<PAGE>
Prospectus March 2, 1998
Stein Roe Mutual Funds
Stein Roe Cash Reserves Fund
Cash Reserves Fund seeks to obtain maximum current income
consistent with capital preservation and maintenance of liquidity.
It seeks to achieve its objective by investing all of its net
investable assets in SR&F Cash Reserves Portfolio, which has the
identical investment objective and substantially the same
investment policies. Cash Reserves Portfolio invests solely in
money market instruments maturing in thirteen months or less from
the time of investment. The investment experience of Cash Reserves
Fund will correspond to Cash Reserves Portfolio. (See Master Fund/
Feeder Fund: Structure and Risk Factors.)
Cash Reserves Fund is a "no-load" money market fund and
attempts to maintain its net asset value at $1.00 per share.
Shares of Cash Reserves Fund are neither insured nor guaranteed by
the U.S. Government and there can be no assurance that it will be
able to maintain a stable net asset value of $1.00 per share.
There are no sales or redemption charges, and Cash Reserves
Fund has no 12b-1 plan. Cash Reserves Fund is a series of Stein
Roe Income Trust.
This prospectus contains information you should know before
investing in Cash Reserves Fund. Please read it carefully and
retain it for future reference.
A Statement of Additional Information dated March 2, 1998,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. That
information, material incorporated by reference, and other
information regarding registrants that file electronically with
the SEC is available at the SEC's website, www.sec.gov.
This prospectus is also available electronically by using Stein
Roe's Internet address: www.steinroe.com. You can get a
free paper copy of the prospectus, the Statement of Additional
Information, and the most recent financial statements by calling
800-338-2550 or by writing to Stein Roe Funds, Suite 3200, One
South Wacker Drive, Chicago, Illinois 60606.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TABLE OF CONTENTS
Page
Summary................................... 2
Fee Table................................. 3
Financial Highlights.......................4
The Fund...................................5
Investment Policies....................... 6
Investment Restrictions................... 7
Risks and Investment Considerations....... 8
How to Purchase Shares.....................9
By Check............................... 9
By Wire.................................9
By Electronic Transfer................ 10
By Exchange........................... 10
Conditions of Purchase................ 10
Purchases Through Third Parties........11
Purchase Price and Effective Date..... 11
How to Redeem Shares..................... 11
By Written Request.................... 11
By Exchange............................12
Special Redemption Privileges......... 12
General Redemption Policies............14
Shareholder Services......................15
Net Asset Value...........................17
Distributions and Income Taxes............18
Management............................... 19
Organization and Description of Shares... 20
Master Fund/Feeder Fund: Structure
and Risk Factors........................22
Certificate of Authorization............. 22
SUMMARY
Stein Roe Cash Reserves Fund ("Cash Reserves Fund") is a series of
Stein Roe Income Trust ("Income Trust"), an open-end management
investment company organized as a Massachusetts business trust.
Cash Reserves Fund is a "no-load" fund--there are no sales or
redemption charges. (See The Fund and Organization and
Description of Shares.) This prospectus is not a solicitation in
any jurisdiction in which shares of Cash Reserves Fund are not
qualified for sale.
Net Asset Value. Cash Reserves Fund attempts to maintain its
price per share at $1.00. There is no assurance that it will
always be able to do so. (See Net Asset Value.)
Investment Objectives and Policies. Cash Reserves Fund is a money
market fund with the objective of seeking maximum current income
consistent with safety of capital and maintenance of liquidity.
Cash Reserves Fund invests all of its net investable assets in
SR&F Cash Reserves Portfolio ("Cash Reserves Portfolio"), which
pursues its objective by investing in a wide range of high-quality
U.S. dollar-denominated money market instruments maturing in
thirteen months or less from the date of purchase. Under normal
market conditions, Cash Reserves Portfolio will invest at least
25% of its total assets in securities of issuers in the financial
services industry. (See Investment Policies.)
