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. 35 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 36 [X]
STEIN ROE INCOME TRUST
(Exact Name of Registrant as Specified in Charter)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 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
(Name and Address of Agents for Service)
It is proposed that this filing will become effective (check
appropriate box):
[X] immediately upon filing pursuant to paragraph (b)
[ ] on (date)0 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 Intermediate Bond Fund, and Stein Roe
High Yield Fund. The Rule 24f-2 Notice for the fiscal year ended
June 30, 1997 was filed on August 27, 1997.
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 (CASH RESERVES PROSPECTUS
AND BOND FUNDS PROSPECTUS)
1 Front cover
2 Fee Table; Summary
3 (a) Financial Highlights
(b) Inapplicable
(c) [Cash Reserves] The Funds; [Bond Funds] Investment
Return
(d) [Cash Reserves] Inapplicable; [Bond Funds] Financial
Highlights
4 Organization and Description of Shares; The Funds;
Investment Policies; Investment Restrictions; Risks and
Investment Considerations; Summary--Investment Risks; [Bond
Funds] Portfolio Investments and Strategies
5 (a) Management--Trustees and Investment Adviser
(b) Management--Trustees and Investment Adviser, Fees and
Expenses
(c) [Cash Reserves] Inapplicable; [Bond Funds] Management
--Portfolio Managers
(d) Inapplicable
(e) Management--Transfer Agent
(f) Management--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] Master Fund/Feeder Fund: Structure and Risk
Factors; [Cash Reserves] Inapplicable
7 How to Purchase Shares
(a) Management--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
(g) 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] The Fund; [Intermediate Bond Fund and
Income Fund] Investment Return
(d) [Cash Reserves] Inapplicable; [Intermediate Bond Fund and
Income Fund] Financial Highlights
4 Organization and Description of Shares; The Fund;
Investment Policies; Investment Restrictions; Risks and
Investment Considerations; [Intermediate Bond Fund and
Income Fund] Portfolio Investments and Strategies
5 (a) Management--Trustees and Investment Adviser
(b) Management--Trustees and Investment Adviser,
Fees and Expenses
(c) [Cash Reserves] Inapplicable; [Intermediate Bond Fund and
Income Fund] Management--Portfolio Manager
(d) Inapplicable
(e) Management--Transfer Agent
(f) Management--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--Distributor
(b) How to Purchase Shares; Net Asset Value
(c) Inapplicable
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
(g) Inapplicable
8 (a) How to Redeem Shares
(b) How to Purchase Shares
(c) Inapplicable
(d) Inapplicable
9 Inapplicable
PART B. (CASH RESERVES STATEMENT OF ADDITIONAL INFORMATION
AND BOND FUNDS 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, Fee Table
(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; [Cash Reserves] Additional
Information on the Determination of Net Asset Value;
see prospectus: Net Asset Value
(c) Purchases and Redemptions
20 Additional Income Tax Considerations; [Bond Funds]
Portfolio Investments and Strategies--Taxation of Options
and Futures
21(a) Distributor
(b) Inapplicable
(c) Inapplicable
22 Investment Performance
23 Financial Statements
PART C
24 Financial Statements and Exhibits
25 Persons Controlled By or Under Common Control with
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriters
30 Location of Accounts and Records
31 Management Services
32 Undertakings
<PAGE>
The prospectuses relating to Stein Roe Cash Reserves Fund, Stein
Roe Intermediate Bond Fund, Stein Roe Income 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. 35.
<PAGE>
Statement of Additional Information Dated Nov. 6, 1997
as revised and supplemented through Nov. 26, 1997
STEIN ROE INCOME TRUST
Bond Funds
----------
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 Prospectus dated Nov. 6, 1997 and
any supplements thereto. The Prospectus may be obtained at no
charge by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History........................2
Investment Policies....................................3
Intermediate Bond Fund..............................3
Income Fund.........................................4
High Yield Fund.....................................5
Portfolio Investments and Strategies...................6
Investment Restrictions...............................24
Additional Investment Considerations..................26
Purchases and Redemptions.............................27
Management............................................28
Financial Statements..................................31
Principal Shareholders................................32
Investment Advisory Services..........................33
Distributor...........................................35
Transfer Agent........................................36
Custodian.............................................36
Independent Auditors..................................37
Portfolio Transactions................................37
Additional Income Tax Considerations..................39
Investment Performance................................39
GENERAL INFORMATION AND HISTORY
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, "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 series of Income Trust are referred
to collectively as "the Funds." On Nov. 1, 1995, the name of
Income Trust and each of its series was changed to separate
"SteinRoe" into two words.
Currently four 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 its 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 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 those
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 only Fund currently operating under the
Master Fund/Feeder Fund structure is High Yield Fund, which
commenced operations on Nov. 1, 1996, as a feeder fund. The
Board of Trustees of Income Trust voted on Nov. 5, 1997 to
convert Intermediate Bond Fund and Income Fund into feeder funds
as of Feb. 2, 1998 for Intermediate Bond Fund and Income Fund.
Their master funds will be new portfolios of Base Trust named
SR&F Intermediate Bond Portfolio and SR&F Income Portfolio,
which have the same investment objectives as their respective
feeder funds. For more information, please refer to the
Prospectus under the caption Master Fund/Feeder Fund: Structure
and Risk Factors.
INVESTMENT POLICIES
The following information supplements the discussion of the
investment objectives and policies described in the
Prospectuses. In pursuing its objective, each Fund will invest
as described below and may employ the investment techniques
described in its 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 are present or represented by proxy or (ii) more than 50%
of the outstanding shares.
- ---------
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
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 Income Fund will invest at least 60% of its assets
in medium- or higher-quality debt securities, it 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. 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.)
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 Income Fund may invest
in unrated securities that the Adviser believes are suitable for
investment.
Under normal market conditions, 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 Income Fund for a sufficient time to permit
orderly disposition thereof or to establish long-term holding
periods for federal income tax purposes.
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
objective of High Yield Portfolio is identical to that 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 and 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 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
Unless otherwise noted, for purposes of discussion under
Portfolio Investments and Strategies, the term "Fund" refers to
Intermediate Bond Fund, Income Fund, High Yield Fund, and High
Yield Portfolio.
Derivatives
Consistent with its objective, each Fund may invest in a
broad array of financial instruments and securities, including
conventional exchange-traded and non-exchange traded options,
futures contracts, futures options, securities collateralized by
underlying pools of mortgages or other receivables, and other
instruments the value of which is "derived" from the performance
of an underlying asset or a "benchmark" such as a security
index, an interest rate, or a currency ("Derivatives").
Derivatives are most often used to manage investment risk
or to create an investment position indirectly because it is
more efficient or less costly than direct investment that cannot
be readily established directly due to portfolio size, cash
availability, or other factors. They also may be used in an
effort to enhance portfolio returns.
The successful use of Derivatives depends on the Adviser's
ability to correctly predict changes in the levels and
directions of movements in security prices, interest rates and
other market factors affecting the Derivative itself or the
value of the underlying asset or benchmark. In addition,
correlations in the performance of an underlying asset to a
Derivative may not be well established. Finally, privately
negotiated and over-the-counter Derivatives may not be as well
regulated and may be less marketable than exchange-traded
Derivatives.
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. Intermediate Bond Fund does not
currently intend to invest, nor has it 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
Each Fund 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 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 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 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, prepayment risks and yield characteristics.
Mortgage-backed securities involve the risk of prepayment on the
underlying mortgages at a faster or slower rate than the
established schedule. Prepayments 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 prepaid 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 prepayment 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
prepayment protection features tending to make them less
susceptible to price volatility.
Non-mortgage asset-backed securities usually have less
prepayment 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.
REMICs
Each Fund may invest in real estate mortgage investment
conduits ("REMICs"). REMICs, which were authorized under the
Tax Reform Act of 1986, are private entities formed for the
purpose of holding a fixed pool of mortgages secured by an
interest in real property. REMICs are similar to CMOs in that
they issue multiple classes of securities. A REMIC is a CMO
that qualifies for special tax treatment under the Internal
Revenue Code and invests in certain mortgages principally
secured by interests in real property. Investors may purchase
beneficial interests in REMICs, which are known as "regular"
interests, or "residual" interests. Guaranteed REMIC pass-
through certificates ("REMIC Certificates") issued by FNMA or
FHLMC represent beneficial ownership interests in a REMIC trust
consisting principally of mortgage loans or FNMA-, FHLMC- or
GNMA-guaranteed mortgage pass-through certificates. For FHLMC
REMIC Certificates, FHLMC guarantees the timely payment of
interest and also guarantees the payment of principal as
payments are required to be made on the underlying mortgage
participation certificates. FNMA REMIC Certificates are issued
and guaranteed as to timely distribution and principal and
interest by FNMA.
