Stein Roe Mutual Funds
Annual Report
JUNE 30, 1997
Stein Roe Money Market Fund
Cash Reserves Fund
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Stein Roe Mutual Funds
Building Wealth for Generations(sm)
Photo of: abacus
<PAGE>
Contents
From the President................................................ 1
Tim Armour's thoughts on the markets and investing
Q&A
Cash Reserves Fund................................................ 3
Interview with the portfolio manager and a summary of
investment activity
Investments....................................................... 6
A complete list of investments with market values
Financial Statements.............................................. 8
Balance sheet, statement of operations and
changes in net assets
Notes to Financial Statements..................................... 11
Financial Highlights.............................................. 14
Selected per-share data
Report of Independent Auditors.................................... 16
General Information............................................... 17
A guide to products and services
Must be preceded or accompanied by a prospectus.
<PAGE>
From the President
Photo of: Timothy K. Armour
To Our Shareholders
We're pleased to present this annual report for the Stein Roe Cash Reserves
Fund. In the following pages, we'll provide you with an overview of the economic
events that occurred over the past year and explain how we positioned Cash
Reserves Fund to respond to these events.
Will the real economic numbers please stand up?
The past 12 months were an eventful period for U.S. money market funds, as
mixed economic data caused money market rates -- which tend to reflect future
expectations for short-term interest rates -- to fluctuate sharply throughout
the period. Money market funds were particularly vulnerable in the days prior to
and immediately following the release of monthly employment reports, which the
market tends to use as a gauge of U.S. economic strength. Overall, the yield on
the three-month Treasury bill rose from 5.19 percent on June 30, 1996, to 5.24
percent on June 30, 1997.
The rise in Treasury bill yields occurred in mid-December, when comments
voiced by ranking Federal Reserve officials were interpreted as evidence that
they might raise interest rates. Soon after, however, a new round of economic
reports showed no discernible increase in inflation and only a modest uptick in
job growth, suggesting there was little need for a rate hike. Federal Reserve
Chairman Alan Greenspan echoed this belief, when he told the Senate Budget
Committee that he saw few signs of the "inflationary tensions" that had hampered
past economic expansions. It appears that Greenspan's comments were enough to
calm investors' fears. In fact, many started to believe that economic growth
would slow in 1997, helping to resolve many of the conflicts that had plagued
money market investors throughout much of 1996.
But, as the new year unfolded, that notion was quickly dispelled as a wide
range of indicators suggested the economy actually was gaining momentum. Among
the economic data that supported this new outlook were reports of
stronger-than-anticipated growth in durable goods orders and personal income, a
surprisingly resilient housing market and a 10-year high in consumer confidence
levels. In spite of this strong economic growth, inflation remained relatively
tame as lower health care and benefits costs helped keep overall labor costs in
check and a stronger dollar helped make imported goods less expensive for U.S.
consumers. Nonetheless, many believed more robust economic growth would force
the Federal Reserve to raise interest rates in an effort to preempt higher
inflation going forward. As a result, few were surprised when, in late March,
the Federal Reserve raised the federal funds rate -- the rate large commercial
banks charge one another for overnight loans -- from 5.25 percent to 5.50
percent.
<PAGE>
Although most economic reports now suggest inflation is under control, we
think there could be some continued pressure on interest rates going forward. We
do not, however, expect interest rates to move sharply higher. That's because
the "real" federal funds rate -- the federal funds rate minus the rate of
inflation -- is already at a level that would typically discourage economic
growth. As a result, while we think it's possible the Federal Reserve may raise
interest rates again, we think the economy will slow enough in the coming months
to quell any remaining inflationary pressures, eliminating the need to raise
interest rates much, if any, higher. Nonetheless, even without the backwind of
higher rates, we think money market funds will continue to do well as investors
seek a safe haven for their investment dollars.
The Basics
Although no one can predict what might happen to the markets in the future,
we believe investors must understand the factors that move the markets, not just
to profit from them, but to gain the patience to ride out short-term volatility
in their investments. As always, no matter what direction you think the economy
is heading, it's important to remember the basics. Think long term and
re-evaluate your investment portfolio from time to time to make sure it
continues to match your goals, risk tolerance and time horizon.
Please call us at 800-338-2550 with your comments and suggestions. As always,
we look forward to serving your investment needs.