Investment Risks. The investment policy of normally investing at
least 25% of assets in securities of issuers in the financial
services industry may cause Cash Reserves Fund to be more
adversely affected by changes in market or economic conditions and
other circumstances affecting the financial services industry. In
addition, since its investment policy permits Cash Reserves
Portfolio to invest in securities of foreign branches of U.S.
banks, U.S. branches of foreign banks, and foreign banks and their
foreign branches, such as negotiable certificates of deposit
(Eurodollar CDs), and securities of foreign governments,
investment in Cash Reserves Fund might involve risks that are
different in some respects from an investment in a fund that
invests only in debt obligations of U.S. domestic issuers. (For a
discussion of risks, see Risks and Investment Considerations.)
Purchases. The minimum initial investment is $2,500, and
additional investments must be at least $100 (only $50 for
purchases by electronic transfer). Lower initial investment
minimums apply to IRAs, UGMAs, and automatic investment plans.
Shares may be purchased by check, by bank wire, by electronic
transfer, or by exchange from another no-load Stein Roe Fund. For
more detailed information, see How to Purchase Shares.
Redemptions. For information on redeeming shares, including the
special redemption privileges, see How to Redeem Shares.
Distributions. Dividends are declared each business day and are
paid monthly. Dividends will be reinvested in additional shares
of Cash Reserves Fund unless you elect to have them paid in cash,
deposited by electronic transfer into your bank account, or
invested in shares of another no-load Stein Roe Fund. (See
Distributions and Income Taxes and Shareholder Services.)
Adviser and Fees. Stein Roe & Farnham Incorporated (the
"Adviser") provides administrative, management, and investment
advisory services to Cash Reserves Fund and Cash Reserves
Portfolio. For a description of the Adviser and its fees, see
Management.
If you have any additional questions about Cash Reserves
Fund, please feel free to discuss them with a Stein Roe account
representative by calling 800-338-2550.
FEE TABLE
Shareholder Transaction Expenses
Sales Load Imposed on Purchases..................None
Sales Load Imposed on Reinvested Dividends.......None
Deferred Sales Load..............................None
Redemption Fees................................ None*
Exchange Fees....................................None
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management and Administrative Fees ............. 0.50%
12b-1 Fees.......................................None
Other Expenses.................................. 0.27%
-----
Total Fund Operating Expenses....................0.77%
=====
____________________
*There is a $7.00 charge for wiring redemption proceeds to your
bank.
Example. You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption at the
end of each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$8 $25 $43 $95
The purpose of the Fee Table is to assist you in
understanding the various costs and expenses that you will bear
directly or indirectly as an investor in Cash Reserves Fund. The
table is based upon actual expenses incurred in the last fiscal
year.
Cash Reserves Fund pays the Adviser an administrative fee
based on the Fund's average daily net assets and Cash Reserves
Portfolio pays the Adviser a management fee based on its average
daily net assets. The expenses of both Cash Reserves Fund and
Cash Reserves Portfolio are summarized in the Fee Table and are
described under Management. The Fund will bear its proportionate
share of Portfolio expenses. The trustees of Income Trust have
considered whether the annual operating expenses of Cash Reserves
Fund, including its proportionate share of the expenses of Cash
Reserves Portfolio, would be more or less than if the Fund
invested directly in the securities held by Cash Reserves
Portfolio. The trustees concluded that the Fund's expenses
would not be greater in such case.
For purposes of the Example above, the figures assume that
the percentage amounts listed under Annual Fund Operating Expenses
remain the same during each of the periods; that all income
dividends and capital gains distributions are reinvested in
additional shares; and that, for purposes of fee breakpoints, the
net assets remain at the same level as in the most recently
completed fiscal year.
The figures in the Example are not necessarily indicative of
past or future expenses, and actual expenses may be greater or
less than those shown. Although information such as that shown in
the Fee Table and Example is useful in reviewing expenses and in
providing a basis for comparison with other mutual funds, it
should not be used for comparison with other investments using
different assumptions or time periods.