Variable and Floating Rate Instruments
Each 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. Intermediate Bond Fund
does not intend to invest more than 10% of its net assets in
floating rate instruments.
Lending of Portfolio Securities
Subject to restriction (7) under Investment Restrictions,
each Fund may lend its portfolio securities to broker-dealers
and banks. Any such loan must be continuously secured by
collateral in cash or cash equivalents maintained on a current
basis in an amount at least equal to the market value of the
securities loaned by a Fund. The Fund would continue to receive
the equivalent of the interest or dividends paid by the issuer
on the securities loaned, and would also receive an additional
return that may be in the form of a fixed fee or a percentage of
the collateral. The Fund would have the right to call the loan
and obtain the securities loaned at any time on notice of not
more than five business days. In the event of bankruptcy or
other default of the borrower, the Fund could experience both
delays in liquidating the loan collateral or recovering the
loaned securities and losses including (a) possible decline in
the value of the collateral or in the value of the securities
loaned during the period while the Fund seeks to enforce its
rights thereto, (b) possible subnormal levels of income and lack
of access to income during this period, and (c) expenses of
enforcing its rights.
None of the Funds has loaned portfolio securities during
its last fiscal year, nor does it intend to loan more than 5% of
its net assets.
Repurchase Agreements
Each Fund may invest in repurchase agreements, provided
that it will not invest more than 10% 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 of the Funds may purchase securities on a when-issued
or delayed-delivery basis, as described in its Prospectus. A
Fund makes such commitments only with the intention of actually
acquiring the securities, but may sell the securities before
settlement date if the Adviser deems it advisable for investment
reasons. Securities purchased on a when-issued or delayed-
delivery basis are sometimes done on a "dollar roll" basis.
Dollar roll transactions consist of the sale by a Fund of
securities with a commitment to purchase similar but not
identical securities, generally at a lower price at a future
date. A dollar roll may be renewed after cash settlement and
initially may involve only a firm commitment agreement by a Fund
to buy a security. A dollar roll transaction involves the
following risks: if the broker-dealer to whom a Fund sells the
security becomes insolvent, the Fund's right to purchase or
repurchase the security may be restricted; the value of the
security may change adversely over the term of the dollar roll;
the security which a Fund is required to repurchase may be worth
less than a security which the Fund originally held; and the
return earned by a Fund with the proceeds of a dollar roll may
not exceed transaction costs.
Each of the Funds may enter into reverse repurchase
agreements with banks and securities dealers. A reverse
repurchase agreement is a repurchase agreement in which the Fund
is the seller of, rather than the investor in, securities and
agrees to repurchase them at an agreed-upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of securities because it avoids
certain market risks and transaction costs.
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 its 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 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
Each Fund may invest up to 25% of total assets (taken at
market value at the time of investment) in securities of foreign
issuers that are not publicly traded in the United States
("foreign securities"). For purposes of these limits, foreign
securities do not include securities represented by American
Depositary Receipts ("ADRs"), securities denominated in U.S.
dollars, or securities guaranteed by U.S. persons. Investment
in foreign securities may involve a greater degree of risk
(including risks relating to exchange fluctuations, tax
provisions, or expropriation of assets) than does investment in
securities of domestic issuers.
Such Funds may invest in both "sponsored" and "unsponsored"
ADRs. In a sponsored ADR, the issuer typically pays some or all
of the expenses of the depositary and agrees to provide its
regular shareholder communications to ADR holders. An
unsponsored ADR is created independently of the issuer of the
underlying security. The ADR holders generally pay the expenses
of the depositary and do not have an undertaking from the issuer
of the underlying security to furnish shareholder
communications. No Fund expects to invest as much as 5% of its
total assets in unsponsored ADRs.
With respect to portfolio securities that are issued by
foreign issuers or denominated in foreign currencies, the Funds'
investment performance is affected by the strength or weakness
of the U.S. dollar against these currencies. For example, if
the dollar falls in value relative to the Japanese yen, the
dollar value of a yen-denominated stock held in the portfolio
will rise even though the price of the stock remains unchanged.
Conversely, if the dollar rises in value relative to the yen,
the dollar value of the yen-denominated stock will fall. (See
discussion of transaction hedging and portfolio hedging under
Currency Exchange Transactions.)
Investors should understand and consider carefully the
risks involved in foreign investing. Investing in foreign
securities, positions 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 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 Funds, 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 Funds'
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, a 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 a Fund's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.
No Fund expects 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 a Fund,
see Financial Highlights in its Prospectus. General portfolio
turnover information is also contained in the Prospectuses under
Risks and Investment Considerations.
The portfolio turnover rates of 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
Prospectuses, and Additional Income Tax Considerations in this
Statement of Additional Information.)
Options on Securities and Indexes
Each Fund may purchase and may sell both put options and
call options on debt or other securities or indexes in
standardized contracts traded on national securities exchanges,
boards of trade, or similar entities, or quoted on Nasdaq, and
agreements, sometimes called cash puts, that may accompany the
purchase of a new issue of bonds from a dealer.
An option on a security (or index) is a contract that gives
the purchaser (holder) of the option, in return for a premium,
the right to buy from (call) or sell to (put) the seller
(writer) of the option the security underlying the option (or
the cash value of the index) at a specified exercise price at
any time during the term of the option. The writer of an option
on an individual security has the obligation upon exercise of
the option to deliver the underlying security upon payment of
the exercise price or to pay the exercise price upon delivery of
the underlying security. Upon exercise, the writer of an option
on an index is obligated to pay the difference between the cash
value of the index and the exercise price multiplied by the
specified multiplier for the index option. (An index is
designed to reflect specified facets of a particular financial
or securities market, a specific group of financial instruments
or securities, or certain economic indicators.)
A Fund will write call options and put options only if they
are "covered." In the case of a call option on a security, the
option is "covered" if the Fund owns the security underlying the
call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if
additional cash consideration is required, cash or cash
equivalents in such amount are held in a segregated account by
its custodian) upon conversion or exchange of other securities
held in its portfolio.
If an option written by a Fund expires, the Fund realizes a
capital gain equal to the premium received at the time the
option was written. If an option purchased by a Fund expires,
the Fund realizes a capital loss equal to the premium paid.
Prior to the earlier of exercise or expiration, an option
may be closed out by an offsetting purchase or sale of an option
of the same series (type, exchange, underlying security or
index, exercise price, and expiration). There can be no
assurance, however, that a closing purchase or sale transaction
can be effected when the Fund desires.
A Fund will realize a capital gain from a closing purchase
transaction if the cost of the closing option is less than the
premium received from writing the option, or, if it is more, the
Fund will realize a capital loss. If the premium received from
a closing sale transaction is more than the premium paid to
purchase the option, the Fund will realize a capital gain or, if
it is less, the Fund will realize a capital loss. The principal
factors affecting the market value of a put or a call option
include supply and demand, interest rates, the current market
price of the underlying security or index in relation to the
exercise price of the option, the volatility of the underlying
security or index, and the time remaining until the expiration
date.
A put or call option purchased by a Fund is an asset of the
Fund, valued initially at the premium paid for the option. The
premium received for an option written by a Fund is recorded as
a deferred credit. The value of an option purchased or written
is marked-to-market daily and is valued at the closing price on
the exchange on which it is traded or, if not traded on an
exchange or no closing price is available, at the mean between
the last bid and asked prices.
Risks Associated with Options on Securities and Indexes.
There are several risks associated with transactions in options
on securities and on indexes. For example, there are
significant differences between the securities markets and
options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to
achieve its objectives. A decision as to whether, when and how
to use options involves the exercise of skill and judgment, and
even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
There can be no assurance that a liquid market will exist
when a Fund seeks to close out an option position. If a Fund
were unable to close out an option that it had purchased on a
security, it would have to exercise the option in order to
realize any profit or the option would expire and become
worthless. If a Fund were unable to close out a covered call
option that it had written on a security, it would not be able
to sell the underlying security until the option expired. As
the writer of a covered call option, a Fund foregoes, during the
option's life, the opportunity to profit from increases in the
market value of the security covering the call option above the
sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased by a Fund,
the Fund would not be able to close out the option. If
restrictions on exercise were imposed, the Fund might be unable
to exercise an option it has purchased.