Sincerely,
Timothy K. Armour
President
July 15, 1997
<PAGE>
Q&A
An Interview with Jane Naeseth, Portfolio Manager of Stein Roe
Cash Reserves Fund
Fund Data
Investment Objective:
Seeks maximum current income consistent with capital preservation and
maintenance of liquidity by investing in high-quality money market
securities, such as U.S. Treasuries, commercial paper, banker's acceptances
and certificates of deposit.
Fund Inception:
October 2, 1976
Total Net Assets:
$452.4 million
photo of: Jane Naeseth
Q: How did the Fund perform?
A: The Fund finished the fiscal year with a 4.92 percent total return, just
ahead of the 4.91 percent median return for its money market fund peer group.
As of June 30, 1997, the Fund's seven-day current yield was 4.96 percent.
This was higher than the 4.70 percent yield of a year ago, and reflected the
see-saw environment of interest rates over the last year. One year ago, the
Federal Reserve had just shifted from an easing to a neutral mode, as its series
of rate cuts designed to bring the economy to a soft landing appeared
successful. Throughout this year, the mixed signals sent by the economy sent
money market rates up and down, but in a fairly tight range. By late March 1997,
however, economic signposts pointed to an economy that was growing too quickly,
and the Federal Reserve tightened rates by one-quarter percentage point. Since
then, however, economic growth appears to have slowed to a more sustainable rate
and the Federal Reserve has stood firm on interest rates.
Q: What has been your investment strategy in this environment?
A: During times of economic uncertainty, we look for pockets of opportunity to
potentially enhance the Fund's yield. While the Federal Reserve was in its
easing-to-neutral mode, we added to our holdings of federal agency securities to
lock in higher yields on longer-term securities. The middle two quarters of the
fiscal year brought mixed economic signals. As a result, we increased our
allocation of shorter-term commercial paper. This benefited the Fund because
many investors expected a tightening move. When it finally came in the first
quarter of 1997, the Fund's yield was able to ride up with higher market rate
yields. As we approached fiscal year end, investors began to anticipate further
rate hikes and we looked to add corporate "floaters" to the Fund at attractive
spreads.
<PAGE>
Q: Are these floaters a new theme for the Fund?
A: No, we just hadn't seen any attractive floaters in a long time. We like these
variable-rate corporate notes because they have one-year maturities and their
coupons adjust or "float" quarterly with market rates. Not only do they offer
high current yield potential, they also offer additional yield potential because
their coupons will float up to at least market rate yields should the Federal
Reserve raise interest rates. We are very selective in the floaters we purchase.
We look at them for more than their defensive characteristics in a rising-rate
environment. We also look for an attractive current coupon so that even if the
Federal Reserve goes into a neutral mode we are getting additional yield
potential.
Q: Looking ahead, what are your plans for the Fund?
A: We plan to keep the Fund's average maturity shorter because there is still a
slim chance that the Federal Reserve may raise interest rates at one of its next
meetings. By maintaining a neutral maturity range, the Fund is positioned to
respond accordingly to the outcome of those meetings or other significant
economic events. As always, we'll look for opportunities to add longer maturity
securities at attractive rates.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL SHARES. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions. An investment in the Fund is neither insured
nor guaranteed by the U.S. government, and there is no assurance that the Fund
will be able to maintain its stable net asset value of $1 per share. According
to Lipper Analytical Services, Inc., an independent monitor of mutual fund
performance, the median total returns for the Fund's money market fund peer
group for the one-, five- and 10-year periods ending June 30, 1997, were 4.91
percent, 4.11 percent and 5.50 percent, respectively.
<PAGE>
Fund Highlights
Cash Reserves Fund
Securities Type Breakdown
<TABLE>
<CAPTION>
PORTFOLIO PORTFOLIO
JUNE 30, 1996 JUNE 30, 1997
<S> <C> <C>
Commercial Paper 75.2% 62.7%
Yankee Certificates of Deposit 3.2 22.0
Corporate Notes 12.7 14.2
Federal Agencies 5.3 1.1
Letter of Credit Commercial Paper 3.6 --
- ------------------------------------------------------------------------------
Total 100.0% 100.0%
</TABLE>
Pie Chart:
Maturity
As of June 30, 1996 As of June 30, 1997
360+ days 4.2% 4.4%
90 - 359 days 5.3% 6.0%
60 - 89 days 4.3% 4.9%
30 - 59 days 8.6% 4.4%
15 - 29 days 46.4% 29.1%
5 - 14 days 18.0% 33.3%
0 - 29 days 13.2% 17.9%
<PAGE>
Cash Reserves Fund
INVESTMENTS AS OF JUNE 30, 1997
(DOLLAR AMOUNTS IN THOUSANDS)
<TABLE>
INTEREST MATURITY PRINCIPAL MARKET
RATE RANGE* DATE RANGE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER (62.3%)
CONSULTING SERVICES (3.8%)
CSC Enterprises .......................................... 5.604% 7/16/97 $17,000 $16,961
ELECTRONICS (6.2%)
