a devaluation that is so
generally anticipated that the Fund is not able to contract to
sell the currency at a price above the devaluation level it
anticipates. The cost to a Fund of engaging in currency
exchange transactions varies with such factors as the currency
involved, the length of the contract period, and prevailing
market conditions. Since currency exchange transactions are
usually conducted on a principal basis, no fees or commissions
are involved.
Synthetic Foreign Positions. The Funds may invest in debt
instruments denominated in foreign currencies. In addition to,
or in lieu of, such direct investment, a Fund may construct a
synthetic foreign position by (a) purchasing a debt instrument
denominated in one currency, generally U.S. dollars, and (b)
concurrently entering into a forward contract to deliver a
corresponding amount of that currency in exchange for a
different currency on a future date and at a specified rate of
exchange. Because of the availability of a variety of highly
liquid U.S. dollar debt instruments, a synthetic foreign
position utilizing such U.S. dollar instruments may offer
greater liquidity than direct investment in foreign currency
debt instruments. The results of a direct investment in a
foreign currency and a concurrent construction of a synthetic
position in such foreign currency, in terms of both income yield
and gain or loss from changes in currency exchange rates, in
general should be similar, but would not be identical because
the components of the alternative investments would not be
identical.
The Funds may also construct a synthetic foreign position
by entering into a swap arrangement. A swap is a contractual
agreement between two parties to exchange cash flows--at the
time of the swap agreement and again at maturity, and, with some
swaps, at various intervals through the period of the agreement.
The use of swaps to construct a synthetic foreign position would
generally entail the swap of interest rates and currencies. A
currency swap is a contractual arrangement between two parties
to exchange principal amounts in different currencies at a
predetermined foreign exchange rate. An interest rate swap is a
contractual agreement between two parties to exchange interest
payments on identical principal amounts. An interest rate swap
may be between a floating and a fixed rate instrument, a
domestic and a foreign instrument, or any other type of cash
flow exchange. A currency swap generally has the same risk
characteristics as a forward currency contract, and all types of
swaps have counter-party risk. Depending on the facts and
circumstances, swaps may be considered illiquid. Illiquid
securities usually have greater investment risk and are subject
to greater price volatility. The net amount of the excess, if
any, of a Fund's obligations over which it is entitled to
receive with respect to an interest rate or currency swap will
be accrued daily and liquid assets (cash, U.S. Government
securities, or other "high grade" debt obligations) of the Fund
having a value at least equal to such accrued excess will be
segregated on the books of the Fund and held by the Custodian
for the duration of the swap.
The Funds may also construct a synthetic foreign position
by purchasing an instrument whose return is tied to the return
of the desired foreign position. An investment in these
"principal exchange rate linked securities" (often called PERLS)
can produce a similar return to a direct investment in a foreign
security.
RULE 144A SECURITIES
Each Bond Fund may purchase securities that have been
privately placed but that are eligible for purchase and sale
under Rule 144A under the 1933 Act. That Rule permits certain
qualified institutional buyers, such as the Fund, to trade in
privately placed securities that have not been registered for
sale under the 1933 Act. The Adviser, under the supervision of
the Board of Trustees, will consider whether securities
purchased under Rule 144A are illiquid and thus subject to the
Fund's restriction of investing no more than 10% of its net
assets in illiquid securities. A determination of whether a
Rule 144A security is liquid or not is a question of fact. In
making this determination, the Adviser will consider the trading
markets for the specific security, taking into account the
unregistered nature of a Rule 144A security. In addition, the
Adviser could consider the (1) frequency of trades and quotes,
(2) number of dealers and potential purchasers, (3) dealer
undertakings to make a market, and (4) nature of the security
and of marketplace trades (e.g., the time needed to dispose of
the security, the method of soliciting offers, and the mechanics
of transfer). The liquidity of Rule 144A securities would be
monitored and, if as a result of changed conditions, it is
determined that a Rule 144A security is no longer liquid, the
Fund's holdings of illiquid securities would be reviewed to
determine what, if any, steps are required to assure that the
Fund does not invest more than 10% of its assets in illiquid
securities. Investing in Rule 144A securities could have the
effect of increasing the amount of the Fund's assets invested in
illiquid securities if qualified institutional buyers are
unwilling to purchase such securities. The Fund does not expect
to invest as much as 5% of its total assets in Rule 144A
securities that have not been deemed to be liquid by the
Adviser.
PORTFOLIO TURNOVER
For information on the portfolio turnover rate of the
Funds, see Financial Highlights in the Prospectus. General
portfolio turnover information is also contained in the
Prospectus under Risks and Investment Considerations.
The portfolio turnover rates of Government Income Fund,
Intermediate Bond Fund, and Income Fund have been greater than
100% in recent fiscal years because of increased volatility in
the financial markets and the Adviser's techniques for reacting
to changes in the markets to shift exposures to certain sectors
and to capture gains. The turnover rate for each of the Funds
in the future may vary greatly from year to year, and when
portfolio changes are deemed appropriate due to market or other
conditions, such turnover rate may be greater than might
otherwise be anticipated. A high rate of portfolio turnover may
result in increased transaction expenses and the realization of
capital gains or losses. Distributions of any net realized
gains are subject to federal income tax. (See Financial
Highlights, Risks and Investment Considerations, and
Distributions and Income Taxes in the Prospectus, and Additional
Income Tax Considerations in this Statement of Additional
Information.)
OPTIONS ON SECURITIES AND INDEXES
Each Bond Fund may purchase and may sell both put options
and call options on debt or other securities or indexes in
standardized contracts traded on national securities exchanges,
boards of trade, or similar entities, or quoted on NASDAQ, and
agreements, sometimes called cash puts, that may accompany the
purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium,
the right to buy from (call) or sell to (put) the seller
(writer) of the option the security underlying the option (or
the cash value of the index) at a specified exercise price at
any time during the term of the option. The writer of an option
on an individual security has the obligation upon exercise of
the option to deliver the underlying security upon payment of
the exercise price or to pay the exercise price upon delivery of
the underlying security. Upon exercise, the writer of an option
on an index is obligated to pay the difference between the cash
value of the index and the exercise price multiplied by the
specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial
or securities market, a specific group of financial instruments
or securities, or certain economic indicators.)
A Bond Fund will write call options and put options only if
they are "covered." In the case of a call option on a security,
the option is "covered" if the Fund owns the security underlying
the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if
additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by
its custodian) upon conversion or exchange of other securities
held in its portfolio.
If an option written by a Bond Fund expires, the Fund
realizes a capital gain equal to the premium received at the
time the option was written. If an option purchased by a Fund
expires, the Fund realizes a capital loss equal to the premium
paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, underlying security or
index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction
can be effected when the Fund desires.
A Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the
Fund will realize a capital loss. If the premium received from
a closing sale transaction is more than the premium paid to
purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. The principal
factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market
price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by a Fund is an asset of the
Fund, valued initially at the premium paid for the option. The
premium received for an option written by a Fund is recorded as
a deferred credit. The value of an option purchased or written
is marked-to-market daily and is valued at the closing price on
the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between
the last bid and asked prices.
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options
on securities and on indexes. For example, there are
significant differences between the securities markets and
options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to
achieve its objectives. A decision as to whether, when and how
to use options involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist
when a Fund seeks to close out an option position. If a Fund
were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to
realize any profit or the option would expire and become
worthless. If a Fund were unable to close out a covered call
option that it had written on a security, it would not be able
to sell the underlying security until the option expired. As
the writer of a covered call option, a Fund foregoes, during the
option's life, the opportunity to profit from increases in the
market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund,
the Fund would not be able to close out the option. If
restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each Bond Fund may use interest rate futures contracts and
index futures contracts. An interest rate or index futures
contract provides for the future sale by one party and purchase
by another party of a specified quantity of a financial
instrument or the cash value of an index /3/ at a specified
price and time. A public market exists in futures contracts
covering a number of indexes as well as the following financial
instruments: U.S. Treasury bonds; U.S. Treasury notes; GNMA
Certificates; three-month U.S. Treasury bills; 90-day commercial
paper; bank certificates of deposit; Eurodollar certificates of
deposit; and foreign currencies. It is expected that other
futures contracts will be developed and traded.
- -------------
/3/ A futures contract on an index is an agreement pursuant to
which two parties agree to take or make delivery of an amount of
cash equal to the difference between the value of the index at
the close of the last trading day of the contract and the price
at which the index contract was originally written. Although
the value of a securities index is a function of the value of
certain specified securities, no physical delivery of those
securities is made.
- -------------
The Bond Funds may purchase and write call and put futures
options. Futures options possess many of the same
characteristics as options on securities and indexes (discussed
above). A futures option gives the holder the right, in return
for the premium paid, to assume a long position (call) or short
position (put) in a futures contract at a specified exercise
price at any time during the period of the option. Upon
exercise of a call option, the holder acquires a long position
in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is
true. A Fund might, for example, use futures contracts to hedge
against or gain exposure to fluctuations in the general level of
security prices, anticipated changes in interest rates or
currency fluctuations that might adversely affect either the
value of the Fund's securities or the price of the securities
that the Fund intends to purchase. Although other techniques
could be used to reduce that Fund's exposure to security price,
interest rate and currency fluctuations, the Fund may be able to
achieve its exposure more effectively and perhaps at a lower
cost by using futures contracts and futures options.
Each Bond Fund will only enter into futures contracts and
futures options that are standardized and traded on an exchange,
board of trade, or similar entity, or quoted on an automated
quotation system.
The success of any futures transaction depends on the
Adviser correctly predicting changes in the level and direction
of security prices, interest rates, currency exchange rates and
other factors. Should those predictions be incorrect, a Fund's
return might have been better had the transaction not been
attempted; however, in the absence of the ability to use futures
contracts, the Adviser might have taken portfolio actions in
anticipation of the same market movements with similar
investment results but, presumably, at greater transaction
costs.
When a purchase or sale of a futures contract is made by a
Fund, the Fund is required to deposit with its custodian (or
broker, if legally permitted) a specified amount of cash or U.S.
Government securities or other securities acceptable to the
broker ("initial margin"). The margin required for a futures
contract is set by the exchange on which the contract is traded
and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good
faith deposit on the futures contract that is returned to the
Fund upon termination of the contract, assuming all contractual
obligations have been satisfied. Each Fund expects to earn
interest income on its initial margin deposits. A futures
contract held by a Fund is valued daily at the official
settlement price of the exchange on which it is traded. Each
day the Fund pays or receives cash, called "variation margin,"
equal to the daily change in value of the futures contract.
This process is known as "marking-to-market." Variation margin
paid or received by a Fund does not represent a borrowing or
loan by a Fund but is instead settlement between the Fund and
the broker of the amount one would owe the other if the futures
contract had expired at the close of the previous trading day.
In computing daily net asset value, each Fund will mark-to-
market its open futures positions.
A Fund is also required to deposit and maintain margin with
respect to put and call options on futures contracts written by
it. Such margin deposits will vary depending on the nature of
the underlying futures contract (and the related initial margin
requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking
delivery of the underlying securities, usually these obligations
are closed out prior to delivery by offsetting purchases or
sales of matching futures contracts (same exchange, underlying
security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, the Fund
realizes a capital gain, or if it is more, the Fund realizes a
capital loss. Conversely, if an offsetting sale price is more
than the original purchase price, the Fund realizes a capital
gain, or if it is less, the Fund realizes a capital loss. The
transaction costs must also be included in these calculations.
RISKS ASSOCIATED WITH FUTURES
There are several risks associated with the use of futures
contracts and futures options as hedging techniques. A purchase
or sale of a futures contract may result in losses in excess of
the amount invested in the futures contract. In trying to
increase or reduce market exposure, there can be no guarantee
that there will be a correlation between price movements in the
futures contract and in the portfolio exposure sought. In
addition, there are significant differences between the
securities and futures markets that could result in an imperfect
correlation between the markets, causing a given transaction not
to achieve its objectives. The degree of imperfection of
correlation depends on circumstances such as: variations in
speculative market demand for futures, futures options and debt
securities, including technical influences in futures trading
and futures options and differences between the financial
instruments and the instruments underlying the standard
contracts available for trading in such respects as interest
rate levels, maturities, and creditworthiness of issuers. A
decision as to whether, when and how to hedge involves the
exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market
behavior or unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation
permitted in certain futures contract prices during a single
trading day. The daily limit establishes the maximum amount
that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the
current trading session. Once the daily limit has been reached
in a futures contract subject to the limit, no more trades may
be made on that day at a price beyond that limit. The daily
limit governs only price movements during a particular trading
day and therefore does not limit potential losses because the
limit may work to prevent the liquidation of unfavorable
positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of
positions and subjecting some holders of futures contracts to
substantial losses.
There can be no assurance that a liquid market will exist
at a time when a Fund seeks to close out a futures or a futures
option position. The Fund would be exposed to possible loss on
the position during the interval of inability to close and would
continue to be required to meet margin requirements until the
position is closed. In addition, many of the contracts
discussed above are relatively new instruments without a
significant trading history. As a result, there can be no
assurance that an active secondary market will develop or
continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
If other options, futures contracts, or futures options of
types other than those described herein are traded in the
future, each Bond Fund may also use those investment vehicles,
provided the Board of Trustees determines that their use is
consistent with the Fund's investment objective.