Futures Contracts and Options on Futures Contracts
Each Fund may use interest rate futures contracts and index
futures contracts. An interest rate or index futures contract
provides for the future sale by one party and purchase by
another party of a specified quantity of a financial instrument
or the cash value of an index /2/ 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.
- -----------
/2/ 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 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 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 Fund may also use those investment vehicles,
provided the Board of Trustees determines that their use is
consistent with the Fund's investment objective.
A Fund will not enter into a futures contract or purchase
an option thereon if, immediately thereafter, the initial margin
deposits for futures contracts held by that Fund plus premiums
paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," /3/ would exceed 5% of
the Fund's total assets.
- ---------
/3/ 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 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). 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.
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.
The Taxpayer Relief Act of 1997 (the "Act") imposed
constructive sale treatment for federal income tax purposes on
certain hedging strategies with respect to appreciated
securities. Under these rules, taxpayers will recognize gain,
but not loss, with respect to securities if they enter into
short sales of "offsetting notional principal contracts" (as
defined by the Act) or futures or "forward contracts" (as
defined by the Act) with respect to the same or substantially
identical property, or if they enter into such transactions and
then acquire the same or substantially identical property.
These changes generally apply to constructive sales after June
8, 1997. Furthermore, the Secretary of the Treasury is
authorized to promulgate regulations that will treat as
constructive sales certain transactions that have substantially
the same effect as short sales, offsetting notional principal
contracts, and futures or forward contracts to deliver the same
or substantially similar property.
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, [all 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 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;
(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 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, except that it may enter into
(i) futures and options on futures and (ii) forward contracts;
(6) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities, but it may make margin deposits in
connection with transactions in options, futures, and options on
futures;
(7) make loans, although it may (a) lend portfolio
securities and 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
nonleveraging, 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 (c) enter into futures and
options transactions; 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
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 Intermediate Bond Fund, Income Fund or High Yield 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; /4/
- ----------
/4/ The Funds have been informed that the staff of the Securities
and Exchange Commission takes the position that the issuers of
certain CMOs and certain other collateralized assets are
investment companies and that subsidiaries of foreign banks may
be investment companies for purposes of Section 12(d)(1) of the
Investment Company Act of 1940, which limits the ability of one
investment company to invest in another investment company.
Accordingly, the Funds intend to operate within the applicable
limitations under Section 12(d)(1)(A) of that Act.
- ----------
(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) 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) write an option on a security unless the option is
issued by the Options Clearing Corporation, an exchange, or
similar entity;
(H) invest in limited partnerships in real estate unless
they are readily marketable;
(I) 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 provided that transactions in options,
futures, and options on futures are not treated as short sales;
(J) 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;
(K) invest more than 10% of its net assets (taken at
market value at the time of a particular investment) in illiquid
securities /5/, including repurchase agreements maturing in more
than seven days.
- -----------
/5/ 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 or equity securities.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectuses
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 Prospectuses disclose
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 Jan., the third Monday in Feb.,
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.
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 INCOME TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
William D. Andrews 50 Executive Vice-President Executive vice president of Stein Roe & Farnham
(4) Incorporated (the "Adviser")
Gary A. Anetsberger 42 Senior Vice-President Chief financial officer of the Mutual Funds division of the
(4) Adviser; senior vice president of the Adviser since Apr.
1996; vice president of the Adviser prior thereto
Timothy K. Armour 49 President; Trustee President of the Mutual Funds division of the Adviser
(1)(2)(4) and director of the Adviser
Jilaine Hummel Bauer 42 Executive Vice-President; General counsel and secretary (since Nov. 1995) and
(4) Secretary senior vice president of the Adviser
Kenneth L. Block 77 Trustee Chairman Emeritus of A. T. Kearney, Inc. (international
(3)(4) management consultants)
William W. Boyd 71 Trustee Chairman and director of Sterling Plumbing Group, Inc.
(3)(4) (manufacturer of plumbing products)
Thomas W. Butch (4) 40 Executive Vice-President Senior vice president of the Adviser since Sept. 1994;
first vice president, corporate communications, of
Mellon Bank Corporation prior thereto
Lindsay Cook (1)(4) 45 Trustee Executive vice president of Liberty Financial
Companies, Inc. (the indirect parent of the Adviser)
since Mar. 1997; senior vice president prior thereto
Philip J. Crosley 51 Vice-President Senior vice president of the Adviser since Feb. 1996;
vice president, institutional sales - advisor sales,
Invesco Funds Group prior thereto
Douglas A. Hacker 42 Trustee Senior vice president and chief financial officer of
(3)(4) United Airlines, since July 1994; senior vice president
- finance, United Airlines, Feb. 1993 to July 1994;
vice president, American Airlines prior thereto
Loren A. Hansen (4) 49 Executive Vice-President Executive vice president of the Adviser since Dec., 1995;
vice president of The Northern Trust (bank) prior thereto
Janet Langford Kelly 39 Trustee Senior vice president, secretary and general counsel of
(3)(4) Sara Lee Corporation (branded, packaged, consumer-
products manufacturer), since 1995; partner, Sidley &
Austin (law firm) prior thereto
Michael T. Kennedy 35 Vice-President Senior vice president of the Adviser since Oct. 1994;
vice president of the Adviser prior thereto
Stephen F. Lockman 36 Vice-President Senior vice president, portfolio manager, and credit
analyst of the Adviser; portfolio manager for Illinois
State Board of Investment 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 Apr. 1996; manager,
mutual fund sales & services of the Adviser since Oct.
1994; supervisor of the Counselor Department of the
Adviser prior thereto
Francis W. Morley 77 Trustee Chairman of Employer Plan Administrators and
(2)(3)(4) Consultants Co. (designer, administrator, and
communicator of employee benefit plans)
Jane M. Naeseth 47 Vice-President Senior vice president of the Adviser
Charles R. Nelson 55 Trustee Van Voorhis Professor of Political Economy of the
(3)(4) University of Washington
Nicolette D. Parrish 48 Vice-President; Senior compliance administrator and assistant secretary
(4) Assistant Secretary of the Adviser since Nov. 1995; senior legal assistant
for the Adviser prior thereto
Sharon R. Robertson 36 Controller Accounting manager for the Adviser's Mutual Funds
(4) division
Janet B. Rysz (4) 42 Assistant Secretary Senior compliance administrator and assistant secretary
of the Adviser
Thomas C. Theobald 60 Trustee Managing director, William Blair Capital Partners (
(3)(4) private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994
Scott E. Volk (4) 26 Treasurer Financial reporting manager for the Adviser's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to Apr. 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept. 1996;
full-time student prior to Sept. 1993
Heidi J. Walter (4) 30 Vice-President Legal counsel for the Adviser since Mar. 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 Oct. 1996;
associate of Bell, Boyd & Lloyd (law firm) from June
1993 to Sept. 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 31 Assistant Treasurer Project manager for the Adviser's Mutual Funds division
(4) since Apr. 1997; compliance manager, Aug. 1995 to Apr.
1997; compliance accountant, Jan. 1995 to July 1995;
section manager, Jan. 1994 to Jan. 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 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'
current 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.
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
Dec. 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 fees are 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 during the fiscal year ended June 30,
1997, to 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-
Kenneth L. Block $15,567 $70,693
William W. Boyd 17,867 80,593
Douglas A. Hacker 16,867 76,593
Janet Langford Kelly 9,200 51,600
Francis W. Morley 16,867 76,943
Charles R. Nelson 17,867 80,593
Thomas C. Theobald 16,867 76,593
_______________
* At June 30, 1997, the Stein Roe Fund Complex consisted of six
series of Income Trust, four series of Stein Roe Municipal
Trust, ten series of Stein Roe Investment Trust, seven series of
Stein Roe Advisor Trust, one series of Stein Roe Institutional
Trust, one series of Stein Roe Trust, and nine series of Base
Trust.
FINANCIAL STATEMENTS
Please refer to the Funds' June 30, 1997 Financial
Statements (balance sheets and schedules of investments as of
June 30, 1997 and the statements of operations, changes in net
assets, and notes thereto) and the report of independent
auditors contained in the June 30, 1997 Annual Report of the
Funds. The Financial Statements and the report of independent
auditors (but no other material from the Annual Report) are
incorporated herein by reference. The Annual Report may be
obtained at no charge by telephoning 800-338-2550.