**Casio Phonemate Inc.
(L.O.C. BOT/Mitsubishi Bank Ltd.) ..................... 5.676 7/09/97 23,000 22,971
**General Signal Corp. ................................... 5.612 7/07/97 5,000 4,995
-------
27,966
FINANCIAL SERVICES (41.8%)
BANKING (4.8%)
**Sumitomo Bank Capital Markets Inc.
(gtd. by Sumitomo Bank Ltd.) ....................... 5.776 7/15/97 22,000 21,951
LENDING INSTITUTIONS (4.4%)
Oak Funding Corp. ..................................... 5.637 7/11/97 20,000 19,969
MISCELLANEOUS FINANCIAL (32.6%)
Associates Corp. of North America ..................... 6.201 7/01/97 16,250 16,250
**Banner Receivables Corp. ............................ 5.622-5.655 7/08-7/15/97 20,603 20,636
Countrywide Home Loans
(gtd. by Countrywide Credit
Industries) ........................................ 5.574 7/03/97 22,000 21,993
**Falcon Asset Securitization Corp. ................... 5.605 7/02/97 7,247 7,246
**International Securitization Corp. .................. 5.626 7/17/97 10,000 9,975
Merrill Lynch International
(gtd. by Merrill Lynch & Co.) ...................... 5.596 7/07/97 4,000 3,996
**Old Line Funding Corp. .............................. 5.617 7/08/97 10,734 10,722
**Pooled Assets Receivable Capital .................... 5.593 7/16/97 19,834 19,788
**Thames Asset Global
Securitization ..................................... 5.640 7/11/97 6,982 6,971
**Tri-Lateral Capital USA Inc. ........................ 5.655 7/15/97 7,000 6,985
**Working Capital Management .......................... 5.756 7/15/97 23,000 22,949
-------
147,478
-------
TOTAL FINANCIAL SERVICES.................................................................................. 189,398
HEALTH CARE (4.0%)
**Columbia HCA Healthcare Corp. .......................... 5.739 7/10/97 18,000 17,974
TELECOMMUNICATIONS (4.6%)
GTE Corp. ................................................ 5.600 7/07/97 21,000 20,980
UTILITIES (1.8%)
New England Power Corp. .................................. 5.587 7/14/97 8,317 8,300
--------
TOTAL COMMERCIAL PAPER
(Amortized cost $281,579) ............................................................................. 281,579
- ------------------------------------------------------------------------------------------------------------------
<PAGE>
<CAPTION>
Cash Reserves Fund CONTINUED
INTEREST MATURITY PRINCIPAL MARKET
RATE RANGE* DATE RANGE AMOUNT VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VARIABLE RATE NOTES (14.1%)
FINANCIAL SERVICES
**American Honda Finance Corp.
(gtd. by Honda Motor Co. Inc.) ................... 5.842% 4/06/98 $ 22,000 $ 21,997
Korea Development Bank .............................. 5.843 6/16/98 22,000 22,000
Morgan Stanley Group Inc. ........................... 5.938 11/16/98 20,000 20,000
--------
TOTAL VARIABLE RATE NOTES
(Amortized cost $63,997) ......................... 63,997
--------
U.S. GOVERNMENT OBLIGATION (1.1%)
Federal Home Loan Bank Callable Note
(Amortized cost $5,000) .......................... 5.750 1/09/98 5,000 5,000
--------
YANKEE CERTIFICATES OF DEPOSIT (21.9%)
FINANCIAL SERVICES
Canadian Imperial Bank .............................. 5.820 3/03/98 22,000 22,000
Dai-ichi Kangyo Bank ................................ 5.840 8/05/97 20,000 20,001
Fuji Bank Ltd.-Chicago .............................. 5.790 7/18/97 22,000 22,000
Norinchukin Bank .................................... 5.750 7/02/97 20,000 20,000
Sanwa Bank .......................................... 5.675 7/01/97 15,000 15,000
--------
TOTAL YANKEE CERTIFICATES OF DEPOSIT
(Amortized cost $99,001) ............................................................................... 99,001
--------
TOTAL INVESTMENTS (99.4%) ................................................................................ 449,577
OTHER ASSETS, LESS LIABILITIES (0.6%) ...................................................................... 2,781
--------
TOTAL NET ASSETS (100.0%) ............................................................................... $452,358
========
<FN>
*The interest rate is the effective rate at the date of purchase except for
variable rate notes, for which the interest rate represents the current rate as
of the most recent reset date. **Represents private placement securities exempt
from registration by Section 4(2) of the Securities Act of 1933. These
securities generally are issued to investors who agree that they are purchasing
the securities for investment and not with a view to public distribution. Any
resale by the Fund must be in an exempt transaction, normally to other
institutional investors. At June 30, 1997, the aggregate value of the Fund's
private placement securities was $195,127, which represented 43.1 percent of net
assets. None of these are deemed to be illiquid securities.