A Bond Fund will not enter into a futures contract or
purchase an option thereon if, immediately thereafter, the
initial margin deposits for futures contracts held by that Fund
plus premiums paid by it for open futures option positions, less
the amount by which any such positions are "in-the-money," /4/
would exceed 5% of the Fund's total assets.
- -------------
/4/ A call option is "in-the-money" if the value of the futures
contract that is the subject of the option exceeds the exercise
price. A put option is "in-the-money" if the exercise price
exceeds the value of the futures contract that is the subject of
the option.
- -------------
When purchasing a futures contract or writing a put on a
futures contract, a Fund must maintain with its custodian (or
broker, if legally permitted) cash or cash equivalents
(including any margin) equal to the market value of such
contract. When writing a call option on a futures contract, the
Fund similarly will maintain with its custodian cash or cash
equivalents (including any margin) equal to the amount by which
such option is in-the-money until the option expires or is
closed out by the Fund.
A Fund may not maintain open short positions in futures
contracts, call options written on futures contracts or call
options written on indexes if, in the aggregate, the market
value of all such open positions exceeds the current value of
the securities in its portfolio, plus or minus unrealized gains
and losses on the open positions, adjusted for the historical
relative volatility of the relationship between the portfolio
and the positions. For this purpose, to the extent the Fund has
written call options on specific securities in its portfolio,
the value of those securities will be deducted from the current
market value of the securities portfolio.
In order to comply with Commodity Futures Trading
Commission Regulation 4.5 and thereby avoid being deemed a
"commodity pool operator," each Fund will use commodity futures
or commodity options contracts solely for bona fide hedging
purposes within the meaning and intent of Regulation 1.3(z), or,
with respect to positions in commodity futures and commodity
options contracts that do not come within the meaning and intent
of 1.3(z), the aggregate initial margin and premiums required to
establish such positions will not exceed 5% of the fair market
value of the assets of a Fund, after taking into account
unrealized profits and unrealized losses on any such contracts
it has entered into [in the case of an option that is in-the-
money at the time of purchase, the in-the-money amount (as
defined in Section 190.01(x) of the Commission Regulations) may
be excluded in computing such 5%].
TAXATION OF OPTIONS AND FUTURES
If a Bond Fund exercises a call or put option that it
holds, the premium paid for the option is added to the cost
basis of the security purchased (call) or deducted from the
proceeds of the security sold (put). For cash settlement
options and futures options exercised by a Fund, the difference
between the cash received at exercise and the premium paid is a
capital gain or loss.
If a call or put option written by a Fund is exercised, the
premium is included in the proceeds of the sale of the
underlying security (call) or reduces the cost basis of the
security purchased (put). For cash settlement options and
futures options written by a Fund, the difference between the
cash paid at exercise and the premium received is a capital gain
or loss.
Entry into a closing purchase transaction will result in
capital gain or loss. If an option written by a Fund was in-
the-money at the time it was written and the security covering
the option was held for more than the long-term holding period
prior to the writing of the option, any loss realized as a
result of a closing purchase transaction will be long-term. The
holding period of the securities covering an in-the-money option
will not include the period of time the option is outstanding.
A futures contract held until delivery results in capital
gain or loss equal to the difference between the price at which
the futures contract was entered into and the settlement price
on the earlier of delivery notice date or expiration date. If a
Fund delivers securities under a futures contract, the Fund also
realizes a capital gain or loss on those securities.
For federal income tax purposes, a Fund generally is
required to recognize as income for each taxable year its net
unrealized gains and losses as of the end of the year on
options, futures and futures options positions ("year-end mark-
to-market"). Generally, any gain or loss recognized with
respect to such positions (either by year-end mark-to-market or
by actual closing of the positions) is considered to be 60%
long-term and 40% short-term, without regard to the holding
periods of the contracts. However, in the case of positions
classified as part of a "mixed straddle," the recognition of
losses on certain positions (including options, futures and
futures options positions, the related securities and certain
successor positions thereto) may be deferred to a later taxable
year. Sale of futures contracts or writing of call options (or
futures call options) or buying put options (or futures put
options) that are intended to hedge against a change in the
value of securities held by a Fund: (1) will affect the holding
period of the hedged securities; and (2) may cause unrealized
gain or loss on such securities to be recognized upon entry into
the hedge.
In order for a Fund to continue to qualify for federal
income tax treatment as a regulated investment company, at least
90% of its gross income for a taxable year must be derived from
qualifying income; i.e., dividends, interest, income derived
from loans of securities, and gains from the sale of securities
or foreign currencies or other income (including but not limited
to gains from options, futures, and forward contracts). In
addition, gains realized on the sale or other disposition of
securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. Any net gain
realized from futures (or futures options) contracts will be
considered gain from the sale of securities and therefore be
qualifying income for purposes of the 90% requirement. In order
to avoid realizing excessive gains on securities held less than
three months, the Fund may be required to defer the closing out
of certain positions beyond the time when it would otherwise be
advantageous to do so.
Each Fund distributes to shareholders annually any net
capital gains that have been recognized for federal income tax
purposes (including year-end mark-to-market gains) on options
and futures transactions. Such distributions are combined with
distributions of capital gains realized on the Fund's other
investments and shareholders are advised of the nature of the
payments.
INVESTMENT RESTRICTIONS
Each Fund and High Yield Portfolio operate under the
following investment restrictions. A Fund or High Yield
Portfolio may not:
(1) invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market
value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that
this restriction does not apply to (i) U.S. Government
Securities, (ii) [Cash Reserves and Government Reserves only]
repurchase agreements, or (iii) [Cash Reserves only] securities
of issuers in the financial services industry, and [all Funds
except High Yield Portfolio] except that all or substantially
all of the assets of the Fund may be invested in another
registered investment company having the same investment
objective and substantially similar investment policies as the
Fund;
(2) invest in a security if, with respect to 75% of its
assets, as a result of such investment, more than 5% of its
total assets (taken at market value at the time of such
investment) would be invested in the securities of any one
issuer, except that this restriction does not apply to U.S.
Government Securities or repurchase agreements for such
securities and [all Funds except High Yield Portfolio] except
that all or substantially all of the assets of the Fund may be
invested in another registered investment company having the
same investment objective and substantially similar investment
policies as the Fund; /5/
- --------------
/5/ Notwithstanding the foregoing, and in accordance with Rule
2a-7 of the Investment Company Act of 1940 (the "Rule"), Cash
Reserves and Government Reserves will not, immediately after the
acquisition of any security (other than a Government Security or
certain other securities as permitted under the Rule), invest
more than 5% of its total assets in the securities of any one
issuer; provided, however, that each may invest up to 25% of its
total assets in First Tier Securities (as that term is defined
in the Rule) of a single issuer for a period of up to three
business days after the purchase thereof.
- --------------
(3) invest in a security if, as a result of such
investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding voting securities of any one
issuer, [all Funds except High Yield Portfolio] except that all
or substantially all of the assets of the Fund may be invested
in another registered investment company having the same
investment objective and substantially similar investment
policies as the Fund;
(4) purchase or sell real estate (although it may purchase
securities secured by real estate or interests therein, or
securities issued by companies which invest in real estate, or
interests therein);
(5) purchase or sell commodities or commodities contracts
or oil, gas or mineral programs, [Government Income Fund only]
except that it may enter into futures and options on futures;
[Intermediate Bond Fund, Income Fund, High Yield Fund, and High
Yield Portfolio only] except that it may enter into (i) futures
and options on futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities, [Bond Funds only] but it may make
margin deposits in connection with transactions in options,
futures, and options on futures;
(7) make loans, although it may (a) [Bond Funds only] lend
portfolio securities and [all Funds] participate in an interfund
lending program with other Stein Roe Funds and Portfolios
provided that no such loan may be made if, as a result, the
aggregate of such loans would exceed 33 1/3% of the value of its
total assets (taken at market value at the time of such loans);
(b) purchase money market instruments and enter into repurchase
agreements; and (c) acquire publicly-distributed or privately-
placed debt securities;
(8) borrow except that it may (a) borrow for non-
leveraging, temporary or emergency purposes, (b) engage in
reverse repurchase agreements and make other borrowings,
provided that the combination of (a) and (b) shall not exceed 33
1/3% of the value of its total assets (including the amount
borrowed) less liabilities (other than borrowings) or such other
percentage permitted by law, and [Bond Funds only] (c) enter
into futures and options transactions; [all Funds] it may borrow
from banks, other Stein Roe Funds and Portfolios, and other
persons to the extent permitted by applicable law;
(9) act as an underwriter of securities, except insofar as
it may be deemed to be an "underwriter" for purposes of the
Securities Act of 1933 on disposition of securities acquired
subject to legal or contractual restrictions on resale, [all
Funds except High Yield Portfolio] except that all or
substantially all of the assets of the Fund may be invested in
another registered investment company having the same investment
objective and substantially similar investment policies as the
Fund; or
(10) issue any senior security except to the extent
permitted under the Investment Company Act of 1940.
The above restrictions are fundamental policies and may not
be changed without the approval of a "majority of the
outstanding voting securities" of a Fund or High Yield
Portfolio, as previously defined herein. The policy on the
scope of transactions involving lending of portfolio securities
to broker-dealers and banks (as set forth herein under Portfolio
Investments and Strategies) is also a fundamental policy.
Each Fund and High Yield Portfolio are also subject to the
following restrictions and policies that may be changed by the
Board of Trustees. None of the following restrictions shall
prevent a Fund from investing all or substantially all of its
assets in another investment company having the same investment
objective and substantially similar investment policies as the
Fund. Unless otherwise indicated, a Fund or High Yield
Portfolio may not:
(A) invest for the purpose of exercising control or
management;
(B) purchase more than 3% of the stock of another
investment company or purchase stock of other investment
companies equal to more than 5% of its total assets (valued at
time of purchase) in the case of any one other investment
company and 10% of such assets (valued at time of purchase) in
the case of all other investment companies in the aggregate; any
such purchases are to be made in the open market where no profit
to a sponsor or dealer results from the purchase, other than the
customary broker's commission, except for securities acquired as
part of a merger, consolidation or acquisition of assets; /6/
- --------------
/6/ The Funds have been informed that the staff of the
Securities and Exchange Commission takes the position that the
issuers of certain CMOs and certain other collateralized assets
are investment companies and that subsidiaries of foreign banks
may be investment companies for purposes of Section 12(d)(1) of
the Investment Company Act of 1940, which limits the ability of
one investment company to invest in another investment company.
Accordingly, the Funds intend to operate within the applicable
limitations under Section 12(d)(1)(A) of that Act.
- --------------
(C) purchase portfolio securities from, or sell portfolio
securities to, any of the officers and directors or trustees of
the Trust or of its investment adviser;
(D) purchase shares of other open-end investment
companies, except in connection with a merger, consolidation,
acquisition, or reorganization;
(E) invest more than 5% of its net assets (valued at time
of investment) in warrants, nor more than 2% of its net assets
in warrants which are not listed on the New York or American
Stock Exchange;
(F) [Bond Funds only] purchase a put or call option if the
aggregate premiums paid for all put and call options exceed 20%
of its net assets (less the amount by which any such positions
are in-the-money), excluding put and call options purchased as
closing transactions;
(G) [Bond Funds only] write an option on a security unless
the option is issued by the Options Clearing Corporation, an
exchange, or similar entity;
(H) [Bond Funds only] buy or sell an option on a security,
a futures contract, or an option on a futures contract unless
the option, the futures contract, or the option on the futures
contract is offered through the facilities of a national
securities association or listed on a national exchange or
similar entity;
(I) [Bond Funds only] invest in limited partnerships in
real estate unless they are readily marketable;
(J) sell securities short unless (i) it owns or has the
right to obtain securities equivalent in kind and amount to
those sold short at no added cost or (ii) the securities sold
are "when issued" or "when distributed" securities which it
expects to receive in a recapitalization, reorganization, or
other exchange for securities it contemporaneously owns or has
the right to obtain and [Bond Funds only] provided that
transactions in options, futures, and options on futures are not
treated as short sales;
(K) [Government Income Fund, Intermediate Bond Fund,
Income Fund, High Yield Fund, and High Yield Portfolio only]
invest more than 15% of its total assets (taken at market value
at the time of a particular investment) in restricted
securities, other than securities eligible for resale pursuant
to Rule 144A under the Securities Act of 1933;
(L) invest more than 10% of its net assets (taken at
market value at the time of a particular investment) in illiquid
securities /7/, including repurchase agreements maturing in more
than seven days.
- ---------------
/7/ In the judgment of the Adviser, Private Placement Notes,
which are issued pursuant to Section 4(2) of the Securities Act
of 1933, generally are readily marketable even though they are
subject to certain legal restrictions on resale. As such, they
are not treated as being subject to the limitation on illiquid
securities.
- ---------------
ADDITIONAL INVESTMENT CONSIDERATIONS
The Adviser seeks to provide superior long-term investment
results through a disciplined, research-intensive approach to
investment selection and prudent risk management. In working to
build wealth for generations, it has been guided by three
primary objectives which it believes are the foundation of a
successful investment program. These objectives are
preservation of capital, limited volatility through managed
risk, and consistent above-average returns, as appropriate for
the particular client or managed account.
Because every investor's needs are different, Stein Roe
mutual funds are designed to accommodate different investment
objectives, risk tolerance levels, and time horizons. In
selecting a mutual fund, investors should ask the following
questions:
What are my investment goals?