PRINCIPAL SHAREHOLDERS
As of Oct. 31, 1997, the only persons known by Income Trust
to own of record or "beneficially" 5% or more of outstanding
shares of any Fund within the definition of that term as
contained in Rule 13d-3 under the Securities Exchange Act of
1934 were as follows:
NAME AND ADDRESS FUND APPROXIMATE % OF
OUTSTANDING
SHARES HELD
- ---------------------- --------------------- -----------------
First Bank National
Association* Intermediate Bond Fund 15.7%
410 N. Michigan Avenue Income Fund 14.9%
Chicago, IL 60611 High Yield Fund 43.4%
Charles Schwab & Co., Intermediate Bond Fund 37.8%
Inc.* Income Fund 17.8%
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
The Northern Trust Co.** Income Fund 21.4%
F/B/O Liberty Mutual
Daily Valuation Transitions
P.O. Box 92956
Chicago, IL 60675
Liberty Financial High Yield Fund 19.8%
Companies, Inc.
600 Atlantic Avenue
Boston, MA 02210
Smith Barney, Inc.* Intermediate Bond Fund 5.8%
333 West 34th Street
7th Floor, Mutual
Funds Division
New York, NY 10013
National Financial Income Fund 12.8%
Service Corp.*
P.O. Box 3908,
Church Street Station
New York, NY 10008
_______________________
*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 Oct. 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
----------- ------- ----------- -------
Intermediate Bond Fund 7,293,546 16.9 118,040 **
Income Fund 9,013,525 21.6 83,648 **
High Yield Fund 383,060 14.1 2,592 **
______________
*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 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 Executive 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 June 30, 1997, the Adviser
managed over $28 billion in assets: over $9 billion in equities
and over $19 billion in fixed income securities (including $1.7
billion in municipal securities). The $28 billion in managed
assets included over $7.9 billion held by open-end mutual funds
managed by the Adviser (approximately 15% of the mutual fund
assets were held by clients of the Adviser). These mutual funds
were owned by over 259,000 shareholders. The $7.9 billion in
mutual fund assets included over $766 million in over 50,000 IRA
accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and
regularly updates information for approximately 7,000 companies.
The Adviser also monitors over 1,400 issues via a proprietary
credit analysis system. At June 30, 1997, the Adviser employed
16 research analysts and 55 account managers. The average
investment-related experience of these individuals was 24 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 descriptions of the Adviser, the
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management and
Fee Table in the Prospectuses, which are 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 fees paid and any expense reimbursements by the Adviser
during the past three fiscal years:
YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
FUND PAYMENT 6/30/97 6/30/96 6/30/95
- ------------- ------------ ---------- ---------- ----------
Intermediate
Bond Fund Advisory fee -- 1,533,498 1,491,075
Management fee 1,090,523 -- --
Administrative fee 465,614 -- --
Reimbursement 54,108 157,406 25,687
Income Fund Advisory fee -- 1,482,696 1,011,101
Management fee 1,630,122 -- --
Administrative fee 446,018 -- --
Reimbursement 40,778 149,999 48,232
High Yield
Fund Administrative fee 9,385 -- --
Reimbursement 81,211 -- --
High Yield
Portfolio Management fee 52,997 -- --
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 Prospectuses
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, 1996 and 1997, the Adviser received
aggregate fees of $114,541, $173,384 and $116,135, respectively,
from Income Trust for services performed under this agreement.
DISTRIBUTOR
Shares of the Funds are currently distributed by Liberty
Securities Corporation, 100 Manhattanville Road, Purchase, NY
10577. On Jan. 1, 1998, Liberty Financial Investments (formerly
named Colonial Investment Services, Inc.), One Financial Center,
Boston, MA 02111, will become the Funds' distributor under a new
Distribution Agreement. Liberty Securities Corporation and
Liberty Financial Investments, Inc. are subsidiaries of Liberty
Financial.
The Distribution Agreement continues in effect from year to
year, provided such continuance is approved annually (1) by a
majority of the trustees or by a majority of the outstanding
voting securities of Income Trust, and (2) 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, the distributor offers shares of the Funds 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. The distributor 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 in each Prospectus. For
performing these services, SSI receives a fee based on an annual
rate of 0.140 of 1% of average daily net assets from each 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.) Under a separate agreement, SSI also provides
certain investor accounting services to High Yield Portfolio.
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, receiving and paying for securities
purchased, delivering against payment securities sold, receiving
and collecting income from investments, making all payments
covering expenses, and performing other administrative duties,
all as directed by authorized persons. The Bank does not
exercise any supervisory function in such matters as purchase
and sale of portfolio securities, payment of dividends, or
payment of expenses.
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 interests 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 Bank and may
purchase or sell securities from or to the Bank.
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 annual financial statements, review certain
regulatory reports and the 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 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.
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 the Association of the National
Association of Securities Dealers ("NASD"). Therefore, except
with respect to purchases by 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
Income Fund were to purchase municipal securities, it would
attempt to recapture selling concessions included in prices paid
by 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 Income Fund.
The following table shows any commissions paid by the Funds
on futures transactions during the past three fiscal years. The
Funds did not pay commissions on any other transactions.
Intermediate High Yield
Bond Fund Income Fund Portfolio
----------- ----------- ----------
Total brokerage commissions
paid during year ended
6/30/97 -0- -0- -0-
Number of futures contracts -0- -0- -0-
Total brokerage commissions
paid during year ended
6/30/96 -0- -0- --
Total brokerage commissions
paid during year ended
6/30/95 $25,000 -0- --
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 their 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, 1997:
Amount of Securities
Fund Broker-Dealer Held (in thousands)
- -------------- --------------------------- -------------------
Intermediate Bond
Fund Paine Webber Group Inc. 5,664
Prudential Property 5,983
Income Fund Goldman Sachs Group L.P. 6,033
Lehman Brothers, Inc. 3,902
Merrill Lynch 3,140
Morgan Stanley Group 3,917
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.
INVESTMENT PERFORMANCE
A Fund may quote yield figures from time to time. The
"Yield" of a Fund is computed by dividing the net investment
income per share earned during a 30-day period (using the
average number of shares entitled to receive dividends) by the
net asset value per share on the last day of the period. The
Yield formula provides for semiannual compounding which assumes
that net investment income is earned and reinvested at a
constant rate and annualized at the end of a six-month period.
For a given period, an "Average Annual Total Return" may be
computed by finding the average annual compounded rate that
would equate a hypothetical initial amount invested of $1,000 to
the ending redeemable value.
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 Funds for the 30-day period
ended June 30, 1997, were:
Intermediate Bond Fund Yield = 6.83%
Income Fund Yield = 6.93%
High Yield Fund = 8.12%
_____________________
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, 1997 were:
TOTAL RETURN AVERAGE ANNUAL
TOTAL RETURN PERCENTAGE TOTAL RETURN
------------ ------------- --------------
Intermediate Bond Fund
1 year 1,093 9.31 9.31
5 years 1,401 40.11 6.98
10 years 2,209 120.87 8.25
Income Fund
1 year 1,103 10.34 10.34
5 years 1,498 49.76 8.41
10 years 2,350 134.95 8.92
High Yield Fund
Life of Fund* 1,169 16.94 16.94
_______
*Since commencement of operations on Nov. 1, 1996.
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.
A Fund may 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
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.
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 Fund
Lehman Aggregate Index Intermediate Bond 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 Intermediate Bond Fund,
Funds Average 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 Intermediate Bond Fund,
Average Income Fund
Merrill Lynch Corporate and Government Intermediate Bond Fund,
Master Index Income Fund
Merrill Lynch High-Yield Master Index Income Fund,
High Yield Fund
Morningstar All Long-Term Fixed Intermediate Bond Fund,
Income Funds Average Income Fund
Morningstar Corporate Bond (General) Income Fund,
Average High Yield Fund
Morningstar Corporate Bond (High
Quality) Average Intermediate Bond Fund
Morningstar Long-Term Taxable Bond Intermediate Bond Fund,
Funds Average Income Fund
Salomon Brothers Broad Investment Intermediate Bond Fund,
Grade Bond Index Income Fund
Salomon Brothers Extended High Yield
Market Index High Yield Fund
Salomon Brothers High Yield Market Index High Yield 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 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.
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 Jan. 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.