</FN>
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Balance Sheet
June 30, 1997
(All Amounts in Thousands Except Per-Share Amounts)
<CAPTION>
<S> <C>
ASSETS
Investments, at value .......................................... $449,577
Accrued interest receivable .................................... 1,615
Cash and other assets .......................................... 4,060
--------
Total Assets ................................................ $455,252
========
LIABILITIES
Payable for fund shares redeemed ............................... $ 1,757
Dividends payable .............................................. 615
Payable to investment adviser and transfer agent ............... 255
Other liabilities .............................................. 267
--------
Total Liabilities ........................................... 2,894
--------
CAPITAL
Paid-in capital ................................................ 452,222
Accumulated net realized gains on investments .................. 136
--------
Total Capital (Net Assets) .................................. 452,358
--------
Total Liabilities and Capital ............................... $455,252
========
Shares Outstanding (Unlimited Number Authorized) ............... 452,275
========
Net Asset Value (Capital) Per Share ............................ $ 1.00
========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Statement of Operations
For The Year Ended
June 30, 1997
(All Amounts in Thousands)
<CAPTION>
<S> <C>
INVESTMENT INCOME
Interest Income .................................................. $26,831
-------
EXPENSES
Management fees .................................................. 1,208
Administrative fees .............................................. 1,208
Transfer agent fees .............................................. 723
Printing and postage ............................................. 200
Accounting fees .................................................. 36
Custodian fees ................................................... 24
Legal and audit fees ............................................. 24
Registration fees ................................................ 49
Trustees' fees ................................................... 26
Other expenses ................................................... 218
-------
Total Expenses ................................................ 3,716
-------
Net Investment Income ......................................... 23,115
-------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ............. $23,115
=======
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
Statements of Changes in Net Assets
FOR THE YEARS ENDED JUNE 30, 1996 AND 1997
(ALL AMOUNTS IN THOUSANDS)
<CAPTION>
1996 1997
<S> <C> <C>
OPERATIONS
Net investment income ......................................... $ 24,237 $ 23,115
--------- ---------
Net Increase in Net Assets Resulting from Operations ....... 24,237 23,115
--------- ---------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income .......................... (24,237) (23,115)
--------- ---------
SHARE TRANSACTIONS
Subscriptions to fund shares .................................. 711,619 846,211
Investment income dividends reinvested ........................ 22,397 19,881
Redemptions of fund shares .................................... (755,339) (890,574)
--------- ---------
Net Decrease from Share Transactions ....................... (21,323) (24,482)
--------- ---------
Net Decrease in Net Assets ................................. (21,323) (24,482)
TOTAL NET ASSETS
Beginning of year ............................................. 498,163 476,840
--------- ---------
End of year ................................................... $ 476,840 $ 452,358
========= =========
ANALYSES OF CHANGES IN SHARES
OF BENEFICIAL INTEREST
Subscriptions to fund shares .................................. 711,619 846,211
Investment income dividends reinvested ........................ 22,397 19,881
--------- ---------
734,016 866,092
Redemptions of fund shares .................................... (755,339) (890,574)
--------- ---------
Net decrease in fund shares ................................... (21,323) (24,482)
Shares outstanding at beginning of year ....................... 498,080 476,757
--------- ---------
Shares outstanding at end of year ............................. 476,757 452,275
========= =========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
Notes to Financial Statements
Note 1. Significant Accounting Policies
The following are the significant accounting policies of Stein Roe Cash Reserves
Fund (the "Fund"), a series of the Stein Roe Income Trust (a Massachusetts
business trust).