It is important to a choose a fund that has investment
objectives compatible with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share
price, such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If
you have a longer investment time frame, you may seek to
maximize your investment returns by investing in a mutual fund
that offers greater yield or appreciation potential in exchange
for greater investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks
which will vary depending on investment objective and security
type. However, mutual funds seek to reduce risk through
professional investment management and portfolio
diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values
than bond or money market mutual funds. Although there is no
guarantee that they will be able to maintain a stable net asset
value of $1.00 per share, money market funds emphasize safety of
principal and liquidity, but tend to offer lower income
potential than bond funds. Bond funds tend to offer higher
income potential than money market funds but tend to have
greater risk of principal and yield volatility.
In addition, the Adviser believes that investment in a high
yield fund provides an opportunity to diversify an investment
portfolio because the economic factors that affect the
performance of high-yield, high-risk debt securities differ from
those that affect the performance of high-quality debt
securities securities or equity securities.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
Net Asset Value, and Shareholder Services, and that information
is incorporated herein by reference. The Prospectus discloses
that you may purchase (or redeem) shares through investment
dealers, banks, or other institutions. It is the responsibility
of any such institution to establish procedures insuring the
prompt transmission to Income Trust of any such purchase order.
The state of Texas has asked that Income Trust disclose in its
Statement of Additional Information, as a reminder to any such
bank or institution, that it must be registered as a dealer in
Texas.
Each Fund's net asset value is determined on days on which
the New York Stock Exchange (the "NYSE") is open for trading.
The NYSE is regularly closed on Saturdays and Sundays and on New
Year's Day, the third Monday in February, Good Friday, the last
Monday in May, Independence Day, Labor Day, Thanksgiving, and
Christmas. If one of these holidays falls on a Saturday or
Sunday, the NYSE will be closed on the preceding Friday or the
following Monday, respectively. Net asset value will not be
determined on days when the NYSE is closed unless, in the
judgment of the Board of Trustees, net asset value of a Fund
should be determined on any such day, in which case the
determination will be made at 3:00 p.m., central time.
Income Trust reserves the right to suspend or postpone
redemptions of shares of any Fund during any period when: (a)
trading on the NYSE is restricted, as determined by the
Securities and Exchange Commission, or the NYSE is closed for
other than customary weekend and holiday closings; (b) the
Securities and Exchange Commission has by order permitted such
suspension; or (c) an emergency, as determined by the Securities
and Exchange Commission, exists, making disposal of portfolio
securities or valuation of net assets of such Fund not
reasonably practicable.
Although neither Cash Reserves nor Government Reserves
currently charges a fee to its shareholders for the use of the
special Check-Writing Redemption Privilege offered by those
Funds, as described under How to Redeem Shares in the Money
Market Prospectus, each Fund pays for the cost of printing and
mailing checks to its shareholders and pays charges of the
custodian for payment of each check. The Trust reserves the
right to establish a direct charge to shareholders for use of
the Privilege and both the Trust and the custodian reserve the
right to terminate this service.
Income Trust intends to pay all redemptions in cash and is
obligated to redeem shares of a Fund solely in cash up to the
lesser of $250,000 or one percent of the net assets of that Fund
during any 90-day period for any one shareholder. However,
redemptions in excess of such limit may be paid wholly or partly
by a distribution in kind of securities. If redemptions were
made in kind, the redeeming shareholders might incur transaction
costs in selling the securities received in the redemptions.
Due to the relatively high cost of maintaining smaller
accounts, Income Trust reserves the right to redeem shares in
any account for their then-current value (which will be promptly
paid to the investor) if at any time the shares in the account
do not have a value of at least $1,000. An investor will be
notified that the value of his account is less than the minimum
and allowed at least 30 days to bring the value of the account
up to at least $1,000 before the redemption is processed. The
Agreement and Declaration of Trust also authorizes Income Trust
to redeem shares under certain other circumstances as may be
specified by the Board of Trustees.
MANAGEMENT
The following table sets forth certain information with
respect to trustees and officers of Income Trust:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH PRINCIPAL OCCUPATION(S)
NAME AGE INSTITUTIONAL TRUST DURING PAST FIVE YEARS
<C> <S> <S> <S>
Gary A. Anetsberger 41 Senior Vice-President Chief Financial Officer of the
(4) Mutual Funds division of Stein
Roe & Farnham Incorporated
(the "Adviser"); senior vice
president of the Adviser since
April, 1996; vice president
of the Adviser prior thereto
Timothy K. Armour 48 President; Trustee President of the Mutual Funds
(1)(2)(4) division of the Adviser and
director of the Adviser since
June, 1992; senior vice president
and director of marketing of
Citibank Illinois prior thereto
Jilaine Hummel Bauer 41 Executive Vice-President; General counsel and secretary of
(4) Secretary the Adviser since November 1995;
senior vice president of the
Adviser since April, 1992; vice
president of the Adviser prior
thereto
Ann H. Benjamin 38 Vice-President Senior vice president of the
Adviser since July, 1994; vice
president of the Adviser from
January, 1992 to July, 1994;
associate of the Adviser prior
thereto
Kenneth L. Block 76 Trustee Chairman Emeritus of A. T. Kearney,
(3)(4) Inc. (international management
consultants)
William W. Boyd 70 Trustee Chairman and director of Sterling
(3)(4) Plumbing Group, Inc. (manufacturer
of plumbing products) since 1992;
chairman, president, and chief
executive officer of Sterling
Plumbing Group, Inc. prior thereto
Thomas W. Butch (4) 40 Executive Vice-President Senior vice president of the
Adviser since September, 1994;
first vice president, corporate
communications, of Mellon Bank
Corporation prior thereto
Lindsay Cook(1)(4) 45 Trustee Senior vice president of Liberty
Financial Companies, Inc. (the
indirect parent of the Adviser)
Philip J. Crosley 50 Vice-President Senior Vice President of the
Adviser since February, 1996;
Vice President, Institutional
Sales-Advisor Sales, Invesco
Funds Group prior thereto
Douglas A. Hacker 41 Trustee Senior vice president and chief
(3)(4) financial officer, United
Airlines, since July, 1994;
senior vice president - Finance,
United Airlines, February, 1993
to July, 1994; vice president,
American Airlines prior thereto
Janet Langford Kelly 39 Trustee Senior vice president, secretary
(3)(4) and general counsel, Sara Lee
Corporation (branded, packaged,
consumer-products manufacturer),
since 1995; partner, Sidley &
Austin (law firm), 1991 through 1994
Michael T. Kennedy 34 Vice-President Senior vice president of the
Adviser since October, 1994;
vice president of the Adviser
from January, 1992 to October,
1994; associate of the Adviser
prior thereto
Lynn C. Maddox 56 Vice-President Senior vice president of the Adviser
Anne E. Marcel 39 Vice-President Vice president of the Adviser
since April, 1996; manager,
Mutual Fund Sales & Services
of the Adviser since October,
1994; supervisor of the Counselor
Department of the Adviser from
October, 1992 to October, 1994;
vice president of Selected
Financial Services prior thereto
Francis W. Morley 76 Trustee Chairman of Employer Plan
(2)(3)(4) Administrators and Consultants
Co. (designer, administrator,
and communicator of employee
benefit plans)
Jane M. Naeseth 46 Vice-President Senior vice president of the
Adviser since January, 1991; vice
president of the Adviser prior thereto
Charles R. Nelson 54 Trustee Van Voorhis Professor of Political
(3) (4) Economy of the University of Washington
Nicolette D. Parrish 47 Vice-President; Senior compliance administrator and
(4) Assistant Secretary assistant secretary of the Adviser
since November 1995; senior legal
assistant for the Adviser prior thereto
Cynthia A. Prah (4) 34 Vice-President Manager of Shareholder
Transaction Processing for
the Adviser
Sharon R. Robertson 35 Controller Accounting manager for the Adviser's
(4) Mutual Funds division
Janet B. Rysz (4) 41 Assistant Secretary Senior compliance administrator
and assistant secretary of the
Adviser
Thomas P. Sorbo 36 Vice-President Senior vice president of the
Adviser since January, 1994;
vice president of the Adviser
from September, 1992 to December,
1993; associate of Travelers
Insurance Company prior thereto
Thomas C. Theobald 59 Trustee Managing director, William Blair
(3) (4) Capital Partners (private equity
fund) since 1994; chief executive
officer and chairman of the Board
of Directors of Continental Bank
Corporation prior thereto
Heidi J. Walter (4) 29 Vice-President Legal counsel for the Adviser
since March, 1995; associate with
Beeler Schad & Diamond, PC (law firm).
prior thereto
Stacy H. Winick (4) 32 Vice-President Senior legal counsel for the Adviser
since Octob er, 1996; associate of
Bell, Boyd & Lloyd (law firm), June,
1993 to September, 1996; associate of
Debevoise & Plimpton (law firm) prior
thereto
Hans P. Ziegler (4) 56 Executive Vice-President Chief executive officer of the
Adviser since May, 1994;
president of the Investment
Counsel division of the Adviser
from July, 1993 to June, 1994;
president and chief executive
officer, Pitcairn Financial
Management Group prior thereto
Margaret O. Zwick 30 Treasurer Compliance manager for the Adviser's
(4) Mutual Funds division since
August 1995; compliance
accountant, January 1995 to
July 1995; section manager,
January 1994 to January 1995;
supervisor prior thereto
<FN>
______________________
(1) Trustee who is an "interested person" of the Trust and of the
Adviser, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
(4) This person holds the corresponding officer or trustee
position with the Base Trust.
</TABLE>
Certain of the trustees and officers of Income Trust and of
Base Trust are trustees or officers of other investment
companies managed by the Adviser. Mr. Armour, Ms. Bauer, Mr.
Cook, and Ms. Walter are also vice presidents of the Funds'
distributor, Liberty Securities Corporation. The address of Mr.
Block is 11 Woodley Road, Winnetka, Illinois 60093; that of Mr.
Boyd is 2900 Golf Road, Rolling Meadows, Illinois 60008; that of
Mr. Cook is 600 Atlantic Avenue, Boston, MA 02210; that of Mr.
Hacker is P.O. Box 66100, Chicago, IL 60666; that of Ms. Kelly
is Three First National Plaza, Chicago, Illinois 60602; that of
Mr. Morley is 20 North Wacker Drive, Suite 2275, Chicago,
Illinois 60606; that of Mr. Nelson is Department of Economics,
University of Washington, Seattle, Washington 98195; that of Mr.
Theobald is Suite 3300, 222 West Adams Street, Chicago, IL
60606; and that of the officers is One South Wacker Drive,
Chicago, Illinois 60606.
Associated with the Adviser since 1977, Ms. Naeseth has
been portfolio manager of Cash Reserves since 1980 and of
Government Reserves since its inception in 1982. From 1973 to
1977, she was with the First Trust Company of Ohio. She
received her B.A. degree from the University of Illinois in
1972. As of June 30, 1996, she was responsible for managing
$607 million in mutual fund assets.
Officers and trustees affiliated with the Adviser serve
without any compensation from Income Trust. In compensation for
their services to Income Trust, trustees who are not "interested
persons" of Income Trust or the Adviser are paid an annual
retainer of $8,000 (divided equally among the Funds of Income
Trust) plus an attendance fee from each Fund for each meeting of
the Board or standing committee thereof attended at which
business for that Fund is conducted. The attendance fees (other
than for a Nominating Committee or Compensation Committee
meeting) are based on each Fund's net assets as of the preceding
December 31. For a Fund with net assets of less than $50
million, the fee is $50 per meeting; with $51 to $250 million,
the fee is $200 per meeting; with $251 million to $500 million,
$350; with $501 million to $750 million, $500; with $751 million
to $1 billion, $650; and with over $1 billion in net assets,
$800. For a Fund participating in the master fund/feeder fund
structure, the trustees' attendance fee is paid solely by the
master portfolio. Each non-interested trustee also receives
$500 from Income Trust for attending each meeting of the
Nominating Committee or Compensation Committee. Income Trust
has no retirement or pension plan. The following table sets
forth compensation paid by Income Trust during the fiscal year
ended June 30, 1996 to each of the trustees:
Aggregate
Name of Compensation Total Compensation from
Trustee from Income Trust the Stein Roe Fund Complex*
- ---------------- ----------------- ---------------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Douglas A. Hacker -0- -0-
Janet Langford Kelly -0- -0-
Thomas C. Theobald -0- -0-
Kenneth L. Block $23,567 $82,417
William W. Boyd 25,067 86,317
Francis W. Morley 23,767 82,017
Charles R. Nelson 25,067 86,317
Gordon R. Worley 23,567 82,817
_______________
* During this period, the Stein Roe Fund Complex consisted of
the six series of Income Trust, four series of Stein Roe
Municipal Trust, eight series of Stein Roe Investment Trust, and
one series of Base Trust. Messrs. Hacker and Theobald were
elected trustees on June 18, 1996, and, therefore, did not
receive any compensation for the year ended June 30, 1996. Mr.
Worley retired as a trustee on December 31, 1996 and Ms. Kelly
became a trustee on January 1, 1997.