FINANCIAL HIGHLIGHTS
The following table reflects the results of operations of Cash
Reserves Fund on a per-share basis and has been audited by Ernst &
Young LLP, independent auditors. The table should be read in
conjunction with the financial statements and notes thereto, which
may be obtained from Income Trust without charge upon request.
<TABLE>
<CAPTION>
Six
Year Months
Ended Ended
Dec. 31, June 30, Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income. 0.060 0.032 0.081 0.079 0.068 0.044 0.028 0.028 0.048 0.050 0.048
Distributions from net
investment income.... (0.060) (0.032) (0.081) (0.079) (0.068) (0.044) (0.028) (0.028) (0.048) (0.050) (0.048)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets... 0.72% *0.70% 0.75% 0.76% 0.78% 0.78% 0.79% 0.79% 0.76% 0.78% 0.77%
Ratio of net investment
income to average
net assets........... 6.02% *6.36% 8.13% 7.94% 6.81% 4.40% 2.81% 2.77% 4.83% 4.98% 4.80%
Total return.......... 6.15% *6.43% 8.41% 8.20% 6.98% 4.49% 2.83% 2.81% 4.96% 5.07% 4.92%
Net assets, end of
period (000 omitted).$962,901 $930,074 $948,018 $949,803 $840,525 $711,087 $627,110 $554,713 $498,163 $476,840 $452,358
<FN>
*Annualized.
</TABLE>
THE FUND
Stein Roe Cash Reserves Fund ("Cash Reserves Fund") is a no-load
"mutual fund." Mutual funds sell their own shares to investors
and use the money they receive to invest in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping. Because Cash Reserves Fund invests only in
money market instruments, it is called a "money market fund." No-
load funds do not impose commissions or charges when shares are
purchased or redeemed.
Cash Reserves Fund is a series of Income Trust, an open-end
management investment company which is authorized to issue shares
of beneficial interest in separate series. Each series represents
interests in a separate portfolio of securities and other assets,
with its own investment objectives and policies.
Although there can be no assurance that it will always be
able to do so, Cash Reserves Fund follows procedures designed to
stabilize its price per share at $1.00. The Statement of
Additional Information describes these procedures.
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory, administrative, and accounting and bookkeeping
services to Cash Reserves Fund and Cash Reserves Portfolio.
The Adviser also manages several other mutual funds
with different investment objectives, including international
funds, equity funds and taxable and tax-exempt bond funds. To
obtain prospectuses and other information on any of those mutual
funds, please call 800-338-2550.
On March 2, 1998, Cash Reserves Fund became a "feeder fund"--
that is, it invested all of its assets in SR&F Cash Reserves
Portfolio ("Cash Reserves Portfolio"), a "master fund" that has an
investment objective identical to that of the Fund. Cash Reserves
Portfolio is a series of SR&F Base Trust ("Base Trust"). Prior to
converting to a feeder fund, Cash Reserves Fund had invested its
assets in a diversified group of securities. Under the "master
fund/feeder fund structure," a feeder fund and one or more other
feeder funds pool their assets in a master portfolio that has the
same investment objective and substantially the same investment
policies as the feeder funds. The purpose of such an arrangement
is to achieve greater operational efficiencies and reduce costs.
The assets of Cash Reserves Portfolio, Cash Reserves Fund's master
fund, are managed by the Adviser in the same manner as the assets of
the Fund were managed before conversion to the master fund/feeder
fund structure. (For more information, see Master Fund/Feeder Fund:
Structure and Risk Factors.)
Because Cash Reserves Fund strives to maintain a $1.00 per
share value, its return is usually quoted either as a current
seven-day yield, calculated by totaling the dividends on a share
of Cash Reserves Fund for the previous seven days and restating
that yield as an annual rate; or as an effective yield, calculated
by adjusting the current yield to assume daily compounding. The
current and effective yields for the seven-day period ended Jan.