__________________________
<PAGE>
Statement of Additional Information Dated Nov. 6, 1997
as revised and supplemented through Nov. 26, 1997
STEIN ROE INCOME TRUST
Money Market Fund
-----------------
Stein Roe Cash Reserves 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 Prospectus dated Nov. 6, 1997 and
any supplements thereto. The Prospectus may be obtained at no
charge by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History..........................2
Investment Policies......................................3
Portfolio Investments and Strategies.....................5
Investment Restrictions..................................8
Additional Investment Considerations....................10
Purchases and Redemptions...............................11
Management..............................................12
Financial Statements....................................16
Principal Shareholders..................................16
Investment Advisory Services............................16
Distributor.............................................19
Transfer Agent..........................................19
Custodian...............................................19
Independent Auditors....................................20
Portfolio Transactions..................................20
Additional Income Tax Considerations....................22
Additional Information on the Determination of Net
Asset Value...........................................22
Investment Performance..................................24
Appendix--Ratings.......................................29
GENERAL INFORMATION AND HISTORY
Stein Roe Cash Reserves Fund is a series of the Stein Roe
Income Trust ("Income Trust"). Each series of Income Trust
invests in a separate portfolio of securities and other assets,
with its own objectives and policies.
As used herein, "Cash Reserves" refers to the series of
Income Trust designated Stein Roe Cash Reserves Fund. On Nov.
1, 1995, the name of Income Trust and each of its series was
changed to separate "SteinRoe" into two words.
Currently four 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 its 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
investment advisory, administrative, and accounting and
recordkeeping services to Cash Reserves.
Special Considerations Regarding Master Fund/Feeder Fund
Structure
Rather than invest in securities directly, Cash Reserves
may seek to achieve its objective by pooling its assets with
those 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 Board of Trustees of Income
Trust voted on Nov. 5, 1997 to convert Cash Reserves, into a
feeder fund on or about Feb. 16, 1998. Its master fund will be
a new portfolio of SR&F Base Trust named SR&F Cash Reserves
Portfolio, which has the same investment objectives as its
feeder fund.
INVESTMENT POLICIES
The following information supplements the discussion of the
investment objective and policies described in the Prospectus.
In pursuing its objective, Cash Reserves will invest as
described below and may employ the investment techniques
described in the Prospectus and under Portfolio Investments and
Strategies. The investment objective is a non-fundamental
policy and may be changed by the Board of Trustees without the
approval of a "majority of the outstanding voting securities." /1/
- -----------
/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 are present or represented by proxy or (ii) more than 50%
of the outstanding shares.
- -----------
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 Cash
Reserves 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.
PORTFOLIO INVESTMENTS AND STRATEGIES
Rated Securities
For a description of the ratings applied by Moody's
Investors Service and Standard & Poor's Corporation (two of the
approved NRSROs) to debt securities, please refer to the
Appendix. The rated debt securities described under Investment
Policies above include securities given a rating conditionally
by Moody's or provisionally by S&P. If the rating of a security
held by the Fund is withdrawn or reduced, it is not required to
sell the security, but the Adviser will consider such fact in
determining whether to 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, the Fund will attempt to use
comparable ratings as standards for its investments in debt
securities in accordance with its investment policies.
Variable and Floating Rate Instruments
In accordance with its investment objective and policies,
Cash Reserves 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. Cash Reserves will not 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.
When-Issued and Delayed-Delivery Securities; Standby Commitments
Cash Reserves may purchase instruments on a when-issued or
delayed-delivery basis. Although the payment terms are
established at the time it 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. It 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.
Cash Reserves may also invest on a standby commitment
basis, which is a delayed-delivery agreement in which it binds
itself to accept delivery of and to pay for an instrument within
a specified period at the option of the other party to the
agreement.
At the time Cash Reserves enters into a binding obligation
to purchase securities on a when-issued basis or enters into a
standby commitment, liquid assets (cash, U.S. Government or
other "high grade" debt obligations) having a value at least as
great as the purchase price of the securities to be purchased
will be segregated on the books of Cash Reserves and held by the
custodian throughout the period of the obligation.
Standby commitment agreements create an additional risk for
Cash Reserves because the other party to the standby agreement
generally will not be obligated to deliver the security, but it
will be obligated to accept it if delivered. Depending on
market conditions, Cash Reserves 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 Cash Reserves. 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 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 it actually
obtains the security.
Short Sales Against the Box
Cash Reserves 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.
Cash Reserves may make short sales of securities only if at all
times when a short position is open it 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, Cash Reserves does not
deliver from its portfolio the securities sold. Instead, it
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 Cash Reserves, to the purchaser of
such securities. Cash Reserves 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, Cash Reserves must
deposit and continuously maintain in a separate account with its
custodian an equivalent amount of the securities sold short or
securities convertible into or exchangeable for such securities
at no additional cost. Cash Reserves is said to have a short
position in the securities sold until it delivers to the broker-
dealer the securities sold. Cash Reserves 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 Cash Reserves 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 owned, either
directly or indirectly, and, in the case where it 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 Cash Reserves replaces the borrowed
security, it will incur a loss and if the price declines during
this period, it 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 it may have to pay in
connection with such short sale. Certain provisions of the
Internal Revenue Code may limit the degree to which Cash
Reserves is able to enter into short sales. There is no
limitation on the amount of 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. Cash
Reserves 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,
Cash Reserves 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, Cash Reserves has received permission to
lend money to, and borrow money from, other mutual funds advised
by the Adviser. Cash Reserves 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.
INVESTMENT RESTRICTIONS
Cash Reserves operates under the following investment
restrictions. It may not:
(1) invest in a security if, as a result of such
investment, more than 25% of its total assets (taken at market
value at the time of such investment) would be invested in the
securities of issuers in any particular industry, except that
this restriction does not apply to (i) U.S. Government
Securities, (ii) repurchase agreements, or (iii) securities of
issuers in the financial services industry, and except that all
or substantially all of the assets of the Fund may be invested
in another registered investment company having the same
investment objective and substantially similar investment
policies as the Fund;
(2) invest in a security if, with respect to 75% of 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 except that all or substantially all of the
assets of the Fund may be invested in another registered
investment company having the same investment objective and
substantially similar investment policies as the Fund; /3/
- ----------
/3/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Cash
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 it 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, 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;
(6) purchase securities on margin, except for use of
short-term credit necessary for clearance of purchases and sales
of portfolio securities;
(7) make loans, although it may (a) participate in an
interfund lending program with other Stein Roe Funds 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
nonleveraging, 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; 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, 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," as previously defined herein.
Cash Reserves is also subject to the following restrictions
and policies that may be changed by the Board of Trustees. None
of the following restrictions shall prevent Cash Reserves 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. Cash
Reserves 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; /4/
- ---------
/4/ Stein Roe 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, Cash Reserves Portfolio intends 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) 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;
(G) invest more than 10% of its net assets (taken at
market value at the time of a particular investment) in illiquid
securities /5/, including repurchase agreements maturing in more
than seven days.
- ----------
/5/ 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 or equity securities.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectuses
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 Prospectuses disclose
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.
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 Jan., the third Monday in Feb., 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 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 Fund shares 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 not reasonably practicable.
Although Cash Reserves does not currently charge a fee to
its shareholders for the use of the special Check-Writing
Redemption Privilege, as described under How to Redeem Shares in
the Prospectus, Cash Reserves pays for the cost of printing and
mailing checks to its shareholders and pays charges of the bank
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 bank reserve the right to
terminate this service.
Income Trust intends to pay all redemptions in cash and is
obligated to redeem shares solely in cash up to the lesser of
$250,000 or one percent of the net assets 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 INCOME TRUST DURING PAST FIVE YEARS
<S> <C> <C> <C>
William D. Andrews 50 Executive Vice-President Executive vice president of Stein Roe & Farnham
(4) Incorporated (the "Adviser")
Gary A. Anetsberger 42 Senior Vice-President Chief financial officer of the Mutual Funds division of the
(4) Adviser; senior vice president of the Adviser since Apr.
1996; vice president of the Adviser prior thereto
Timothy K. Armour 49 President; Trustee President of the Mutual Funds division of the Adviser
(1)(2)(4) and director of the Adviser
Jilaine Hummel Bauer 42 Executive Vice-President; General counsel and secretary (since Nov. 1995) and
(4) Secretary senior vice president of the Adviser
Kenneth L. Block 77 Trustee Chairman Emeritus of A. T. Kearney, Inc. (international
(3)(4) management consultants)
William W. Boyd 71 Trustee Chairman and director of Sterling Plumbing Group, Inc.