FINANCIAL STATEMENTS
Please refer to the Money Market Funds' and the Bond Funds'
June 30, 1996 Financial Statements (balance sheets and schedules
of investments as of June 30, 1996 and the statements of
operations, changes in net assets, and notes thereto) and the
reports of independent auditors contained in the June 30, 1996
Annual Reports of the Money Market Funds and the Bond Funds.
The Financial Statements and the reports of independent auditors
(but no other material from the Annual Reports) are incorporated
herein by reference. The Annual Reports may be obtained at no
charge by telephoning 800-338-2550.
PRINCIPAL SHAREHOLDERS
As of January 31, 1997, the only persons known by Income
Trust to own of record or "beneficially" 5% or more of
outstanding shares of any other Fund within the definition of
that term as contained in Rule 13d-3 under the Securities
Exchange Act of 1934 were as follows:
NAME AND ADDRESS FUND APPROXIMATE % OF
OUTSTANDING
SHARES HELD
First Bank National Cash Reserves 12.17%
Association* Government Reserves 20.03%
410 N. Michigan Avenue Government Income Fund 21.44%
Chicago, IL 60611 Intermediate Bond Fund 14.94%
Income Fund 8.70%
High Yield Fund 8.38%
Charles Schwab & Co., Government Income Fund 6.90%
Inc.* Intermediate Bond Fund 31.62%
Attn: Mutual Fund Dept. Income Fund 16.00%
101 Montgomery Street High Yield Fund 7.66%
San Francisco, CA 94104
The Northern Trust Co.** Income Fund 23.19%
F/B/O Liberty Mutual
Daily Valuation Transitions
P.O. Box 92956
Chicago, IL 60675
Dunspaugh-Dalton Founda- Government Income Fund 5.76%
tion, Inc.
9040 Sunset Drive
Miami, FL 33173
Helmsman Management Government Reserves 7.72%
Services, Inc.
Attn: Director of
Finance & Budget
Riverside Office Park
13 Riverside Road
Weston, MA 02193
Liberty Financial High Yield Fund 58.58%
Companies, Inc.
600 Atlantic Avenue
Boston, MA 02210
___________________
*Shares held of record, but not beneficially.
**Northern Trust Company holds shares of record on behalf of the
Liberty Mutual Employees' Thrift-Incentive Plan.
The following table shows shares of the Funds held by the
categories of persons indicated as of January 31, 1997, and in
each case the approximate percentage of outstanding shares
represented:
Clients of the Adviser Trustees and
in their Client Accounts* Officers
------------------------ -------------------
Shares Held Percent Shares Held Percent
----------- ------- ----------- -------
Cash Reserves 66,322,198 13.95% 1,551,336 **
Government Reserves 9,551,034 15.17 510,530 **
Government Income Fund 480,394 12.61 14,344 **
Intermediate Bond Fund 7,153,580 19.98 74,658 **
Income Fund 8,491,458 24.27 59,512 **
High Yield Fund 44,953 5.19 335 **
______________
*The Adviser may have discretionary authority over such shares
and, accordingly, they could be deemed to be owned
"beneficially" by the Adviser under Rule 13d-3. However, the
Adviser disclaims actual beneficial ownership of such shares.
**Represents less than 1% of the outstanding shares.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated provides administrative
services to each Fund and High Yield Portfolio and portfolio
management services to Cash Reserves, Government Reserves,
Government Income Fund, Intermediate Bond Fund, Income Fund, and
High Yield Portfolio. The Adviser is a wholly owned subsidiary
of SteinRoe Services Inc. ("SSI"), the Funds' transfer agent,
which is a wholly owned subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which is a majority owned
subsidiary of LFC Holdings, Inc., which is a wholly owned
subsidiary of Liberty Mutual Equity Corporation, which is a
wholly owned subsidiary of Liberty Mutual Insurance Company.
Liberty Mutual Insurance Company is a mutual insurance company,
principally in the property/casualty insurance field, organized
under the laws of Massachusetts in 1912.
The directors of the Adviser are Kenneth R. Leibler, Harold
W. Cogger, C. Allen Merritt, Jr., Timothy K. Armour, and Hans P.
Ziegler. Mr. Leibler is President and Chief Executive Officer
of Liberty Financial; Mr. Cogger is Executive Vice President of
Liberty Financial; Mr. Merritt is Senior Vice President and
Treasurer of Liberty Financial; Mr. Armour is President of the
Adviser's Mutual Funds division; and Mr. Ziegler is Chief
Executive Officer of the Adviser. The business address of
Messrs. Leibler, Cogger, and Merritt is Federal Reserve Plaza,
Boston, Massachusetts 02210; and that of Messrs. Armour, and
Ziegler is One South Wacker Drive, Chicago, Illinois 60606.
The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of December 31, 1996, the Adviser
managed over $26.7 billion in assets: over $8 billion in
equities and over $18.7 billion in fixed income securities
(including $1.6 billion in municipal securities). The $26.7
billion in managed assets included over $7.5 billion held by
open-end mutual funds managed by the Adviser (approximately 16%
of the mutual fund assets were held by clients of the Adviser).
These mutual funds were owned by over 227,000 shareholders. The
$7.5 billion in mutual fund assets included over $743 million in
over 47,000 IRA accounts. In managing those assets, the Adviser
utilizes a proprietary computer-based information system that
maintains and regularly updates information for approximately
6,500 companies. The Adviser also monitors over 1,400 issues
via a proprietary credit analysis system. At December 31, 1996,
the Adviser employed 19 research analysts and 55 account
managers. The average investment-related experience of these
individuals was 22 years.
Stein Roe Counselor [SERVICE MARK] and Stein Roe Personal
Counselor [SERVICE MARK] are professional investment advisory
services offered by the Adviser to Fund shareholders. Each is
designed to help shareholders construct Fund investment
portfolios to suit their individual needs. Based on information
shareholders provide about their financial goals and objectives
in response to a questionnaire, the Adviser's investment
professionals create customized portfolio recommendations.
Shareholders participating in Stein Roe Counselor [SERVICE MARK]
are free to self direct their investments while considering the
Adviser's recommendations; shareholders participating in Stein
Roe Personal Counselor [SERVICE MARK] enjoy the added benefit
of having the Adviser implement portfolio recommendations
automatically for a fee of 1% or less, depending on the size of
their portfolios. In addition to reviewing shareholders' goals
and objectives periodically and updating portfolio
recommendations to reflect any changes, the Adviser provides
shareholders participating in these programs with a dedicated
Counselor [SERVICE MARK] representative. Other distinctive
services include specially designed account statements with
portfolio performance and transaction data, newsletters, and
regular investment, economic, and market updates. A $50,000
minimum investment is required to participate in either program.
Please refer to the description of the Adviser, the
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management of
the Funds and Fee Table in the Prospectus, which is incorporated
herein by reference. The advisory agreement relating to each
Fund (other than High Yield Fund) was replaced on July 1, 1996
with separate management and administrative agreements. The
table below shows gross advisory fees paid by the Funds and any
expense reimbursements by the Adviser to them, which are
described in the Prospectus.
YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
FUND PAYMENT 6/30/96 6/30/95 6/30/94
- ------------- ------------ ---------- ---------- ----------
Cash Reserves Advisory fee $2,432,015 $2,648,885 $3,071,640
Government
Reserves Advisory fee 424,847 513,808 537,413
Reimbursement 104,830 50,557 48,548
Government
Income Fund Advisory fee 219,271 253,463 338,576
Reimbursement 61,700 38,282 --
Intermediate
Bond Fund Advisory fee 1,533,498 1,491,075 1,579,884
Reimbursement 157,406 25,687 --
Income Fund Advisory fee 1,482,696 1,011,101 1,004,273
Reimbursement 149,999 48,232 14,043
The Adviser provides office space and executive and other
personnel to the Funds and bears any sales or promotional
expenses. Each Fund pays all expenses other than those paid by
the Adviser, including but not limited to printing and postage
charges and securities registration and custodian fees and
expenses incidental to its organization.
Each Fund's administrative agreement provides that the
Adviser shall reimburse the Fund to the extent that total annual
expenses of the Fund (including fees paid to the Adviser, but
excluding taxes, interest, brokers' commissions and other normal
charges incident to the purchase and sale of portfolio
securities, and expenses of litigation to the extent permitted
under applicable state law) exceed the applicable limits
prescribed by any state in which shares of such Fund are being
offered for sale to the public; however, such reimbursement for
any fiscal year will not exceed the amount of the fees paid by
such Fund under that agreement for such year. In addition, in
the interest of further limiting the Funds' expenses, the
Adviser may voluntarily waive its management fee and/or absorb
certain expenses for a Fund, as described in the Prospectus
under Fee Table. Any such reimbursements will enhance the
yields of such Fund.
Each management agreement also provides that neither the
Adviser nor any of its directors, officers, stockholders (or
partners of stockholders), agents, or employees shall have any
liability to Income Trust or Base Trust or any shareholder of
the Fund or High Yield Portfolio for any error of judgment,
mistake of law or any loss arising out of any investment, or for
any other act or omission in the performance by the Adviser of
its duties under the agreement, except for liability resulting
from willful misfeasance, bad faith or gross negligence on the
Adviser's part in the performance of its duties or from reckless
disregard by the Adviser of the Adviser's obligations and duties
under that agreement.
Any expenses that are attributable solely to the
organization, operation, or business of a Fund shall be paid
solely out of that Fund's assets. Any expenses incurred by
Income Trust that are not solely attributable to a particular
Fund are apportioned in such manner as the Adviser determines is
fair and appropriate, unless otherwise specified by the Board of
Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with Income Trust, the
Adviser receives a fee for performing certain bookkeeping and
accounting services for each Fund. For these services, the
Adviser receives an annual fee of $25,000 per Fund plus .0025 of
1% of average net assets over $50 million. During the fiscal
years ended June 30, 1995 and 1996, the Adviser received
aggregate fees of $114,541 and $173,384, respectively, from
Income Trust for services performed under this agreement.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Securities
Corporation ("LSC"), under a Distribution Agreement as described
under Management of the Funds in the Prospectus, which is
incorporated herein by reference. The Distribution Agreement
continues in effect from year to year, provided such continuance
is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of Income Trust,
and (ii) by a majority of the trustees who are not parties to
the Agreement or interested persons of any such party. Income
Trust has agreed to pay all expenses in connection with
registration of its shares with the Securities and Exchange
Commission and auditing and filing fees in connection with
registration of its shares under the various state blue sky laws
and assumes the cost of preparation of prospectuses and other
expenses.
As agent, LSC offers shares of each Fund to investors in
states where the shares are qualified for sale, at net asset
value, without sales commissions or other sales load to the
investor. No sales commission or "12b-1" payment is paid by any
Fund. LSC offers the Funds' shares only on a best-efforts
basis.
TRANSFER AGENT
SSI performs certain transfer agency services for Income
Trust, as described under Management of the Funds in the
Prospectus. For performing these services, SSI receives from
each Fund a fee based on an annual rate of 0.150 of 1% of
average daily net assets of each Money Market Fund and 0.140 of
1% of average daily net assets of each Bond Fund (but not High
Yield Portfolio). The Board of Trustees believes the charges by
SSI to the Funds are comparable to those of other companies
performing similar services. (See Investment Advisory
Services.)
CUSTODIAN
State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian
for Income Trust and Base Trust. It is responsible for holding
all securities and cash of the Funds, receiving and paying for
securities purchased, delivering against payment securities
sold, receiving and collecting income from investments, making
all payments covering expenses of the Funds, and performing
other administrative duties, all as directed by authorized
persons. The custodian does not exercise any supervisory
function in such matters as purchase and sale of portfolio
securities, payment of dividends, or payment of expenses of the
Funds.
Portfolio securities purchased in the U.S. are maintained
in the custody of the Bank or of other domestic banks or
depositories. Portfolio securities purchased outside of the
U.S. are maintained in the custody of foreign banks and trust
companies that are members of the Bank's Global Custody Network,
and foreign depositories ("foreign sub-custodians"). Each of
the domestic and foreign custodial institutions holding
portfolio securities has been approved by the Board of Trustees
in accordance with regulations under the Investment Company Act
of 1940.
Each Board of Trustees reviews, at least annually, whether
it is in the best interest of each Fund, High Yield Portfolio,
and their shareholders to maintain assets in each custodial
institution. However, with respect to foreign sub-custodians,
there can be no assurance that a Fund, and the value of its
shares, will not be adversely affected by acts of foreign
governments, financial or operational difficulties of the
foreign sub-custodians, difficulties and costs of obtaining
jurisdiction over, or enforcing judgments against, the foreign
sub-custodians, or application of foreign law to a Fund's
foreign sub-custodial arrangements. Accordingly, an investor
should recognize that the non-investment risks involved in
holding assets abroad are greater than those associated with
investing in the United States.
The Funds may invest in obligations of the custodian and
may purchase or sell securities from or to the custodian.
INDEPENDENT AUDITORS
The independent auditors for Income Trust and High Yield
Portfolio are Ernst & Young LLP, 233 South Wacker Drive,
Chicago, Illinois 60606. The independent auditors audit and
report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' federal income tax returns,
and perform other professional accounting, auditing, tax and
advisory services when engaged to do so by the Trust.
PORTFOLIO TRANSACTIONS
For purposes of discussion under Portfolio Transactions,
the term "Fund" refers to Cash Reserves, Government Reserves,
Government Income Fund, Intermediate Bond Fund, Income Fund,
High Yield Fund, and High Yield Portfolio.