Investment Valuations
The Fund utilizes the amortized cost method to value its investments, which
approximates market value. This technique involves valuing a security initially
at cost and, thereafter, assuming a constant amortization to maturity of any
discount or premium. In the event that a deviation of .50 of 1 percent or more
exists between the Fund's $1.00 per-share net asset value, calculated at
amortized cost, and the net asset value calculated by reference to market
quotations, the Board of Trustees would consider what action, if any, should be
taken. Other assets of the Fund are valued by a method that the Board of
Trustees believes represents a fair value.
Federal Income Taxes
No provision is made for federal income taxes since the Fund elects to be
taxed as a "regulated investment company" and makes such distribu tions to its
shareholders as to be relieved of all federal income taxes under provisions of
current federal tax law.
Distributions to Shareholders
The Fund declares income dividends from net investment income daily and
pays these dividends monthly.
Other Information
Realized gains or losses from sales of securities are determined on the
specific identified cost basis.
The Fund attempts to maintain its net asset value per share at $1.00, which
it believes will be possible under most conditions. The Fund requires issuers
of repurchase agreements to transfer thesecurities underlying the agreements
to the Fund's custodian at the time of payment for the repurchase agreement.
All amounts, except per-share amounts, are shown in thousands.
Note 2. Portfolio Composition
Cash Reserves Fund invests in U.S. dollar-denominated money market instruments
maturing in 13 months or less from the time of investment. Under normal market
conditions, the Fund will invest at least 25 percent of its total assets in
securities of issuers in the financial services industry (which includes, but is
not limited to, banks, personal credit and business institutions, and other
financial services institutions). At June 30, 1997, 77.4 percent of the Fund's
total assets were invested in the financial services industry. In addition, at
June 30, 1997, 58.2 percent of the Fund's investments were in instruments of
entities located in the United States and 32.0 percent were in instruments of
Japanese entities. Country determination is based on either the location of the
issuer or, in the case of those instruments that are guaranteed by another
entity, the location of the guarantor.
<PAGE>
See the Fund's schedule of invest ments for additional information on
portfolio composition.
Note 3. Trustees' Fees and Transactions with Affiliates
The Fund pays monthly management and administrative fees to Stein Roe & Farnham,
an indirect, majority-owned subsidiary of Liberty Mutual Insurance Company, for
its services as investment adviser and manager. The manage ment fee is .25 of 1
percent of average daily net assets. The administrative fee is .25 of 1 percent
of the first $500 million of average daily net assets, .20 of 1 percent of
the next $500 million, and .15 of 1 percent over $1 billion.
The administrative agreement of the Fund provides that the Adviser will
reimburse the Fund to the extent that its annual expenses, excluding certain
expenses, exceed the applicable limits prescribed by any state in which the
Fund's shares are offered for sale.
The transfer agent fees of the Fund are paid to SteinRoe Services Inc. (SSI),
an indirect, majority-owned sub sidiary of Liberty Mutual Insurance Company. SSI
has entered into an agreement with Colonial Investors Service Center, Inc., an
indirect, majority-owned subsidiary of Liberty Mutual Insurance Company, to act
as sub-transfer agent for the Fund.
The Adviser also provides the Fund with fund accounting services.
Certain officers and trustees of the Trust are also officers of the Adviser.
Compensation is paid to trustees not affiliated with the Adviser. No
remuneration was paid to any other trustee or officer of the Trust for the Fund
for the year ended June 30, 1997.
Note 4. Investment Transactions
Cost of investments of the Fund was the same for financial reporting purposes
and federal income tax purposes.