30, 1998, were 4.99% and 5.11% respectively. To obtain current
yield information, you may call 800-338-2550.
From time to time, Cash Reserves Fund may also quote total
return figures. The total return from an investment in Cash
Reserves Fund is measured by the distributions received (assuming
reinvestment) plus or minus the change in the net asset value per
share for a given period. A total return percentage may be
calculated by dividing the value of a share at the end of the
period (including reinvestment of distributions) by the value of
the share at the beginning of the period and subtracting one. For
a given period, an average annual total return may be calculated
by finding the average annual compounded rate that would equate a
hypothetical $1,000 investment to the ending redeemable value.
Comparison of the yield or total return of Cash Reserves Fund
with those of alternative investments should consider differences
between the Fund and the alternative investments, the periods and
methods used in calculation of the return being compared, and the
impact of taxes on alternative investments. Past performance is
no guarantee of future results.
INVESTMENT POLICIES
Cash Reserves Fund seeks to obtain maximum current income
consistent with the preservation of capital and the maintenance of
liquidity. It seeks to achieve its objective by investing all of
its net investable assets in Cash Reserves Portfolio, which has
the identical investment objective. Cash Reserves Portfolio seeks
to achieve its objective 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; /1/
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of $1 billion, or the equivalent in other currencies
(as of the date of the most recent available financial
statements) or of any branches, agencies or subsidiaries (U.S.
or foreign) of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term obligations.
- -----------
/1/ For a description of certain NRSRO commercial paper, note,
and bond ratings, see the Appendix to the Statement of Additional
Information.
/2/ A sale of securities to Cash Reserves Portfolio in which the
seller (a bank or securities dealer that the Adviser believes to
be financially sound) agrees to repurchase the securities at a
higher price, which includes an amount representing interest on
the purchase price, within a specified time.
- -----------
In accordance with its investment objectives and policies,
Cash Reserves Portfolio may invest in variable and floating rate
money market instruments which provide for periodic or automatic
adjustment in coupon interest rates that are reset based on
changes in amount and directions of specified short-term interest
rates.
Under normal market conditions, Cash Reserves Portfolio will
invest at least 25% of its total assets in securities of issuers
in the financial services industry (which includes, but is not
limited to, banks, personal credit and business credit
institutions, and other financial services institutions).
Cash Reserves Portfolio maintains a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a
stable net asset value per share, and not in excess of 90 days.
It is a fundamental policy /3/ that the maturity of any instrument
that grants the holder an optional right to redeem at par plus
interest and without penalty will be deemed at any time to be the
next date provided for payment on exercise of such optional
redemption right.
- --------------
/3/ A fundamental policy may be changed only with the approval of
a "majority of the outstanding voting securities" as defined in
the Investment Company Act of 1940.
- --------------
INVESTMENT RESTRICTIONS
Each of Cash Reserves Fund and Cash Reserves Portfolio is
diversified as that term is defined in the Investment Company Act
of 1940.
Neither Cash Reserves Fund nor Cash Reserves Portfolio will,
with respect to 75% of its total assets, invest more than 5% of
its total assets in the securities of any one issuer--this
restriction does not apply to U.S. Government Securities or
repurchase agreements for such securities./4/ Notwithstanding the
limitation on investment in a single issuer, Cash Reserves Fund
may invest all or substantially all of its assets in another
investment company having the identical investment objective under
a master fund/feeder fund structure.
- ----------
/4/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Cash
Reserves Portfolio 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.
- ----------
While neither Cash Reserves Fund nor Cash Reserves Portfolio
may make loans, that each may (1) purchase money market
instruments and enter into repurchase agreements; (2) acquire
publicly distributed or privately placed debt securities; and (3)
participate in an interfund lending program with other Stein Roe
Funds and Portfolios. Cash Reserves Fund and Cash Reserves
Portfolio may not borrow money, except for nonleveraging,
temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the
aggregate borrowings (including reverse repurchase agreements) nor
aggregate loans at any one time may exceed 33 1/3% of the value of
total assets. Additional securities may not be purchased when
borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
Cash Reserves Portfolio will not invest more than 10% of its
net assets in illiquid securities, including repurchase agreements
maturing in more than seven days (however, there is otherwise no
limitation on the percentage of assets which may be invested in
repurchase agreements).