The Adviser places the orders for the purchase and sale of
portfolio securities and options and futures contracts for the
Bond Funds. Purchases and sales of portfolio securities are
ordinarily transacted with the issuer or with a primary market
maker acting as principal or agent for the securities on a net
basis, with no brokerage commission being paid by a Fund.
Transactions placed through dealers reflect the spread between
the bid and asked prices. Occasionally, a Fund may make
purchases of underwritten issues at prices that include
underwriting discounts or selling concessions.
The Adviser's overriding objective in effecting portfolio
transactions is to seek to obtain the best combination of price
and execution. The best net price, giving effect to transaction
charges, if any, and other costs, normally is an important
factor in this decision, but a number of other judgmental
factors may also enter into the decision. These include: the
Adviser's knowledge of current transaction costs; the nature of
the security being traded; the size of the transaction; the
desired timing of the trade; the activity existing and expected
in the market for the particular security; confidentiality; the
execution, clearance and settlement capabilities of the broker
or dealer selected and others that are considered; the Adviser's
knowledge of the financial stability of the broker or dealer
selected and such other brokers or dealers; and the Adviser's
knowledge of actual or apparent operational problems of any
broker or dealer. Recognizing the value of these factors, a
Fund may incur a transaction charge in excess of that which
another broker or dealer may have charged for effecting the same
transaction. Evaluations of the reasonableness of the costs of
portfolio transactions, based on the foregoing factors, are made
on an ongoing basis by the Adviser's staff and reports are made
annually to the Board of Trustees.
With respect to issues of securities involving brokerage
commissions, when more than one broker or dealer is believed to
be capable of providing the best combination of price and
execution with respect to a particular portfolio transaction for
a Fund, the Adviser often selects a broker or dealer that has
furnished it with research products or services such as research
reports, subscriptions to financial publications and research
compilations, compilations of securities prices, earnings,
dividends and similar data, and computer databases, quotation
equipment and services, research-oriented computer software and
services, and services of economic and other consultants.
Selection of brokers or dealers is not made pursuant to an
agreement or understanding with any of the brokers or dealers;
however, the Adviser uses an internal allocation procedure to
identify those brokers or dealers who provide it with research
products or services and the amount of research products or
services they provide, and endeavors to direct sufficient
commissions generated by its clients' accounts in the aggregate,
including the Funds, to such brokers or dealers to ensure the
continued receipt of research products or services the Adviser
feels are useful. In certain instances, the Adviser receives
from brokers and dealers products or services which are used
both as investment research and for administrative, marketing,
or other non-research purposes. In such instances, the Adviser
makes a good faith effort to determine the relative proportions
of such products or services which may be considered as
investment research. The portion of the costs of such products
or services attributable to research usage may be defrayed by
the Adviser (without prior agreement or understanding, as noted
above) through brokerage commissions generated by transactions
of clients (including the Funds), while the portion of the costs
attributable to non-research usage of such products or services
is paid by the Adviser in cash. No person acting on behalf of a
Fund is authorized, in recognition of the value of research
products or services, to pay a price in excess of that which
another broker or dealer might have charged for effecting the
same transaction. The Adviser may also receive research in
connection with selling concessions and designations in fixed
price offerings in which the Funds participate. Research
products or services furnished by brokers and dealers through
whom transactions are effected may be used in servicing any or
all of the clients of the Adviser and not all such research
products or services are used in connection with the management
of such Fund.
The Board has reviewed the legal developments pertaining to
and the practicability of attempting to recapture underwriting
discounts or selling concessions when portfolio securities are
purchased in underwritten offerings. The Board has been advised
by counsel that recapture by a mutual fund currently is not
permitted under the Rules of Fair Practice of the National
Association of Securities Dealers ("NASD"). Therefore, except
with respect to purchases by the Income Fund of municipal
securities which are not subject to NASD Rules, the Funds will
not attempt to recapture underwriting discounts or selling
concessions. If the Income Fund were to purchase municipal
securities, it would attempt to recapture selling concessions
included in prices paid by the Income Fund in underwritten
offerings; however, the Adviser would not be able to negotiate
discounts from the fixed offering price for those issuers for
which there is a strong demand, and will not allow the failure
to obtain a discount to prejudice its ability to purchase an
issue for the Income Fund.
The following table shows any commissions paid by the Bond
Funds on futures transactions during the past three fiscal
years. The Funds did not pay commissions on any other
transactions.
Intermediate Government
Bond Fund Income Fund Income Fund
----------- ----------- -----------
Total brokerage commissions
paid during year ended
6/30/96 -0- -0- -0-
Number of futures contracts -0- -0- -0-
Total brokerage commissions
paid during year ended
6/30/95 $25,000 -0- $7,625
Total brokerage commissions
paid during year ended
6/30/94 $32,900 -0- $5,002
The Trust has arranged for its custodian to act as a
soliciting dealer to accept any fees available to the custodian
as a soliciting dealer in connection with any tender offer for
portfolio securities. The custodian will credit any such fees
received against its custodial fees.
During the last fiscal year, certain Funds held securities
issued by one or more of the Funds' regular broker-dealers or
the parent of such broker-dealers that derive more than 15% of
gross revenue from securities-related activities. Such holdings
were as follows at June 30, 1996:
Amount of Securities
Fund Broker-Dealer Held (in thousands)
Cash Reserves Lehman Brothers Holdings Inc. $24,000
Morgan Stanley & Company, Inc. 20,000
Intermediate Kidder Peabody 3,699
Bond Fund Prudential Securities 6,770
Merrill Lynch, Pierce,
Fenner & Smith 9,416
Lehman Brothers,Inc. 12,720
Income Fund Goldman Sachs & Company 5,969
Lehman Brothers, Inc. 9,720
Government
Income Fund Merrill Lynch, Pierce,
Fenner & Smith 597
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund and High Yield Portfolio intend to comply with
the special provisions of the Internal Revenue Code that relieve
it of federal income tax to the extent of its net investment
income and capital gains currently distributed to shareholders.
Because capital gain distributions reduce net asset value,
if a shareholder purchases shares shortly before a record date,
he will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as
his tax basis.
Each Fund expects that none of its dividends will qualify
for the deduction for dividends received by corporate
shareholders.
ADDITIONAL INFORMATION ON THE DETERMINATION OF NET
ASSET VALUE OF THE MONEY MARKET FUNDS
Please refer to Net Asset Value in the Prospectus, which is
incorporated herein by reference. Each Money Market Fund values
its portfolio by the "amortized cost method" by which it
attempts to maintain its net asset value at $1.00 per share.
This involves valuing an instrument at its cost and thereafter
assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates
on the market value of the instrument. Although this method
provides certainty in valuation, it may result in periods during
which value as determined by amortized cost is higher or lower
than the price a Fund would receive if it sold the instrument.
Other assets are valued at a fair value determined in good faith
by the Board of Trustees.
In connection with the Money Market Funds' use of amortized
cost and the maintenance of each Fund's per share net asset
value of $1.00, the Trust has agreed, with respect to each Fund:
(i) to seek to maintain a dollar-weighted average portfolio
maturity appropriate to its objective of maintaining relative
stability of principal and not in excess of 90 days; (ii) not to
purchase a portfolio instrument with a remaining maturity of
greater than thirteen months; and (iii) to limit its purchase of
portfolio instruments to those instruments that are denominated
in U.S. dollars which the Board of Trustees determines present
minimal credit risks and that are of eligible quality as
determined by any major rating service as defined under SEC Rule
2a-7 or, in the case of any instrument that is not rated, of
comparable quality as determined by the Board.
Each Money Market Fund has also agreed to establish
procedures reasonably designed to stabilize the Fund's price per
share as computed for the purpose of sales and redemptions at
$1.00. Such procedures include review of the Funds' portfolio
holdings by the Board of Trustees, at such intervals as it deems
appropriate, to determine whether the Funds' net asset values
calculated by using available market quotations or market
equivalents deviate from $1.00 per share based on amortized
cost. Calculations are made to compare the value of its
investments valued at amortized cost with market value. Market
values are obtained by using actual quotations provided by
market makers, estimates of market value, values from yield data
obtained from reputable sources for the instruments, values
obtained from the Adviser's matrix, or values obtained from an
independent pricing service. Any such service might value a
Fund's investments based on methods which include consideration
of: yields or prices of securities of comparable quality,
coupon, maturity and type; indications as to values from
dealers; and general market conditions. The service may also
employ electronic data processing techniques, a matrix system or
both to determine valuations.
In connection with each Money Market Fund's use of the
amortized cost method of portfolio valuation to maintain its net
asset value at $1.00 per share, a Fund might incur or anticipate
an unusual expense, loss, depreciation, gain or appreciation
that would affect its net asset value per share or income for a
particular period. The extent of any deviation between a Fund's
net asset value based upon available market quotations or market
equivalents and $1.00 per share based on amortized cost will be
examined by the Board of Trustees as it deems appropriate. If
such deviation exceeds 1/2 of 1%, the Board of Trustees will
promptly consider what action, if any, should be initiated. In
the event the Board of Trustees determines that a deviation
exists that may result in material dilution or other unfair
results to investors or existing shareholders, it will take such
action as it considers appropriate to eliminate or reduce to the
extent reasonably practicable such dilution or unfair results.
Actions which the Board might take include: selling portfolio
instruments prior to maturity to realize capital gains or losses
or to shorten average portfolio maturity; increasing, reducing,
or suspending dividends or distributions from capital or capital
gains; or redeeming shares in kind. The Board might also
establish a net asset value per share by using market values, as
a result of which the net asset value might deviate from $1.00
per share.
INVESTMENT PERFORMANCE
Money Market Funds
A Money Market Fund may quote a "Current Yield" or
"Effective Yield" or both from time to time. The Current Yield
is an annualized yield based on the actual total return for a
seven-day period. The Effective Yield is an annualized yield
based on a daily compounding of the Current Yield. These yields
are each computed by first determining the "Net Change in
Account Value" for a hypothetical account having a share balance
of one share at the beginning of a seven-day period ("Beginning
Account Value"), excluding capital changes. The Net Change in
Account Value will always equal the total dividends declared
with respect to the account, assuming a constant net asset value
of $1.00.
The yields are then computed as follows:
Net Change in Account Value 365
--------------------------- ----
Current Yield = Beginning Account Value x 7
[1 + Net Change in Account Value]365/7
--------------------------------------
Effective Yield = Beginning Account Value - 1
For example, the yields of the Money Market Funds for the
seven-day period ended June 30, 1996 were:
Cash Reserves
$.00089954 365
----------- ---
Current Yield = $1.00 x 7 = 4.70%
[1+$.00089954]35/7
-------------------
Effective Yield = $1.00 - 1 = 4.80%
Government Reserves
$.000863014 365
----------- ----
Current Yield = $1.00 x 7 = 4.50%
[1+$.000863014]365/7
--------------------
Effective Yield = $1.00 - 1 = 4.60%
The average dollar-weighted portfolio maturities of Cash
Reserves and of Government Reserves for the seven days ended
June 30, 1996 were 48 and 56 days, respectively.
In addition to fluctuations reflecting changes in net
income of a Money Market Fund resulting from changes in income
earned on its portfolio securities and in its expenses, a Fund's
yield also would be affected if the Fund were to restrict or
supplement its dividends in order to maintain its net asset
value at $1.00. (See Net Asset Value in the Money Market Funds'
Prospectus and Additional Information on the Determination of
Net Asset Value of the Money Market Funds herein.) Portfolio
changes resulting from net purchases or net redemptions of Fund
shares may affect yield. Accordingly, a Fund's yield may vary
from day to day and the yield stated for a particular past
period is not a representation as to its future yield. A Fund's
yield is not assured, and its principal is not insured; however,
each Money Market Fund will attempt to maintain its net asset
value per share at $1.00.
Comparison of a Money Market Fund's yield with those of
alternative investments (such as savings accounts, various types
of bank deposits, and other money market funds) should be made
with consideration of differences between the Fund and the
alternative investments, differences in the periods and methods
used in the calculation of the yields being compared, and the
impact of income taxes on alternative investments.
Bond Funds
A Bond Fund may quote yield figures from time to time. The
"Yield" of a Bond Fund is computed by dividing the net
investment income per share earned during a 30-day period (using
the average number of shares entitled to receive dividends) by
the net asset value per share on the last day of the period.
The Yield formula provides for semiannual compounding which
assumes that net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period.
For a given period, an "Average Annual Total Return" may be
computed by finding the average annual compounded rate that
would equate a hypothetical initial amount invested of $1,000 to
the ending redeemable value.
6
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1) -1].
Where: a = dividends and interest earned during the period
. (For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which net
asset value is calculated.)
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
d = the ending net asset value of the Fund for the period.
For example, the Yields of the Bond Funds for the 30-day
period ended June 30, 1996 were:
Government Income Fund Yield = 6.65%
Intermediate Bond Fund Yield = 6.14%
Income Fund Yield = 7.36%
_____________________
Each Fund may quote total return figures from time to time.
A "Total Return" on a per share basis is the amount of dividends
received per share plus or minus the change in the net asset
value per share for a period. A "Total Return Percentage" may
be calculated by dividing the value of a share at the end of a
period (including reinvestment of distributions) by the value of
the share at the beginning of the period and subtracting one.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).