(3)(4) (manufacturer of plumbing products)
Thomas W. Butch (4) 40 Executive Vice-President Senior vice president of the Adviser since Sept. 1994;
first vice president, corporate communications, of
Mellon Bank Corporation prior thereto
Lindsay Cook (1)(4) 45 Trustee Executive vice president of Liberty Financial
Companies, Inc. (the indirect parent of the Adviser)
since Mar. 1997; senior vice president prior thereto
Philip J. Crosley 51 Vice-President Senior vice president of the Adviser since Feb. 1996;
vice president, institutional sales - advisor sales,
Invesco Funds Group prior thereto
Douglas A. Hacker 42 Trustee Senior vice president and chief financial officer of
(3)(4) United Airlines, since July 1994; senior vice president
- finance, United Airlines, Feb. 1993 to July 1994;
vice president, American Airlines prior thereto
Loren A. Hansen (4) 49 Executive Vice-President Executive vice president of the Adviser since Dec., 1995;
vice president of The Northern Trust (bank) prior thereto
Janet Langford Kelly 39 Trustee Senior vice president, secretary and general counsel of
(3)(4) Sara Lee Corporation (branded, packaged, consumer-
products manufacturer), since 1995; partner, Sidley &
Austin (law firm) prior thereto
Michael T. Kennedy 35 Vice-President Senior vice president of the Adviser since Oct. 1994;
vice president of the Adviser prior thereto
Stephen F. Lockman 36 Vice-President Senior vice president, portfolio manager, and credit
analyst of the Adviser; portfolio manager for Illinois
State Board of Investment 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 Apr. 1996; manager,
mutual fund sales & services of the Adviser since Oct.
1994; supervisor of the Counselor Department of the
Adviser prior thereto
Francis W. Morley 77 Trustee Chairman of Employer Plan Administrators and
(2)(3)(4) Consultants Co. (designer, administrator, and
communicator of employee benefit plans)
Jane M. Naeseth 47 Vice-President Senior vice president of the Adviser
Charles R. Nelson 55 Trustee Van Voorhis Professor of Political Economy of the
(3)(4) University of Washington
Nicolette D. Parrish 48 Vice-President; Senior compliance administrator and assistant secretary
(4) Assistant Secretary of the Adviser since Nov. 1995; senior legal assistant
for the Adviser prior thereto
Sharon R. Robertson 36 Controller Accounting manager for the Adviser's Mutual Funds
(4) division
Janet B. Rysz (4) 42 Assistant Secretary Senior compliance administrator and assistant secretary
of the Adviser
Thomas C. Theobald 60 Trustee Managing director, William Blair Capital Partners (
(3)(4) private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation, 1987-1994
Scott E. Volk (4) 26 Treasurer Financial reporting manager for the Adviser's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to Apr. 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept. 1996;
full-time student prior to Sept. 1993
Heidi J. Walter (4) 30 Vice-President Legal counsel for the Adviser since Mar. 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 Oct. 1996;
associate of Bell, Boyd & Lloyd (law firm) from June
1993 to Sept. 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 31 Assistant Treasurer Project manager for the Adviser's Mutual Funds division
(4) since Apr. 1997; compliance manager, Aug. 1995 to Apr.
1997; compliance accountant, Jan. 1995 to July 1995;
section manager, Jan. 1994 to Jan. 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 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 Cash Reserves'
current 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. 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, 1997, she was responsible for managing
$576 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 series of Income
Trust) plus an attendance fee from each series for each meeting
of the Board or standing committee thereof attended at which
business for that series is conducted. The attendance fees
(other than for a Nominating Committee or Compensation Committee
meeting) are based on each series' net assets as of the
preceding Dec. 31. For a series 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 series participating in the master
fund/feeder fund structure, the trustees' attendance fees are
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 during the fiscal year ended
June 30, 1997, to 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-
Kenneth L. Block $15,567 $70,693
William W. Boyd 17,867 80,593
Douglas A. Hacker 16,867 76,593
Janet Langford Kelly 9,200 51,600
Francis W. Morley 16,867 76,943
Charles R. Nelson 17,867 80,593
Thomas C. Theobald 16,867 76,593
_______________
* At June 30, 1997, the Stein Roe Fund Complex consisted of six
series of Income Trust, four series of Stein Roe Municipal
Trust, ten series of Stein Roe Investment Trust, seven series of
Stein Roe Advisor Trust, one series of Stein Roe Institutional
Trust, one series of Stein Roe Trust, and nine series of Base
Trust.
FINANCIAL STATEMENTS
Please refer to Cash Reserves' June 30, 1997 Financial
Statements (balance sheet and schedule of investments as of June
30, 1997 and the statement of operations, changes in net assets,
and notes thereto) and the report of independent auditors
contained in the June 30, 1997 Annual Report of Cash Reserves.
The Financial Statements and the report of independent auditors
(but no other material from the Annual Report) are incorporated
herein by reference. The Annual Report may be obtained at no
charge by telephoning 800-338-2550.
PRINCIPAL SHAREHOLDERS
As of Oct. 31, 1997, the only person known by Income Trust
to own of record or "beneficially" 5% or more of outstanding
shares of Cash Reserves within the definition of that term as
contained in Rule 13d-3 under the Securities Exchange Act of
1934 was as follows:
NAME AND ADDRESS APPROXIMATE % OF
OUTSTANDING
SHARES HELD
- ---------------------- -----------------
First Bank National 11.7%
Association*
410 N. Michigan Avenue
Chicago, IL 60611
_______________________
*Shares held of record, but not beneficially.
The following table shows shares of Cash Reserves held by
the categories of persons indicated as of Oct. 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 63,122,464 12.5% 1,658,209 **
______________
*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 and portfolio management services to Cash Reserves.
The Adviser is a wholly owned subsidiary of SteinRoe Services
Inc. ("SSI"), the Fund's 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 Executive 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 June 30, 1997, the Adviser
managed over $28 billion in assets: over $9 billion in equities
and over $19 billion in fixed income securities (including $1.7
billion in municipal securities). The $28 billion in managed
assets included over $7.9 billion held by open-end mutual funds
managed by the Adviser (approximately 15% of the mutual fund
assets were held by clients of the Adviser). These mutual funds
were owned by over 259,000 shareholders. The $7.9 billion in
mutual fund assets included over $766 million in over 50,000 IRA
accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and
regularly updates information for approximately 7,000 companies.
The Adviser also monitors over 1,400 issues via a proprietary
credit analysis system. At June 30, 1997, the Adviser employed
16 research analysts and 55 account managers. The average
investment-related experience of these individuals was 24 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 descriptions of the Adviser, the
management and administrative agreements, fees, expense
limitations, and transfer agency services under Management and
Fee Table in the Prospectuses, which are incorporated herein by
reference. The table below shows gross fees paid and any
expense reimbursements by the Adviser during the past three
fiscal years:
YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
PAYMENT 6/30/97 6/30/96 6/30/95
------------ ---------- ---------- ----------
Advisory fee -- $2,432,015 $2,648,885
Management fee $1,207,715 -- --
Administrative fee 1,207,715 -- --
The Adviser provides office space and executive and other
personnel to Cash Reserves and bears any sales or promotional
expenses. Cash Reserves 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.
The administrative agreement provides that the Adviser
shall reimburse the Fund to the extent that its total annual
expenses (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 Fund shares 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 Cash Reserves under that
agreement for such year. In addition, in the interest of
further limiting the Fund's expenses, the Adviser may
voluntarily waive its management fee and/or absorb certain
expenses, as described in the Prospectuses under Fee Table. Any
such reimbursements will enhance the yields of the 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
Cash Reserves 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 Cash Reserves shall be
paid solely out of its 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 series. For these services, the
Adviser receives an annual fee of $25,000 per series plus .0025
of 1% of average net assets over $50 million. During the fiscal
years ended June 30, 1995, 1996 and 1997, the Adviser received
aggregate fees of $114,541, $173,384 and $116,135, respectively,
from Income Trust for services performed under this agreement.
DISTRIBUTOR
Shares of Cash Reserves are currently distributed by
Liberty Securities Corporation, 100 Manhattanville Road,
Purchase, NY 10577. On Jan. 1, 1998, Liberty Financial
Investments (formerly named Colonial Investment Services, Inc.),
One Financial Center, Boston, MA 02111, will become the
distributor under a new Distribution Agreement. Liberty
Securities Corporation and Liberty Financial Investments, Inc.
are subsidiaries of Liberty Financial.
The Distribution Agreement continues in effect from year to
year, provided such continuance is approved annually (1) by a
majority of the trustees or by a majority of the outstanding
voting securities of Income Trust, and (2) 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, the distributor offers Fund shares 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
Cash Reserves. The distributor offers Fund shares only on a
best-efforts basis.