The policies described in the second and third paragraphs of
this section, which summarize certain important investment
restrictions of Cash Reserves Fund and Cash Reserves Portfolio,
and the policy with respect to concentration of investment in the
financial services industry, can be changed only with the approval
of a "majority of the outstanding voting securities," as defined
in the Investment Company Act of 1940. All of the investment
restrictions are set forth in the Statement of Additional
Information.
RISKS AND INVESTMENT CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. There can be no
guarantee that Cash Reserves Fund or Cash Reserves Portfolio will
achieve its objective or be able at all times to maintain its net
asset value per share at $1.00.
In the event of a bankruptcy or other default of a seller of
a repurchase agreement, Cash Reserves Portfolio could experience
both delays in liquidating the underlying securities and losses,
including: (a) possible decline in the value of the collateral
during the period in which it seeks to enforce its rights thereto;
(b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its
rights.
The investment objective of Cash Reserves Fund and Cash
Reserves Portfolio is not fundamental and may be changed by the
Board of Trustees without a vote of shareholders. If there is a
change in the investment objective, shareholders should consider
whether Cash Reserves Fund remains an appropriate investment in
light of their then-current financial position and needs.
The investment policy of investing at least 25% of its assets
in securities of issuers in the financial services industry may
cause it to be more adversely affected by changes in market or
economic conditions and other circumstances affecting the
financial services industry. Because the investment policy
permits Cash Reserves Portfolio 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 Fund might involve risks
that are different in some respects from an investment in a fund
that invests only in debt obligations of U.S. domestic issuers.
Such risks may include future political and economic developments;
the possible imposition of foreign withholding taxes on interest
income payable on securities held in the portfolio; possible
seizure or nationalization of foreign deposits; the possible
establishment of exchange controls; or the adoption of other
foreign governmental restrictions that might adversely affect the
payment of principal and interest on securities in the portfolio.
Additionally, there may be less public information available about
foreign banks and their branches. Foreign banks and foreign
branches of foreign banks are not regulated by U.S. banking
authorities, and generally are not bound by accounting, auditing,
and financial reporting standards comparable to U.S. banks.
Cash Reserves Portfolio may invest in securities purchased on
a when-issued or delayed-delivery basis. Although the payment
terms of these securities are established at the time Cash
Reserves Portfolio enters into the commitment, the securities may
be delivered and paid for a month or more after the date of
purchase, when their value may have changed and the yields then
available in the market may be greater. It will make such
commitments only with the intention of actually acquiring the
securities, but may sell the securities before settlement date if
it is deemed advisable for investment reasons.
Cash Reserves Portfolio may also invest in securities
purchased on a standby commitment basis, which is a delayed-
delivery agreement in which it binds itself to accept delivery of
a security at the option of the other party to the agreement.
HOW TO PURCHASE SHARES
You may purchase shares by check, by wire, by electronic transfer,
or by exchange from your account with another no-load Stein Roe
Fund. The initial purchase minimum per account is $2,500; the
minimum for Uniform Gifts/Transfers to Minors Act ("UGMA")
accounts is $1,000; the minimum for accounts established under an
automatic investment plan (i.e., Regular Investments, Dividend
Purchase Option, or the Automatic Exchange Plan) is $1,000 for
regular accounts and $500 for UGMA accounts; and the minimum per
account for Stein Roe IRAs is $500. The initial purchase minimum
is waived for shareholders who participate in the Stein Roe
Counselor [service mark] program and for clients of the Adviser.