For example, for a $1,000 investment in a Fund, the "Total
Return," the "Total Return Percentage," and the "Average Annual
Total Return" at June 30, 1996 were:
TOTAL RETURN AVERAGE ANNUAL
TOTAL RETURN PERCENTAGE TOTAL RETURN
Cash Reserves
1 year $1,051 5.07% 5.07%
5 years 1,218 21.83 4.03
10 years 1,721 72.12 5.58
Government
Reserves
1 year 1,050 5.01 5.01
5 years 1,214 21.35 3.95
10 years 1,687 68.67 5.37
Government
Income Fund
1 year 1,046 4.63 4.63
5 years 1,414 41.44 7.18
10 years 2,028 102.80 7.33
Intermediate
Bond Fund
1 year 1,058 5.76 5.76
5 years 1,461 46.14 7.88
10 years 2,089 108.92 7.65
Income Fund
1 year 1,057 5.70 5.70
5 years 1,565 56.50 9.37
10 years 2,293 129.34 8.65
Investment performance figures assume reinvestment of all
dividends and distributions and do not take into account any
federal, state, or local income taxes which shareholders must
pay on a current basis. They are not necessarily indicative of
future results. The performance of a Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing a Fund's performance and in providing
some basis for comparison with other investment alternatives, it
should not be used for comparison with other investments using
different reinvestment assumptions or time periods.
In advertising and sales literature, a Fund may compare its
yield and performance with that of other mutual funds, indexes
or averages of other mutual funds, indexes of related financial
assets or data, and other competing investment and deposit
products available from or through other financial institutions.
The composition of these indexes or averages differs from that
of the Funds. Comparison of a Fund to an alternative investment
should be made with consideration of differences in features and
expected performance.
All of the indexes and averages noted below will be
obtained from the indicated sources or reporting services, which
the Funds believe to be generally accurate. A Fund may also
note its mention in newspapers, magazines, or other media from
time to time. However, the Funds assume no responsibility for
the accuracy of such data. Newspapers and magazines that might
mention the Funds include, but are not limited to, the
following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
Working Women
Worth
Your Money
All of the Funds may compare their performance to the
Consumer Price Index (All Urban), a widely-recognized measure of
inflation.
A Fund's performance may be compared to the following as
indicated below:
BENCHMARK FUND(S)
CS First Boston High Yield Index High Yield
Donoghue's Money Fund Averages [trademark]--Aggressive Cash Reserves
Donoghue's Money Fund Averages [trademark]--All Taxable Cash Reserves,
Government Reserves
Donoghue's Money Fund Averages [trademark]--Government Government Reserves
Donoghue's Money Fund Averages [trademark]--Prime Cash Reserves
Donoghue's Money Fund Averages [trademark]--Prime
and Eurodollar Cash Reserves
Donoghue's Money Fund Averages [trademark]--Prime,
Eurodollar, and Yankeedollar Cash Reserves
Donoghue's Money Fund Averages [trademark]--Taxable
(Includes the previous four categories) Cash Reserves
Donoghue's Money Fund Averages [trademark]--U.S.
Government & Agencies Government Reserves
Donoghue's Money Fund Averages [trademark]--U.S.
Treasury Government Reserves
Lehman Aggregate Index Intermediate Bond Fund
Lehman Government Bond Index Government Income Fund
Lehman Government/Corporate Index Intermediate Bond Fund
Lehman High Yield Bond Index High Yield Fund
Lehman High Yield Corporate Bond Index High Yield Fund
Lehman Intermediate Corporate Bond Index Income Fund
Lehman Intermediate Government/Corporate Index Intermediate Bond Fund
Lipper All Long-Term Fixed Income Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Lipper Corporate Bond Funds (A Rated) Average Intermediate Bond Fund
Lipper Corporate Bond Funds (BBB Rated) Average Income Fund
Lipper Intermediate-Term (5-10 Year) Investment
Grade Debt Funds Average Intermediate Bond Fund
Lipper Long-Term Taxable Bond Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Lipper Money Market Instrument Funds Average Cash Reserves
Lipper Short-Term Income Fund Average Cash Reserves,
Government Reserves
Lipper Short-Term U.S. Government Funds Average Government Reserves
Lipper U.S. Government Funds Average Government Income Fund
Merrill Lynch Corporate and Government Master Index Government Income
Fund, Intermediate
Bond Fund, Income Fund
Merrill Lynch High-Yield Master Index Income Fund, High
Yield Fund
Merrill Lynch Mortgage Master Index Government Income Fund
Morningstar All Long-Term Fixed Income Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Morningstar Corporate Bond (General) Average Income Fund, High
Yield Fund
Morningstar Corporate Bond (High Quality) Average Intermediate Bond Fund
Morningstar Government Bond (General) Average Government Income Fund
Morningstar Long-Term Taxable Bond Funds Average Government Income
Fund, Intermediate
Bond Fund, Income Fund
Salomon Brothers Broad Investment Grade Bond Index Government Income
Fund, Intermediate
Bond Fund, Income Fund
Salomon Brothers Extended High Yield Market Index High Yield Fund
Salomon Brothers High Yield Market Index High Yield
Salomon Brothers Mortgage Index Government Income Fund
The Lipper and Morningstar averages are unweighted averages
of total return performance of mutual funds as classified,
calculated, and published by these independent services that
monitor the performance of mutual funds. The Funds may also use
comparative performance as computed in a ranking by these
services or category averages and rankings provided by another
independent service. Should these services reclassify a Fund to
a different category or develop (and place a Fund into) a new
category, that Fund may compare its performance or rank against
other funds in the newly-assigned category (or the average of
such category) as published by the service.
In advertising and sales literature, a Fund may also cite
its rating, recognition, or other mention by Morningstar or any
other entity. Morningstar's rating system is based on risk-
adjusted total return performance and is expressed in a star-
rating format. The risk-adjusted number is computed by
subtracting a fund's risk score (which is a function of its
monthly returns less the 3-month T-bill return) from its load-
adjusted total return score. This numerical score is then
translated into rating categories, with the top 10% labeled five
star, the next 22.5% labeled four star, the next 35% labeled
three star, the next 22.5% labeled two star, and the bottom 10%
one star. A high rating reflects either above-average returns
or below-average risk, or both.
The Merrill Lynch Mortgage Master Index measures total
return performance of federal agency mortgage-backed pass-
through securities. The Merrill Lynch High-Yield Master Index
measures the total return performance of corporate debt issues
rated less than investment grade but not in default. The
Merrill Lynch Corporate and Government Master Index measures
total return performance of a broad range of U.S. Treasury,
federal agency, and corporate debt securities, but excluding
mortgage-backed securities.
The Salomon Brothers Broad Investment Grade Bond Index
measures the market-weighted total return of a wide range of
debt securities, including U.S. Treasury/agency securities,
investment-grade corporate bonds, and mortgage pass-through
securities. The Salomon Brothers Mortgage Index measures total
return of the mortgage pass-through securities market.
Each Money Market Fund may compare its after-tax yield
(computed by multiplying the yield by one minus the highest
marginal federal individual tax rate) to the average yield for
the tax-free categories of the aforementioned services.
Investors may desire to compare the performance and
features of the Money Market Funds to those of various bank
products. Each Fund may compare its yield to the average rates
of bank and thrift institution money market deposit accounts,
Super N.O.W. accounts, and certificates of deposit. The rates
published weekly by the BANK RATE MONITOR [copyright], a North
Palm Beach (Florida) financial reporting service, in its BANK
RATE MONITOR [copyright] National Index are averages of the
personal account rates offered on the Wednesday prior to the
date of publication by one hundred leading banks and thrift
institutions in the top ten Consolidated Standard Metropolitan
Statistical Areas. Account minimums range upward from $2,500 in
each institution and compounding methods vary. Super N.O.W.
accounts generally offer unlimited checking, while money market
deposit accounts generally restrict the number of checks that
may be written. If more than one rate is offered, the lowest
rate is used. Rates are subject to change at any time specified
by the institution. Bank account deposits may be insured.
Shareholder accounts in a Fund are not insured. Bank passbook
savings accounts compete with money market mutual fund products
with respect to certain liquidity features but may not offer all
of the features available from a money market mutual fund, such
as check writing. Bank passbook savings accounts normally offer
a fixed rate of interest while the yield of each Fund
fluctuates. Bank checking accounts normally do not pay interest
but compete with money market mutual funds with respect to
certain liquidity features (e.g., the ability to write checks
against the account). Bank certificates of deposit may offer
fixed or variable rates for a set term. (Normally, a variety of
terms are available.) Withdrawal of these deposits prior to
maturity will normally be subject to a penalty. In contrast,
shares of a Fund are redeemable at the next determined net asset
value (normally, $1.00 per share) after a request is received,
without charge.
Of course, past performance is not indicative of future
results.
____________________
To illustrate the historical returns on various types of
financial assets, the Funds may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based
investment firm. Ibbotson constructs (or obtains) very long-
term (since 1926) total return data (including, for example,
total return indexes, total return percentages, average annual
total returns and standard deviations of such returns) for the
following asset types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
____________________
A Fund may also use hypothetical returns to be used as an
example in a mix of asset allocation strategies. One such
example is reflected in the chart below, which shows the effect
of tax deferral on a hypothetical investment. This chart
assumes that an investor invested $2,000 a year on January 1,
for any specified period, in both a Tax-Deferred Investment and
a Taxable Investment, that both investments earn either 3%, 5%,
7%, or 9% compounded annually, and that the investor withdrew
the entire amount at the end of the period. (A tax rate of
39.6% is applied annually to the Taxable Investment and on the
withdrawal of earnings on the Tax-Deferred Investment.)
<TABLE>
<CAPTION>
TAX-DEFERRED INVESTMENT VS. TAXABLE INVESTMENT
Interest
Rate 3% 5% 7% 9% 3% 5% 7% 9%
- --------------------------------------------------------------------------------
Com-
pound-
ing
Years Tax-Deferred Investment Taxable Investment
- ---- ------------------------------------ ------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30 $82,955 $108,031 $145,856 $203,239 $80,217 $98,343 $121,466 $151,057
25 65,164 80,337 101,553 131,327 63,678 75,318 89,528 106,909
20 49,273 57,781 68,829 83,204 48,560 55,476 63,563 73,028
15 35,022 39,250 44,361 50,540 34,739 38,377 42,455 47,025
10 22,184 23,874 25,779 27,925 22,106 23,642 25,294 27,069
5 10,565 10,969 11,393 11,840 10,557 10,943 11,342 11,754
1 2,036 2,060 2,085 2,109 2,036 2,060 2,085 2,109
</TABLE>
Average Life Calculations. From time to time, a Fund may
quote an average life figure for its portfolio. Average life is
the weighted average period over which the Adviser expects the
principal to be paid, and differs from stated maturity in that
it estimates the effect of expected principal prepayments and
call provisions. With respect to GNMA securities and other
mortgage-backed securities, average life is likely to be
substantially less than the stated maturity of the mortgages in
the underlying pools. With respect to obligations with call
provisions, average life is typically the next call date on
which the obligation reasonably may be expected to be called.
Securities without prepayment or call provisions generally have
an average life equal to their stated maturity.
Dollar Cost Averaging. Dollar cost averaging is an
investment strategy that requires investing a fixed amount of
money in Fund shares at set intervals. This allows you to
purchase more shares when prices are low and fewer shares when
prices are high. Over time, this tends to lower your average
cost per share.
Like any investment strategy, dollar cost averaging can't
guarantee a profit or protect against losses in a steadily
declining market. Dollar cost averaging involves uninterrupted
investing regardless of share price and therefore may not be
appropriate for every investor.
From time to time, a Fund may offer in its advertising and
sales literature to send an investment strategy guide, a tax
guide, or other supplemental information to investors and
shareholders. It may also mention the Stein Roe Counselor
[SERVICE MARK] and Stein Roe Personal Counselor [SERVICE MARK]
Programs and asset allocation and other investment strategies.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's
opinion as to the credit quality of the security being rated.
However, the ratings are general and are not absolute standards
of quality or guarantees as to the creditworthiness of an
issuer. Consequently, the Adviser believes that the quality of
debt securities should be continuously reviewed and that
individual analysts give different weightings to the various
factors involved in credit analysis. A rating is not a
recommendation to purchase, sell or hold a security because it
does not take into account market value or suitability for a
particular investor. When a security has received a rating from
more than one service, each rating should be evaluated
independently. Ratings are based on current information
furnished by the issuer or obtained by the rating services from
other sources that they consider reliable. Ratings may be
changed, suspended or withdrawn as a result of changes in or
unavailability of such information, or for other reasons.
The following is a description of the characteristics of
ratings used by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P").
CORPORATE BOND RATINGS
RATINGS BY MOODY'S
Aaa. Bonds rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements
are likely to change, such changes as can be visualized are more
unlikely to impair the fundamentally strong position of such
bonds.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
bonds.
A. Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as
well.
Ba. Bonds which are rated Ba are judged to have
speculative elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of the
contract over any long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca. Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often in
default or have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
RATINGS BY S&P
AAA. Debt rated AAA has the highest rating. Capacity to
pay interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the highest rated
issues only in small degree.
A. Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more likely to
lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher rated
categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance
with the terms of the obligation. BB indicates the lowest
degree of speculation and C the highest degree of speculation.