<PAGE>
Financial Highlights
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
<TABLE>
<CAPTION>
Six
Year Months
Ended Ended
Dec. 31, June 30, Years Ended June 30,
1987 1988 1989 1990
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- --------
Net investment income 0.060 0.032 0.081 0.079
Distributions from net investment income (0.060) (0.032) (0.081) (0.079)
-------- -------- -------- --------
Net Asset Value, End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ========
Ratio of expenses to average net assets 0.72% 0.70%* 0.75% 0.76%
Ratio of net investment income to average net assets 6.02% 6.36%* 8.13% 7.94%
Total return 6.15% 6.43%* 8.41% 8.20%
Net assets, end of year $962,901 $930,074 $948,018 $949,803
<PAGE>
<CAPTION>
Years Ended June 30,
1991 1992 1993 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- --------
Net investment income 0.068 0.044 0.028 0.028
Distributions from net investment income (0.068) (0.044) (0.028) (0.028)
-------- -------- -------- --------
Net Asset Value, End of Period $ 1.000 $ 1.000 $ 1.000 $ 1.000
======== ======== ======== ========
Ratio of expenses to average net assets 0.78% 0.78% 0.79% 0.79%
Ratio of net investment income to average net assets 6.81% 4.40% 2.81% 2.77%
Total return 6.98% 4.49% 2.83% 2.81%
Net assets, end of year $840,525 $711,087 $627,110 $554,713
<PAGE>
<CAPTION>
Years Ended June 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Net Asset Value, Beginning of Period $ 1.000 $ 1.000 $ 1.000
-------- -------- --------
Net investment income 0.048 0.050 0.048
Distributions from net investment income (0.048) (0.050) (0.048)
-------- -------- --------
Net Asset Value, End of Period $ 1.000 $ 1.000 $ 1.000
======== ======== ========
Ratio of expenses to average net assets 0.76% 0.78% 0.77%
Ratio of net investment income to average net assets 4.83% 4.98% 4.80%
Total return 4.96% 5.07% 4.92%
Net assets, end of year $498,163 $476,840 $452,358
<FN>
* Annualized
</FN>
</TABLE>
<PAGE>
Report of Independent Auditors
To the Shareholders and Board of Trustees of Stein Roe Income Trust
Stein Roe Cash Reserves Fund
We have audited the accompanying balance sheet, including the
schedule of investments, of Stein Roe Cash Reserves Fund as of June 30, 1997,
and the related statement of operations for the year then ended, the statements
of changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the fiscal periods since 1987. These
financial statements and financial highlights are the responsibility of the
Fund's manage ment. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of June
30, 1997, by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Stein
Roe Cash Reserves Fund at June 30, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the fiscal periods
since 1987, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
July 25, 1997
<PAGE>
A Guide to Stein Roe Services
We encourage you to take advantage of our free shareholder services. If you
would like additional information about how to establish or use a Stein Roe
service, just call us at 800-338-2550.
Purchases
In addition to sending us a check or wire to purchase additional fund shares,
you can take advantage of these convenient automatic services:
o Automatic Investment Plan -- Make regular investments ($50 minimum) in your
Stein Roe account directly from your bank checking account. You select
monthly, quarterly, semiannual or annual purchases.
o Special Investments -- Purchase shares by telephone and pay for them by
electronic transfer from your bank checking account.
Exchanges
o Telephone Exchange -- Call us to exchange $50 or more from your existing
account in one Stein Roe fund to an identically registered existing account
in another Stein Roe fund. You receive this service when you open a Stein
Roe fund account, unless you elect not to.*
o Automatic Exchange -- Stein Roe will regularly exchange shares from your
account in one Stein Roe fund to your account in another. You select
twice-monthly, monthly, quarterly, semiannual or annual exchanges.
Redemptions
o Telephone Redemption by Check -- Call to redeem $1,000 or more from your
account. A check will be sent to your registered address. You automatically
receive this service when you open a Stein Roe account, unless you elect
not to.
o Telephone Redemption by Wire -- Redeem shares by phone from your account
($1,000 minimum) and wire the proceeds to your bank checking account. A
small fee for wiring proceeds will be deducted from the amount wired.
o Special Redemption Option-- If you do not want to pre-schedule your
redemptions, you can redeem shares by telephone ($50 minimum/$100,000
maximum) and have the proceeds sent directly to your bank checking account.
o Automatic Redemption Plan -- Redeem either a fixed dollar or share amount,
or a fixed percentage of your account automatically on a schedule you
establish. You select monthly, quarterly, semiannual or annual withdrawals
($50 minimum/ $100,000 maximum), and the proceeds are sent either to your
bank checking account or to an address you specify.
o Money Market Fund Check Writing -- Write checks for $50 or more on your
money market fund account.
* Stein Roe reserves the right to discontinue or modify the exchange
privilege, and certain restrictions apply. Please refer to your prospectus for
details.