Subsequent purchases must be at least $100, or at least $50 if you
purchase by electronic transfer. If you wish to purchase shares
to be held by a tax-sheltered retirement plan sponsored by the
Adviser, you must obtain special forms for those plans. (See
Shareholder Services.)
By Check. To make an initial purchase of shares by check, please
complete and sign the application and mail it, together with a
check made payable to Stein Roe Mutual Funds, to SteinRoe Services
Inc. at P.O. Box 8900, Boston, Massachusetts 02205. Participants
in the Stein Roe Counselor [service mark] program should send
orders to SteinRoe Services Inc. at P.O. Box 803938, Chicago,
Illinois 60680.
You may make subsequent investments by submitting a check
along with either the stub from your account confirmation
statement or a note indicating the amount of the purchase, your
account number, and the name in which your account is registered.
Money orders will not be accepted for initial purchases into new
accounts. Credit card convenience checks will not be accepted for
initial or subsequent purchases into your account. Each
individual check submitted for purchase must be at least $100, and
Cash Reserves Fund generally will not accept cash, drafts, third
or fourth party checks, or checks drawn on banks outside of the
United States. Should an order to purchase shares of Cash
Reserves Fund be cancelled because your check does not clear, you
will be responsible for any resulting loss incurred.
By Wire. You also may pay for shares by instructing your bank to
wire federal funds (monies of member banks within the Federal
Reserve System) to the First National Bank of Boston. Your bank
may charge you a fee for sending the wire. If you are opening a
new account by wire transfer, you must first call 800-338-2550 to
request an account number and furnish your Social Security or
other tax identification number. Neither Cash Reserves Fund nor
Income Trust will be responsible for the consequences of delays,
including delays in the banking or Federal Reserve wire systems.
Your bank must include the full name(s) in which your account is
registered and your account number, and should address its wire as
follows:
First National Bank of Boston
Boston, Massachusetts
ABA Routing No. 011000390
Attention: SteinRoe Services Inc.
Fund No. 36; Stein Roe Cash Reserves Fund
Account of (exact name(s) in registration)
Shareholder Account No. ________
Participants in the Stein Roe Counselor [service mark]
program should address their wires as follows:
First National Bank of Boston
Boston, Massachusetts
ABA Routing No. 011000390
Attention: SteinRoe Services Inc.
Fund No. 36; Stein Roe Cash Reserves Fund
Account of (exact name(s) in registration)
Counselor Account No. ________
By Electronic Transfer. You may also make subsequent investments
by an electronic transfer of funds from your bank account.
Electronic transfer allows you to make purchases at your request
("Special Investments") by calling 800-338-2550 or at pre-
scheduled intervals ("Regular Investments") elected on your
application. (See Shareholder Services.) Electronic transfer
purchases are subject to a $50 minimum and a $100,000 maximum.
You may not open a new account through electronic transfer.
Should an order to purchase shares be cancelled because your
electronic transfer does not clear, you will be responsible for
any resulting loss incurred.
By Exchange. You may purchase shares by exchange of shares from
another no-load Stein Roe Fund account either by phone (if the
Telephone Exchange Privilege has been established on the account
from which the exchange is being made), by mail, in person, or
automatically at regular intervals (if you have elected Automatic
Exchanges). Restrictions apply; please review the information
under How to Redeem Shares--By Exchange.
Conditions of Purchase. Each purchase order must be accepted by
an authorized officer of Income Trust or its authorized agent and
is not binding until accepted and entered on the books of Cash
Reserves Fund. Once your purchase order has been accepted, you
may not cancel or revoke it; you may, however, redeem the shares.
Income Trust reserves the right not to accept any purchase order
that it determines not to be in the best interests of Income Trust
or Fund shareholders. Income Trust also reserves the right to
waive or lower its investment minimums for any reason. Income
Trust does not issue certificates for shares.