While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears. The D rating is
also used upon the filing of a bankruptcy petition if debt
service payments are jeopardized.
NOTES:
The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the
major rating categories. Foreign debt is rated on the same
basis as domestic debt measuring the creditworthiness of the
issuer; ratings of foreign debt do not take into account
currency exchange and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high
volatility or high variability in expected returns due to non-
credit risks. Examples of such obligations are: securities
whose principal or interest return is indexed to equities,
commodities, or currencies; certain swaps and options; and
interest only and principal only mortgage securities. The
absence of an "r" symbol should not be taken as an indication
that an obligation will exhibit no volatility or variability in
total return.
COMMERCIAL PAPER RATINGS
RATINGS BY MOODY'S
Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial
paper obligations are supported by the credit of another entity
or entities, Moody's, in assigning ratings to such issuers,
evaluates the financial strength of the indicated affiliated
corporations, commercial banks, insurance companies, foreign
governments or other entities, but only as one factor in the
total rating assessment.
RATINGS BY S&P
A brief description of the applicable rating symbols and
their meaning follows:
A. Issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3
to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues
determined to possess overwhelming safety characteristics will
be denoted with a plus (+) sign designation.
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) 1. Financial statements included in Part A of this Amendment
to the Registration Statement: Financial Highlights.
2. Financial statements included in Part B of this Amendment:
Financial statements (investments as of 6/30/96, balance
sheets as of 6/30/96, statements of operations for the
year ended 6/30/96, statements of changes in net assets
for each of the two years in the period ended 6/30/96,
and notes thereto) are incorporated by reference to
Registrant's 6/30/96 annual reports.
(b) Exhibits: [Note: As used herein, the term "Registration
Statement" refers to the Registration Statement of the
Registrant on Form N-1A under the Securities Act of 1933, No.
33-02633. The terms "Pre-Effective Amendment" and "PEA"
refer, respectively, to a pre-effective amendment and a post-
effective amendment to the Registration Statement.]
1. (a) Agreement and Declaration of Trust as amended through
10/25/94. (Exhibit 1 to PEA #27.)*
(b) Amendment to Agreement and Declaration of Trust dated
11/1/95. (Exhibit 1(b) to PEA #28.)*
2. By-Laws of Registrant as amended through 2/3/93. (Exhibit
2 to PEA #29.)*
3. None.
4. None. Registrant no longer issues share certificates.
5. (a) Management agreement between Registrant and Stein Roe &
Farnham Incorporated (the "Adviser") as amended through
11/1/96. (Exhibit 5(a) to PEA #30.)*
(b) Expense undertakings of the Adviser with respect to
Stein Roe Income Fund dated 10/29/93; and with respect
to Stein Roe Government Income Fund, Stein Roe
Government Reserves Fund, and Stein Roe High Yield Fund
dated 10/31/96. (Exhibit 5(b) to PEA #30.)*
6. Underwriting agreement between the Stein Roe Funds and
Liberty Securities Corporation as amended through 10/28/92.
(Exhibit 6 to PEA #29.)*
7. None.
8. Custodian contract between Registrant and State Street
Bank and Trust Company dated 2/24/86 as amended through
5/8/95. (Exhibit 8 to PEA #27).*
9. (a) Transfer agency agreement dated 8/1/95 between
Registrant and SteinRoe Services Inc. as amended
through 11/1/96. (Exhibit 9(a) to PEA #30.)*
(b) Accounting and Bookkeeping Agreement between Registrant
and the Adviser as amended through November 1, 1996.
(Exhibit 9(b) to PEA #30.)*
(c) Administrative Agreement between Registrant and the
Adviser as amended through November 1, 1996. (Exhibit
9(c) to PEA #30.)*
(d) Sub-transfer agency agreement with Colonial Investors
Service Center, Inc. dated July 3, 1996. (Exhibit 9(d)
to PEA #30.)*
10. (a) Opinions and consents of Ropes & Gray. (Exhibit 10(a)
to PEA #29.)*
(b) Opinions and consents of Bell, Boyd & Lloyd with
respect to the series SteinRoe High-Yield Bonds (now
named Stein Roe Income Fund), SteinRoe Cash Reserves,
SteinRoe Government Reserves, SteinRoe Governments Plus
(now named Stein Roe Government Income Fund), and
SteinRoe Managed Bonds (now named Stein Roe
Intermediate Bond Fund). (Exhibit 10(b) to PEA #29.)*
(c) Opinion and consent of Bell, Boyd & Lloyd with respect
to the series Stein Roe High Yield Fund. (Exhibit
10(c) to PEA #30.)*
11. (a) Consent of Ernst & Young LLP, independent auditors.
(b) Consent of Morningstar, Inc. (Exhibit 11(b) to PEA
#29.)*
12. None.
13. Inapplicable.
14. (a) Stein Roe Funds Individual Retirement Account Plan.
(Exhibit 14(a) to PEA #28.)*
(b) Stein Roe & Farnham Prototype Paired Defined
Contribution Plan. (Exhibit 14(b) to PEA #14.)*
15. None.
16. Schedules for computation of yield and total return of
SteinRoe High-Yield Bonds (now named Stein Roe Income
Fund), SteinRoe Governments Plus (now named Stein Roe
Government Income Fund), SteinRoe Managed Bonds (now named
Stein Roe Intermediate Bond Fund), Stein Roe Cash Reserves,
Stein Roe Government Reserves. (Exhibit 16 to PEA #29.)*
17. (a) Financial Data Schedule--Income Fund.
(b) Financial Data Schedule--Government Income Fund.
(c) Financial Data Schedule--Intermediate Bond Fund.
(d) Financial Data Schedule--Cash Reserves Fund.
(e) Financial Data Schedule--Government Reserves Fund.
18. Inapplicable.
19. (Miscellaneous.)
(a) Fund Application. (Exhibit 19(a) to PEA #30.)*
(b) Automatic Redemption Services Application. (Exhibit
19(b) to PEA #29.)*
________
*Incorporated by reference.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
The Registrant does not consider that it is directly or indirectly
controlling, controlled by, or under common control with other
persons within the meaning of this Item. See "Investment Advisory
Services," "Management," and "Transfer Agent" in the Statement of
Additional Information, each of which is incorporated herein by
reference.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record Holders
Title of Series as of January 31, 1997
--------------- -----------------------
Stein Roe Cash Reserves Fund......................19,872
Stein Roe Government Reserves Fund................ 1,908
Stein Roe Income Fund............................. 3,859
Stein Roe Government Income Fund.................. 1,275
Stein Roe Intermediate Bond Fund.................. 5,054
Stein Roe High Yield Fund ........................ 195
ITEM 27. INDEMNIFICATION.
Article Tenth of the Agreement and Declaration of Trust of
Registrant (Exhibit 1), which Article is incorporated herein by
reference, provides that Registrant shall provide indemnification
of its trustees and officers (including each person who serves or
has served at Registrant's request as a director, officer, or
trustee of another organization in which Registrant has any
interest as a shareholder, creditor or otherwise) ("Covered
Persons") under specified circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act")
provides that neither the Agreement and Declaration of Trust nor
the By-Laws of Registrant, nor any other instrument pursuant to
which Registrant is organized or administered, shall contain any
provision which protects or purports to protect any trustee or
officer of Registrant against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. In
accordance with Section 17(h) of the 1940 Act, Article Tenth shall
not protect any person against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Unless otherwise permitted under the 1940 Act,
(i) Article Tenth does not protect any person against any
liability to Registrant or to its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office;
(ii) in the absence of a final decision on the merits by a court
or other body before whom a proceeding was brought that a Covered
Person was not liable by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office, no indemnification is permitted under
Article Tenth unless a determination that such person was not so
liable is made on behalf of Registrant by (a) the vote of a
majority of the trustees who are neither "interested persons" of
Registrant, as defined in Section 2(a)(19) of the 1940 Act, nor
parties to the proceeding ("disinterested, non-party trustees"),
or (b) an independent legal counsel as expressed in a written
opinion; and
(iii) Registrant will not advance attorneys' fees or other
expenses incurred by a Covered Person in connection with a civil
or criminal action, suit or proceeding unless Registrant receives
an undertaking by or on behalf of the Covered Person to repay the
advance (unless it is ultimately determined that he is entitled to
indemnification) and (a) the Covered Person provides security for
his undertaking, or (b) Registrant is insured against losses
arising by reason of any lawful advances, or (c) a majority of the
disinterested, non-party trustees of Registrant or an independent
legal counsel as expressed in a written opinion, determine, based
on a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the
Covered Person ultimately will be found entitled to
indemnification.
Any approval of indemnification pursuant to Article Tenth does not
prevent the recovery from any Covered Person of any amount paid to
such Covered Person in accordance with Article Tenth as
indemnification if such Covered Person is subsequently adjudicated
by a court of competent jurisdiction not to have acted in good
faith in the reasonable belief that such Covered Person's action
was in, or not opposed to, the best interests of Registrant or to
have been liable to Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of such Covered
Person's office.
Article Tenth also provides that its indemnification provisions
are not exclusive.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers, and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by Registrant of expenses incurred or paid by a trustee, officer,
or controlling person of Registrant in the successful defense of
any action, suit, or proceeding) is asserted by such trustee,
officer, or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final
adjudication of such issue.
Registrant, its trustees and officers, its investment adviser, the
other investment companies advised by the adviser, and persons
affiliated with them are insured against certain expenses in
connection with the defense of actions, suits, or proceedings, and
certain liabilities that might be imposed as a result of such
actions, suits, or proceedings. Registrant will not pay any
portion of the premiums for coverage under such insurance that
would (1) protect any trustee or officer against any liability to
Registrant or its shareholders to which he would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office or (2) protect its investment adviser or
principal underwriter, if any, against any liability to Registrant
or its shareholders to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, or gross
negligence, in the performance of its duties, or by reason of its
reckless disregard of its duties and obligations under its
contract or agreement with the Registrant; for this purpose the
Registrant will rely on an allocation of premiums determined by
the insurance company.
Pursuant to the indemnification agreement among the Registrant,
its transfer agent and its investment adviser,
the Registrant, its trustees, officers and employees, its transfer
agent and the transfer agent's directors, officers and employees
are indemnified by Registrant's investment adviser against any and
all losses, liabilities, damages, claims and expenses arising out
of any act or omission of the Registrant or its transfer agent
performed in conformity with a request of the investment adviser
that the transfer agent and the Registrant deviate from their
normal procedures in connection with the issue, redemption or
transfer of shares for a client of the investment adviser.
Registrant, its trustees, officers, employees and representatives
and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933 are
indemnified by the distributor of Registrant's shares (the
"distributor"), pursuant to the terms of the distribution
agreement, which governs the distribution of Registrant's shares,
against any and all losses, liabilities, damages, claims and
expenses arising out of the acquisition of any shares of the
Registrant by any person which (i) may be based upon any wrongful
act by the distributor or any of the distributor's directors,
officers, employees or representatives or (ii) may be based upon
any untrue or alleged untrue statement of a material fact
contained in a registration statement, prospectus, statement of
additional information, shareholder report or other information
covering shares of the Registrant filed or made public by the
Registrant or any amendment thereof or supplement thereto or the
omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
therein not misleading if such statement or omission was made in
reliance upon information furnished to the Registrant by the
distributor in writing. In no case does the distributor's
indemnity indemnify an indemnified party against any liability to
which such indemnified party would otherwise be subject by reason
of willful misfeasance, bad faith, or negligence in the
performance of its or his duties or by reason of its or his
reckless disregard of its or his obligations and duties under the
distribution agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser is a wholly-owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn is a wholly-owned subsidiary of Liberty
Financial Companies, Inc., which a majority-owned subsidiary of LFC
Holdings, Inc., which is a wholly owned subsidiary of Liberty
Mutual Equity Corporation, which is a wholly owned subsidiary of
Liberty Mutual Insurance Company. The Adviser acts as investment
adviser to individuals, trustees, pension and profit-sharing plans,
charitable organizations, and other investors. In addition to
Registrant, it also acts as investment adviser to other investment
companies having different investment policies.
For a two-year business history of officers and directors of the
Adviser, please refer to the Form ADV of Stein Roe & Farnham
Incorporated and to the section of the statement of additional
information (part B) entitled "Investment Advisory Services."
Certain directors and officers of the Adviser also serve and have
during the past two years served in various capacities as
officers, directors, or trustees of SSI and of the Registrant,
Stein Roe Investment Trust, Stein Roe Municipal Trust, SR&F Base
Trust, Stein Roe Advisor Trust, Stein Roe Institutional Trust,
Stein Roe Trust, SteinRoe Variable Investment Trust and LFC Utilities
Trust, investment companies managed by the Adviser. (The listed
entities are located at One South Wacker Drive, Chicago, Illinois
60606, except for SteinRoe Variable Investment Trust, which is located
at Federal Reserve Plaza, Boston, MA 02210 and LFC Utilities Trust,
which is located at One Financial Center, Boston, MA 02111.) A list
of such capacities is given below.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Gary A. Anetsberger Vice President
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President; Secretary
Kenneth J. Kozanda Vice President; Treasurer
Kenneth R. Leibler Director
C. Allen Merritt, Jr. Director; Vice President
Hans P. Ziegler Director, President, Vice Chairman
Chairman
SR&F BASE TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President; Secy.