<PAGE>
Distributions
Most investors like to reinvest their dividends and capital gains
distributions and put them back to work. If, however, you do not want them
reinvested, consider these alternatives:
o Dividend Purchase Option -- Use the distributions from one Stein Roe fund
account ($25 minimum) to automatically purchase shares in your account with
another Stein Roe fund.
o Automatic Dividend Deposit -- Instead of receiving your dividends by check,
your distributions are deposited automatically into your bank checking
account.
Recordkeeping
o Summary of Investments -- Consolidates quarterly transaction and investment
information for any or all of your household's Stein Roe accounts on one
easy-to-read statement. At year-end, Stein Roe provides a complete summary
of all account activity for the year.
<PAGE>
To Contact Us. . .
By Phone 800-338-2550
You can discuss your investment questions with a Stein Roe account
representative by calling us toll free. We'll be happy to answer questions about
your current account, or to provide you with information about opening a Stein
Roe account, including Stein Roe IRAs. We're available seven days a week, from 7
a.m. to 8 p.m. weekdays and from 9 a.m. to 2 p.m. Saturday and Sunday (Central
time).
Stein Roe's Funds-on-Call(R)
24-Hour Service Line
Using a touch-tone phone, call our toll-free number, day or night, for your
current account balance, the latest Stein Roe Fund prices and yields and other
information. In addition, if you have a Personal Identification Number (PIN),
you may place orders for the following transactions 24 hours a day:
o Exchange shares between your Stein Roe accounts;
o Purchase fund shares by electronic transfer;
o Order additional account statements and money market fund checks;
o Redeem shares by check, wire or electronic transfer.
Retirement Plan Accounts
Call us for information about how we can assist you with your defined
contribution plan, including 401(k) plans. You can reach us toll free at
800-322-1130. For information on IRA plans, call us toll free at 800-338-2550.
By Mail or E-Mail
If you prefer to contact us by mail, please address all correspondence to:
P.O. Box 8900, Boston, MA 02205-8900. To contact us by e-mail, send
correspondence directly to: comments @steinroe.com or visit us at
www.steinroe.com on the Internet.
In Person
If you are in the Chicago area, please visit our Investor Center located in
downtown Chicago at One South Wacker Drive, 32nd Floor. Our account
representatives can answer questions about your current Fund investments or
provide you infor-mation about any of the Stein Roe Funds and retirement plans.
Stop by weekdays between 8 a.m. and 5:15 p.m.
Must be preceded or accompanied by a prospectus.
<PAGE>
Stein Roe Income Trust
Trustees
Timothy K. Armour
President, Mutual Fund Division and
Director, Stein Roe & Farnham Incorporated
Kenneth L. Block
Chairman Emeritus, A.T. Kearney, Inc.
William W. Boyd
Chairman and Director, Sterling Plumbing
Group Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Douglas A. Hacker
Senior Vice President and Chief Financial Officer,
United Airlines
Janet Langford Kelly
Senior Vice President, Secretary and General
Counsel, Sara Lee Corporation
Francis W. Morley
Chairman, Employer Plan Administrators
and Consultants Co.
Charles R. Nelson
Van Voorhis Professor of Political Economy,
University of Washington
Thomas C. Theobald
Managing Director, William Blair Capital Partners
Officers
Timothy K. Armour, President
Jilaine H. Bauer, Executive Vice President,
Secretary
Thomas W. Butch, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Philip J. Crosley, Vice President
Michael T. Kennedy, Vice President
Stephen F. Lockman, Vice President
Lynn C. Maddox, Vice President
Anne E. Marcel, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Cynthia A. Prah, Vice President
Thomas P. Sorbo, Vice President
Heidi J. Walter, Vice President
Stacy H. Winick, Vice President
Sharon R. Robertson, Controller
Margaret O. Zwick, Assistant Treasurer
Janet B. Rysz, Assistant Secretary
<PAGE>
The Stein Roe Mutual Funds
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe High Yield Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe Balanced Fund
Stein Roe Growth & Income Fund
Stein Roe Growth Stock Fund
Stein Roe Young Investor Fund
Stein Roe Special Fund
Stein Roe Growth Opportunities Fund
Stein Roe Special Venture Fund
Stein Roe Capital Opportunities Fund
Stein Roe International Fund
Stein Roe Emerging Markets Fund
Stein Roe Mutual Funds
P.O. Box 8900
Boston, Massachusetts 02205-8900
1-800-338-2550
http://www.steinroe.com
In Chicago, visit our Fund Center at One South Wacker Drive, 32nd Floor
Liberty Securities Corporation, Distributor
Member SIPC
MMIIA 8/97