Purchases Through Third Parties. You may purchase (or redeem)
shares through certain broker-dealers, banks, or other
intermediaries ("Intermediaries"). These Intermediaries may
charge for their services or place limitations on the extent to
which you may use the services offered by Income Trust. There are
no charges or limitations imposed by Income Trust (other than
those described in this prospectus) if shares are purchased (or
redeemed) directly from Income Trust.
An Intermediary, who accepts orders that are processed at the
net asset value next determined after receipt of the order by the
Intermediary, accepts such orders as agent of Cash Reserves Fund.
The Intermediary is required to segregate any orders received on a
business day after the close of regular session trading on the New
York Stock Exchange and transmit those orders separately for
execution at the net asset value next determined after that
business day.
Some Intermediaries that maintain nominee accounts with Cash
Reserves Fund for their clients who are shareholders charge an
annual fee of up to 0.25% of the average net assets held in such
accounts for accounting, servicing, and distribution services they
provide with respect to the underlying shares. The Adviser and
the transfer agent share in the expense of these annual fees, and
the Adviser pays all sales and promotional expenses.
Purchase Price and Effective Date. Each purchase of shares made
directly with Cash Reserves Fund is made at its net asset value
(see Net Asset Value) next determined after receipt of an order in
good form, including receipt of payment as follows:
Check purchases--net asset value next determined after your
check is converted into federal funds (currently one business day
after receipt of your check). Your investment will begin earning
dividends on the day of purchase.
Wire purchases--net asset value next determined after receipt
of the wire. If your wire is received before 11:00 a.m., central
time, your investment will begin earning dividends on the day of
purchase. If your wire is received at or after 11:00 a.m.,
central time, your investment will begin earning dividends on the
following day.
Electronic transfer--net asset value next determined after
Cash Reserves Fund receives the electronic transfer from your
bank. A Special Electronic Transfer Investment instruction
received by telephone on a business day before 3:00 p.m., central
time, is effective on the next business day. Your investment will
begin earning dividends on the day following the date of purchase.
Each purchase of shares through an Intermediary that is an
authorized agent of Income Trust for the receipt of orders is made
at the net asset value next determined after the receipt of the
order by the Intermediary.
HOW TO REDEEM SHARES
By Written Request. You may redeem all or a portion of your
shares by submitting a written request in "good order" to SteinRoe
Services Inc. at P.O. Box 8900, Boston, Massachusetts 02205.
Participants in the Stein Roe Counselor [service mark] program
should send redemption requests to SteinRoe Services Inc. at P.O.
Box 803938, Chicago, Illinois 60680. A redemption request will be
considered to have been received in good order if the following
conditions are satisfied:
(1) The request must be in writing, in English and must indicate
the number of shares or the dollar amount to be redeemed and
identify the shareholder's account number;
(2) The request must be signed by the shareholder(s) exactly as
the shares are registered;
(3) The request must be accompanied by any certificates for the
shares, either properly endorsed for transfer, or accompanied
by a stock assignment properly endorsed exactly as the shares
are registered;
(4) The signatures on either the written redemption request or the
certificates (or the accompanying stock power) must be
guaranteed (a signature guarantee is not a notarization, but
is a widely accepted way to protect you and Cash Reserves Fund
by verifying your signature);
(5) Corporations and associations must submit with each request a
completed Certificate of Authorization included in this
prospectus (or a form of resolution acceptable to Income
Trust); and
(6) The request must include other supporting legal documents as
required from organizations, executors, administrators,
trustees, or others acting on accounts not registered in their
names.
By Exchange. You may redeem all or any portion of your shares and
use the proceeds to purchase shares of any other no-load Stein Roe
Fund offered for sale in your state if your signed, properly
completed application is on file. An exchange transaction is a
sale and purchase of shares for federal income tax purposes and
may result in capital gain or loss. Before exercising the
Exchange Privilege, you should obtain the prospectus for the no-
load Stein Roe Fund in which you wish to invest and read it
carefully. The registration of the account to which you are
making an exchange must be exactly the same as that of the Cash
Reserves Fund account from which the exchange is made and the
amount you exchange must meet any applicable minimum investment of
the no-load Stein Roe Fund being purchased. Unless you have
elected to receive your dividends in cash, on an exchange of all
shares, any accrued unpaid dividends will be invested in the no-
load Stein Roe Fund to which you exchange on the next business
day. An exchange may be made by following the redemption
procedure described under By Written Request and indicating the
no-load Stein Roe Fund to be purchased--a signature guarantee
normally is not required. (See also the discussion below of the
Telephone Exchange Privilege and Automatic Exchanges.)