Ann H. Benjamin Vice-President
Thomas W. Butch Executive Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INCOME TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Ann H. Benjamin Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Michael T. Kennedy Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INVESTMENT TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Richard B. Peterson Vice-President
Gloria J. Santella Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
Gary A. Anetsberger Senior Vice-President Controller
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Joanne T. Costopoulos Vice-President
Philip J. Crosley Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE ADVISOR TRUST
Gary A. Anetsberger Senior Vice-President
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Richard B. Peterson Vice-President
Gloria J. Santella Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INSTITUTIONAL TRUST and STEIN ROE TRUST
Gary A. Anetsberger Senior Vice-President
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Ann H. Benjamin Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Michael T. Kennedy Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Thomas P. Sorbo Vice-President
Hans P. Ziegler Executive Vice-President
STEINROE VARIABLE INVESTMENT TRUST
Gary A. Anetsberger Treasurer
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President
Ann H. Benjamin Vice President
E. Bruce Dunn Vice President
Erik P. Gustafson Vice President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
Richard B. Peterson Vice President
LFC UTILITIES TRUST
Gary A. Anetsberger Vice President
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
ITEM 29. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Liberty Securities
Corporation, is a wholly owned subsidiary of Liberty Investment
Services, Inc., a wholly owned subsidiary of Liberty Financial
Services, Inc. which, in turn, is a wholly owned subsidiary of
Liberty Financial Companies, Inc. Liberty Financial Companies,
Inc. is a public corporation whose majority shareholder is LFC
Holdings, Inc., a wholly owned subsidiary of Liberty Mutual Equity
Corporation. Liberty Mutual Equity Corporation is a wholly owned
subsidiary of Liberty Mutual Insurance Company.
Liberty Securities Corporation is principal underwriter for the
following investment companies:
Stein Roe Income Trust
Stein Roe Municipal Trust
Stein Roe Investment Trust
Stein Roe Institutional Trust
Stein Roe Advisor Trust
Stein Roe Trust
Set forth below is information concerning the directors and
officers of Liberty Securities Corporation:
Positions
Positions and Offices and Offices
Name with Underwriter with Registrant
- ------------------ -------------------- ---------------
Porter P. Morgan Chairman of the Board; Director None
Frank L. Tarantino President; Chief Operating
Officer; Director None
Robert L. Spadafora Executive Vice President -
Sales and Marketing None
John T. Treece, Jr. Senior Vice President - Operations None
John W. Reading Senior Vice President and
Assistant Secretary None
Valerie A. Arendell Senior Vice President - Sales None
Gerald H. Stanney, Vice President and Compliance
Jr. Officer (Boston) None
Jilaine Hummel Bauer Vice President and Compliance Exec. V-P &
Officer (Chicago) Secretary
Bruce F. Ripepi Vice President, General Counsel None
and Assistant Secretary
Timothy K. Armour Vice President President,
Trustee
Lindsay Cook Vice President Trustee
Ralph E. Nixon Vice President None
Joyce B. Riegel Vice President None
Heidi J. Walter Vice President V-P
Glenn E. Williams Assistant Vice President None
Philip J. Iudice Treasurer None
John A. Benning Secretary None
John A. Davenport Assistant Secretary None
Marjorie M. Pluskota Assistant Secretary None
C. Allen Merritt, Jr. Assistant Treasurer; Assistant
Secretary; Director None
The principal business address of Mr. Armour,Ms. Bauer, Ms.
Pluskota, Ms. Riegel and Ms. Walter is One South Wacker Drive,
Chicago, IL 60606; that of Mr. Williams is Two Righter Parkway,
Wilmington, DE 19803; and that of the other officers is 600
Atlantic Avenue, Boston, MA 02210-2214.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Jilaine Hummel Bauer
Executive Vice-President and Secretary
One South Wacker Drive
Chicago, Illinois 60606
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
Since the information called for by Item 5A for the Funds (other
than the Money Market Funds, to which this item does not relate)
is contained in the latest annual report to shareholders,
Registrant undertakes to furnish each person to whom a prospectus
is delivered with a copy of the latest annual report to
shareholders of the Bond Funds upon request and without charge.
Registrant hereby undertakes to file a post-effective amendment
relating to the series Stein Roe High Yield Fund using financial
statements, which need not be certified, within four to six months
from the effective date of this Registration Statement.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it
meets all of the requirements for effectiveness of this
registration statement pursuant to Rule 485(b) under the Securities
Act of 1933 and has duly caused this amendment to the Registration
Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Chicago and State of Illinois on
the 18th day of February, 1997.
STEIN ROE INCOME TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated:
Signature* Title Date
- ------------------------ --------------------- --------------
TIMOTHY K. ARMOUR President and Trustee February 18, 1997
Timothy K. Armour
Principal Executive Officer
GARY A. ANETSBERGER Senior Vice-President February 18, 1997
Gary A. Anetsberger
Principal Financial Officer
SHARON R. ROBERTSON Controller February 18, 1997
Sharon R. Robertson
Principal Accounting Officer
KENNETH L. BLOCK Trustee February 18, 1997
Kenneth L. Block
WILLIAM W. BOYD Trustee February 18, 1997
William W. Boyd
LINDSAY COOK Trustee February 18, 1997
Lindsay Cook
__________________ Trustee _________________
Douglas A. Hacker
JANET LANGFORD KELLY Trustee February 18, 1997
Janet Langford Kelly
FRANCIS W. MORLEY Trustee February 18, 1997
Francis W. Morley
CHARLES R. NELSON Trustee February 18, 1997
Charles R. Nelson
THOMAS C. THEOBALD Trustee February 18, 1997
Thomas C. Theobald
*This Registration Statement has also been signed by the above
persons in their capacities as trustees and officers of SR&F Base
Trust as it relates to Stein Roe High Yield Fund.
<PAGE>
STEIN ROE INCOME TRUST
INDEX TO EXHIBITS FILED WITH THIS AMENDMENT
Exhibit
Number Description
- ------- -------------
11(a) Consent of Ernst & Young LLP
17(a) Financial Data Schedule--Stein Roe Income Fund
17(b) Financial Data Schedule--Stein Roe Government Income Fund
17(c) Financial Data Schedule--Stein Roe Intermediate Bond Fund
17(d) Financial Data Schedule--Stein Roe Cash Reserves Fund
17(e) Financial Data Schedule--Stein Roe Government Reserves Fund
Exhibit 11(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption
"Independent Auditors" and to the incorporation by reference of
our reports dated July 26, 1996 with respect to Stein Roe
Government Reserves Fund and Stein Roe Cash Reserves Fund, August
2, 1996 with respect to Stein Roe Government Income Fund, and
August 8, 1996 with respect to Stein Roe Intermediate Bond Fund
and Stein Roe Income Fund in the Registration Statement (Form N-
1A) and related Statement of Additional Information of Stein Roe
Income Trust, filed with the Securities and Exchange Commission in
this Post-Effective Amendment No. 31 to the Registration Statement
under the Securities Act of 1933 (Registration No. 33-02633) and
in this Amendment No. 32 to the Registration Statement under the
Investment Company Act of l940 (Registration No. 811-4552).
ERNST & YOUNG LLP
Chicago, Illinois
February 13, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STEIN ROE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 309,949
<INVESTMENTS-AT-VALUE> 306,448
<RECEIVABLES> 15,818
<ASSETS-OTHER> 362
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 322,628
<PAYABLE-FOR-SECURITIES> 11,964
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,100
<TOTAL-LIABILITIES> 13,064
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 319,189
<SHARES-COMMON-STOCK> 32,129
<SHARES-COMMON-PRIOR> 17,807
<ACCUMULATED-NII-CURRENT> 78
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,202)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (3,501)
<NET-ASSETS> 309,564
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 19,271
<OTHER-INCOME> 0
<EXPENSES-NET> 1,953
<NET-INVESTMENT-INCOME> 17,318
<REALIZED-GAINS-CURRENT> 1,846
<APPREC-INCREASE-CURRENT> (10,391)
<NET-CHANGE-FROM-OPS> 8,773
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (17,246)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 216,512
<NUMBER-OF-SHARES-REDEEMED> (85,588)
<SHARES-REINVESTED> 12,786
<NET-CHANGE-IN-ASSETS> 135,237
<ACCUMULATED-NII-PRIOR> 6
<ACCUMULATED-GAINS-PRIOR> (8,047)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,483
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,103
<AVERAGE-NET-ASSETS> 238,704
<PER-SHARE-NAV-BEGIN> 9.79
<PER-SHARE-NII> .71
<PER-SHARE-GAIN-APPREC> (.16)
<PER-SHARE-DIVIDEND> (.71)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.63
<EXPENSE-RATIO> 0.82
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> STEIN ROE GOVERNMENT INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 37,717
<INVESTMENTS-AT-VALUE> 38,454
<RECEIVABLES> 488
<ASSETS-OTHER> 100
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 39,042
<PAYABLE-FOR-SECURITIES> 1,718
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 114
<TOTAL-LIABILITIES> 1,832
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 38,533
<SHARES-COMMON-STOCK> 3,836
<SHARES-COMMON-PRIOR> 3,786
<ACCUMULATED-NII-CURRENT> 14
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,074)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 737
<NET-ASSETS> 37,210
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,610
<OTHER-INCOME> 0
<EXPENSES-NET> 365
<NET-INVESTMENT-INCOME> 2,245
<REALIZED-GAINS-CURRENT> 186
<APPREC-INCREASE-CURRENT> (656)
<NET-CHANGE-FROM-OPS> 1,775
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,231)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11,176
<NUMBER-OF-SHARES-REDEEMED> (12,453)
<SHARES-REINVESTED> 1,663
<NET-CHANGE-IN-ASSETS> (70)
<ACCUMULATED-NII-PRIOR> 1,393
<ACCUMULATED-GAINS-PRIOR> (2,260)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 219
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 426
<AVERAGE-NET-ASSETS> 36,649
<PER-SHARE-NAV-BEGIN> 9.85
<PER-SHARE-NII> .61
<PER-SHARE-GAIN-APPREC> (.15)
<PER-SHARE-DIVIDEND> (.61)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.70
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> STEIN ROE INTERMEDIATE BOND FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 297,399
<INVESTMENTS-AT-VALUE> 294,505
<RECEIVABLES> 4,861
<ASSETS-OTHER> 255
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 299,621
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,509
<TOTAL-LIABILITIES> 1,509
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 313,998
<SHARES-COMMON-STOCK> 34,729
<SHARES-COMMON-PRIOR> 34,787
<ACCUMULATED-NII-CURRENT> 327
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (13,319)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (2,894)
<NET-ASSETS> 298,112
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 22,971
<OTHER-INCOME> 0
<EXPENSES-NET> 2,147
<NET-INVESTMENT-INCOME> 20,824
<REALIZED-GAINS-CURRENT> 3,857
<APPREC-INCREASE-CURRENT> (7,549)
<NET-CHANGE-FROM-OPS> 17,132
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (20,525)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 91,892
<NUMBER-OF-SHARES-REDEEMED> (108,873)
<SHARES-REINVESTED> 16,753
<NET-CHANGE-IN-ASSETS> (3,621)
<ACCUMULATED-NII-PRIOR> 28
<ACCUMULATED-GAINS-PRIOR> (17,176)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,533
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,304
<AVERAGE-NET-ASSETS> 306,770
<PER-SHARE-NAV-BEGIN> 8.67
<PER-SHARE-NII> .58
<PER-SHARE-GAIN-APPREC> (.09)
<PER-SHARE-DIVIDEND> (.58)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.58
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> STEIN ROE CASH RESERVES FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 471,553
<INVESTMENTS-AT-VALUE> 471,553
<RECEIVABLES> 786
<ASSETS-OTHER> 7,385
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 479,724
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,884
<TOTAL-LIABILITIES> 2,884
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 476,704
<SHARES-COMMON-STOCK> 476,757
<SHARES-COMMON-PRIOR> 498,080
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 136
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 476,840
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 28,020
<OTHER-INCOME> 0
<EXPENSES-NET> 3,783
<NET-INVESTMENT-INCOME> 24,237
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 24,237
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (24,237)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 711,619
<NUMBER-OF-SHARES-REDEEMED> (755,339)
<SHARES-REINVESTED> 22,397
<NET-CHANGE-IN-ASSETS> (21,323)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 136
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,432
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,783
<AVERAGE-NET-ASSETS> 486,402
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .78
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> STEIN ROE GOVERNMENT RESERVES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> JUN-30-1996
<INVESTMENTS-AT-COST> 66,259
<INVESTMENTS-AT-VALUE> 66,259
<RECEIVABLES> 345
<ASSETS-OTHER> 496
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 67,100
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 172
<TOTAL-LIABILITIES> 172
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 66,968
<SHARES-COMMON-STOCK> 66,967
<SHARES-COMMON-PRIOR> 93,360
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (40)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 66,928
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,804
<OTHER-INCOME> 0
<EXPENSES-NET> 594
<NET-INVESTMENT-INCOME> 4,210
<REALIZED-GAINS-CURRENT> 3
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 4,213
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (4,210)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 60,169
<NUMBER-OF-SHARES-REDEEMED> (90,299)
<SHARES-REINVESTED> 3,737
<NET-CHANGE-IN-ASSETS> (26,390)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (42)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 425
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 699
<AVERAGE-NET-ASSETS> 85,243
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .05
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (.05)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> .70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