TRANSFER AGENT
SSI performs certain transfer agency services for Income
Trust, as described under Management in each Prospectus. For
performing these services, SSI receives a fee based on an annual
rate of 0.150 of 1% of average daily net assets from Cash
Reserves. The Board of Trustees believes the charges by SSI to
Cash Reserves 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, receiving and paying for securities
purchased, delivering against payment securities sold, receiving
and collecting income from investments, making all payments
covering expenses, and performing other administrative duties,
all as directed by authorized persons. The Bank does not
exercise any supervisory function in such matters as purchase
and sale of portfolio securities, payment of dividends, or
payment of expenses.
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 interests of Cash Reserves and its
shareholders to maintain assets in each custodial institution.
However, with respect to foreign sub-custodians, there can be no
assurance that Cash Reserves, 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 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.
Cash Reserves may invest in obligations of the Bank and may
purchase or sell securities from or to the Bank.
INDEPENDENT AUDITORS
The independent auditors for Income Trust are Ernst & Young
LLP, 233 South Wacker Drive, Chicago, Illinois 60606. The
independent auditors audit and report on the annual financial
statements, review certain regulatory reports and the federal
income tax returns, and perform other professional accounting,
auditing, tax and advisory services when engaged to do so by the
Trust.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of
portfolio securities. Purchases and sales of portfolio
securities are ordinarily transacted with the issuer or with a
primary market maker acting as principal or agent for the
securities on a net basis, with no brokerage commission being
paid by Cash Reserves. Transactions placed through dealers
reflect the spread between the bid and asked prices.
Occasionally, Cash Reserves 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, Cash
Reserves 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
Cash Reserves, 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 Cash Reserves, 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 Cash Reserves),
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 Cash Reserves 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
Cash Reserves participates. 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 Cash Reserves.
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 the Association of the National
Association of Securities Dealers ("NASD"). Therefore, Cash
Reserves will not attempt to recapture underwriting discounts or
selling concessions.
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, Cash Reserves held securities
issued by one or more of their 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, 1997:
Amount of Securities
Broker-Dealer Held (in thousands)
--------------------------- -------------------
Associates Corp. of N.A. $16,250
Merrill Lynch 3,996
ADDITIONAL INCOME TAX CONSIDERATIONS
Cash Reserves intends to comply with the special provisions
of the Internal Revenue Code that relieve it of federal income
tax to the extent of its net investment income and capital gains
currently distributed to shareholders.
Because capital gain distributions reduce net asset value,
if a shareholder purchases shares shortly before a record date,
he will, in effect, receive a return of a portion of his
investment in such distribution. The distribution would
nonetheless be taxable to him, even if the net asset value of
shares were reduced below his cost. However, for federal income
tax purposes the shareholder's original cost would continue as
his tax basis.
Cash Reserves expects that none of its dividends will
qualify for the deduction for dividends received by corporate
shareholders.
ADDITIONAL INFORMATION ON THE DETERMINATION OF NET ASSET VALUE
Please refer to Net Asset Value in the Prospectus, which is
incorporated herein by reference. Cash Reserves 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 Cash Reserves 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 use of amortized cost and the
maintenance of a per share net asset value of $1.00, the Trust
has agreed, with respect to Cash Reserves: (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.
Cash Reserves has also agreed to establish procedures
reasonably designed to stabilize its price per share as computed
for the purpose of sales and redemptions at $1.00. Such
procedures include review of the portfolio holdings by the Board
of Trustees, at such intervals as it deems appropriate, to
determine whether the 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 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 Cash Reserves' use of the amortized cost
method of portfolio valuation to maintain its net asset value at
$1.00 per share, it 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 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
Cash Reserves 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 Cash Reserves for the seven-day
period ended June 30, 1997, were:
$.000951233 365
----------- ---
Current Yield = $1.00 x 7 = 4.96%
[1+$.000951233]35/7
-------------------
Effective Yield = $1.00 - 1 = 5.08%
The average dollar-weighted portfolio maturity of Cash
Reserves for the seven days ended June 30, 1997, was 44 days.
In addition to fluctuations reflecting changes in net
income of Cash Reserves resulting from changes in income earned
on its portfolio securities and in its expenses, yield also
would be affected if it were to restrict or supplement its
dividends in order to maintain its net asset value at $1.00.
(See Net Asset Value in the Prospectus and Additional
Information on the Determination of Net Asset Value herein.)
Portfolio changes resulting from net purchases or net
redemptions of Fund shares may affect yield. Accordingly, the
yield of Cash Reserves may vary from day to day and the yield
stated for a particular past period is not a representation as
to its future yield. The yield of Cash Reserves is not assured,
and its principal is not insured; however, it will attempt to
maintain its net asset value per share at $1.00.
Comparison of Cash Reserves' 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.
_____________________
Cash Reserves 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 Cash Reserves, the
"Total Return," the "Total Return Percentage," and the "Average
Annual Total Return" at June 30, 1997 were:
TOTAL RETURN AVERAGE ANNUAL
TOTAL RETURN PERCENTAGE TOTAL RETURN
------------ ------------- --------------
1 year $1,049 4.92% 4.92%
5 years 1,223 22.33 4.11
10 years 1,709 70.94 5.51
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 Cash Reserves is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing the performance of Cash Reserves 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.
Cash Reserves may note its mention in newspapers,
magazines, or other media from time to time. However, Income
Trust assume no responsibility for the accuracy of such data.
Newspapers and magazines that might mention Cash Reserves
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
In advertising and sales literature, Cash Reserves 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 Cash Reserves. Comparison of Cash Reserves
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 Cash Reserves
believes to be generally accurate.
Cash Reserves may compare its performance to the Consumer
Price Index (All Urban), a widely-recognized measure of
inflation.
Cash Reserves' performance may be compared to the following
benchmarks:
Donoghue's Money Fund Averages [trademark]--Aggressive
Donoghue's Money Fund Averages [trademark]--All Taxable
Donoghue's Money Fund Averages [trademark]--Prime
Donoghue's Money Fund Averages [trademark]--Prime and Eurodollar
Donoghue's Money Fund Averages [trademark]--Prime, Eurodollar,
and Yankeedollar
Donoghue's Money Fund Averages [trademark]--Taxable
(Includes the previous four categories)
Lipper Money Market Instrument Funds Average
Lipper Short-Term Income Fund Average
The Lipper 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. Cash Reserves 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 Cash
Reserves to a different category or develop (and place it into)
a new category, it 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.
Cash Reserves may compare its after-tax yield (computed by
multiplying the yield by one minus the highest marginal federal
individual tax rate) to the average yield for the tax-free
categories of the aforementioned services.
Investors may desire to compare the performance and
features of Cash Reserves to those of various bank products.
Cash Reserves 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 Cash Reserves 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 Cash
Reserves 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 Cash Reserves 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, Cash Reserves 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
____________________
Cash Reserves 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 Jan. 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, Cash
Reserves 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, Cash Reserves 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:
The following financial statements are incorporated by
reference to Registrant's June 30, 1997 annual reports:
Investments as of June 30, 1997 of Stein Roe Cash Reserves
Fund, Stein Roe Intermediate Bond Fund, Stein Roe Income
Fund and SR&F High Yield Portfolio; and balance sheets as
of June 30, 1997, statements of operations for the period
ended June 30, 1997, statements of changes in net assets
for each of the two years in the period ended June 30,
1997, notes thereto and report of independent auditors of
Stein Roe Cash Reserves Fund, Stein Roe Intermediate Bond
Fund, Stein Roe Income Fund, Stein Roe High Yield Fund and
SR&F High Yield Portfolio.
(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. Management agreement between Registrant and Stein Roe
& Farnham Incorporated (the "Adviser") as amended
through 11/1/96. (Exhibit 5(a) 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 agent agreement between SteinRoe Services
Inc. and Colonial Investors Service Center, Inc. as
amended through June 30, 1997. (Exhibit 9(d) to
PEA #33.)*
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,
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 #33.)*
(b) Stein Roe & Farnham Prototype Paired Defined
Contribution Plan. (Exhibit 14(b) to PEA #33.)*
15. None.
16. (a) Schedules for computation of yield and total return of
SteinRoe High-Yield Bonds (now named Stein Roe Income
Fund), SteinRoe Managed Bonds (now named Stein Roe
Intermediate Bond Fund), and Stein Roe Cash Reserves.
(Exhibit 16 to PEA #29.)*
(b) Schedule for computation of yield and total return of
Stein Roe High Yield Fund. (Exhibit 16(b) to PEA
#33.)*
17. (a) Financial Data Schedule, 6/30/97--Income Fund.
(b) Financial Data Schedule, 6/30/97--Intermediate Bond Fund.
(c) Financial Data Schedule, 6/30/97--Cash Reserves Fund.
(d) Financial Data Schedule, 6/30/97--High Yield Fund.
18. Inapplicable.
19. (Miscellaneous.)
(a) Fund Application. (Exhibit 19(a) to PEA #33.)*
(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 September 30, 1997
--------------- -----------------------
Stein Roe Cash Reserves Fund......................19,058
Stein Roe Income Fund............................. 4,533
Stein Roe Intermediate Bond Fund.................. 5,318
Stein Roe High Yield Fund ........................ 1,445
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,
SR&F Base Trust, and/or other investment companies managed by the
Adviser. (The listed entities are located at One South Wacker
Drive, Chicago, Illinois 60606, except for SteinRoe Variable
Investment Trust and Keyport Variable Investment Trust, which are
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
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President; Secy.
Thomas W. Butch Executive Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INCOME TRUST; STEIN ROE INSTITUTIONAL TRUST; AND STEIN
ROE TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
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
Loren A. Hansen Executive 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
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
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
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
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
Loren A. Hansen Executive Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart 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
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
KEYPORT VARIABLE INVESTMENT TRUST
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 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 Pres.; 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; that of Mr. Ripepi is 100 Manhattanville
Road, Purchase, NY 10577; 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.
If requested to do so by the holders of at least 10% of the
Trust's outstanding shares, the Trust will call a special
meeting for the purpose of voting upon the question of removal
of a trustee or trustees and will assist in the communications
with other shareholders as if the Trust were subject to Section
16(c) of the Investment Company Act of 1940.
Since the information called for by Item 5A for the Funds (other
than Stein Roe Cash Reserves Fund, 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 such Funds upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant 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 26th day of November, 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 November 26, 1997
Timothy K. Armour
Principal Executive Officer
GARY A. ANETSBERGER Senior Vice-President November 26, 1997
Gary A. Anetsberger
Principal Financial Officer
SHARON R. ROBERTSON Controller November 26, 1997
Sharon R. Robertson
Principal Accounting Officer
KENNETH L. BLOCK Trustee November 26, 1997
Kenneth L. Block
WILLIAM W. BOYD Trustee November 26, 1997
William W. Boyd
LINDSAY COOK Trustee November 26, 1997
Lindsay Cook
DOUGLAS A. HACKER Trustee November 26, 1997
Douglas A. Hacker
JANET LANGFORD KELLY Trustee November 26, 1997
Janet Langford Kelly
FRANCIS W. MORLEY Trustee November 26, 1997
Francis W. Morley
CHARLES R. NELSON Trustee November 26, 1997
Charles R. Nelson
THOMAS C. THEOBALD Trustee November 26, 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 Intermediate Bond Fund
17(c) Financial Data Schedule--Stein Roe Cash Reserves Fund
17(d) Financial Data Schedule--Stein Roe High Yield Fund
Exhibit 11(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Financial Highlights" and "Independent Auditors" and to the
incorporation by reference of our reports dated July 25, 1997
with respect to Stein Roe Cash Reserves Fund and August 11, 1997
with respect to Stein Roe Intermediate Bond Fund, Stein Roe Income
Fund, Stein Roe High Yield Fund and SR&F High Yield Portfolio in
the Registration Statement (Form N-1A) of Stein Roe Income Trust
filed with the Securities and Exchange Commission in this Post-
Effective Amendment No. 35 to the Registration Statement under the
Securities Act of 1933 (Registration No. 33-02633) and in this
Amendment No. 36 to the Registration Statement under the
Investment Company Act of l940 (Registration No. 811-4552).
ERNST & YOUNG LLP
Chicago, Illinois
November 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STEIN ROE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 360,947
<INVESTMENTS-AT-VALUE> 366,485
<RECEIVABLES> 22,338
<ASSETS-OTHER> 192
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 389,015
<PAYABLE-FOR-SECURITIES> 11,975
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,768
<TOTAL-LIABILITIES> 13,743
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 376,132
<SHARES-COMMON-STOCK> 37,965
<SHARES-COMMON-PRIOR> 32,129
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (6,398)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,538
<NET-ASSETS> 375,272
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 27,349
<OTHER-INCOME> 0
<EXPENSES-NET> 2,838
<NET-INVESTMENT-INCOME> 24,511
<REALIZED-GAINS-CURRENT> (196)
<APPREC-INCREASE-CURRENT> 9,039
<NET-CHANGE-FROM-OPS> 33,354
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (24,589)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 131,567
<NUMBER-OF-SHARES-REDEEMED> (92,360)
<SHARES-REINVESTED> 17,736
<NET-CHANGE-IN-ASSETS> 65,708
<ACCUMULATED-NII-PRIOR> 78
<ACCUMULATED-GAINS-PRIOR> (6,202)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,630
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,879
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 9.63
<PER-SHARE-NII> .70
<PER-SHARE-GAIN-APPREC> .25
<PER-SHARE-DIVIDEND> (.70)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> .84
<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-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 320,628
<INVESTMENTS-AT-VALUE> 324,848
<RECEIVABLES> 11,307
<ASSETS-OTHER> 130
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 336,285
<PAYABLE-FOR-SECURITIES> 5,988
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,513
<TOTAL-LIABILITIES> 7,501
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 339,062
<SHARES-COMMON-STOCK> 37,610
<SHARES-COMMON-PRIOR> 34,729
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (14,498)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,220
<NET-ASSETS> 328,784
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 23,987
<OTHER-INCOME> 0
<EXPENSES-NET> 2,284
<NET-INVESTMENT-INCOME> 21,703
<REALIZED-GAINS-CURRENT> (1,179)
<APPREC-INCREASE-CURRENT> 7,114
<NET-CHANGE-FROM-OPS> 27,638
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 22,030
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 119,668
<NUMBER-OF-SHARES-REDEEMED> (110,940)
<SHARES-REINVESTED> 16,336
<NET-CHANGE-IN-ASSETS> 30,672
<ACCUMULATED-NII-PRIOR> 327
<ACCUMULATED-GAINS-PRIOR> (13,319)
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<GROSS-EXPENSE> 2,338
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<PER-SHARE-NAV-BEGIN> 8.58
<PER-SHARE-NII> .60
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<PER-SHARE-DIVIDEND> (.61)
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<EXPENSE-RATIO> .73
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<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-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 449,577
<INVESTMENTS-AT-VALUE> 449,577
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<OTHER-ITEMS-LIABILITIES> 2,894
<TOTAL-LIABILITIES> 2,894
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 452,222
<SHARES-COMMON-STOCK> 452,275
<SHARES-COMMON-PRIOR> 476,757
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 136
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 452,358
<DIVIDEND-INCOME> 0
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<NET-INVESTMENT-INCOME> 23,115
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<DISTRIBUTIONS-OF-INCOME> (23,115)
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<NUMBER-OF-SHARES-SOLD> 846,211
<NUMBER-OF-SHARES-REDEEMED> (890,574)
<SHARES-REINVESTED> 19,881
<NET-CHANGE-IN-ASSETS> (24,482)
<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,208
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<GROSS-EXPENSE> 3,716
<AVERAGE-NET-ASSETS> 481,785
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> .048
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<PER-SHARE-DIVIDEND> (.048)
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<EXPENSE-RATIO> 0.77
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> STEIN ROE HIGH YIELD FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 12,996
<INVESTMENTS-AT-VALUE> 13,482
<RECEIVABLES> 33
<ASSETS-OTHER> 26
<OTHER-ITEMS-ASSETS> 0
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<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 59
<TOTAL-LIABILITIES> 59
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 12,996
<SHARES-COMMON-STOCK> 1,279
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 219
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 267
<NET-ASSETS> 13,482
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 566
<OTHER-INCOME> 0
<EXPENSES-NET> 62
<NET-INVESTMENT-INCOME> 504
<REALIZED-GAINS-CURRENT> 219
<APPREC-INCREASE-CURRENT> 267
<NET-CHANGE-FROM-OPS> 990
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (504)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14,080
<NUMBER-OF-SHARES-REDEEMED> (1,512)
<SHARES-REINVESTED> 428
<NET-CHANGE-IN-ASSETS> 13,482
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 143
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<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> .52
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<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