Special Redemption Privileges. The Telephone Exchange Privilege
and the Telephone Redemption by Check Privilege will be
established automatically for you when you open your account
unless you decline these Privileges on your application. Other
Privileges must be specifically elected. If you do not want the
Telephone Exchange and Redemption Privileges, check the box(es)
under the section "Telephone Redemption Options" when completing
your application. In addition, a signature guarantee may be
required to establish a Privilege after you open your account. If
you establish both the Telephone Redemption by Wire Privilege and
the Electronic Transfer Privilege, the bank account that you
designate for both Privileges must be the same.
You may not use any of the Special Redemption Privileges if
you hold certificates for any of your shares. The Telephone
Redemption by Check, Telephone Redemption by Wire and Check-
Writing Privileges, and Special Electronic Transfer Redemptions
are not available to redeem shares held by a tax-sheltered
retirement plan sponsored by the Adviser. (See also General
Redemption Policies.)
Telephone Exchange Privilege. You may use the Telephone
Exchange Privilege to exchange an amount of $50 or more from your
account by calling 800-338-2550 or by sending a telegram; new
accounts opened by exchange are subject to the $2,500 initial
purchase minimum. Generally, you will be limited to four
Telephone Exchange round-trips per year and Cash Reserves Fund may
refuse requests for Telephone Exchanges in excess of four round-
trips (a round-trip being the exchange out of Cash Reserves Fund
into another no-load Stein Roe Fund, and then back to Cash
Reserves Fund). In addition, Income Trust's general redemption
policies apply to redemptions of shares by Telephone Exchange.
(See General Redemption Policies.)
Income Trust reserves the right to suspend or terminate at
any time and without prior notice the use of the Telephone
Exchange Privilege by any person or class of persons. Income
Trust believes that use of the Telephone Exchange Privilege by
investors utilizing market-timing strategies adversely affects
Cash Reserves Fund. Therefore, regardless of the number of
telephone exchange round-trips made by an investor, Income Trust
generally will not honor requests for Telephone Exchanges by
shareholders identified by Income Trust as "market-timers" if the
officers of Income Trust determine the order not to be in the best
interests of Income Trust or its shareholders. Income Trust
generally identifies as a "market-timer" an investor whose
investment decisions appear to be based on actual or anticipated
near-term changes in the securities markets rather than for
investment considerations. Moreover, Income Trust reserves the
right to suspend, limit, modify, or terminate at any time and
without prior notice the Telephone Exchange Privilege in its
entirety. Because such a step would be taken only if the Board of
Trustees believes it would be in the best interests of Cash
Reserves Fund, Income Trust expects that it would provide
shareholders with prior written notice of any such action unless
it appears that the resulting delay in the suspension, limitation,
modification, or termination of the Telephone Exchange Privilege
would adversely affect Cash Reserves Fund. If Income Trust were
to suspend, limit, modify, or terminate the Telephone Exchange
Privilege, a shareholder expecting to make a Telephone Exchange
might find that an exchange could not be processed or that there
might be a delay in the implementation of the exchange. (See How
to Redeem Shares--By Exchange.) During periods of volatile
economic and market conditions, you may have difficulty placing
your exchange by telephone.
Automatic Exchanges. You may use the Automatic Exchange
Privilege to automatically redeem a fixed amount from your account
for investment in another no-load Stein Roe Fund account on a
regular basis.
Telephone Redemption by Check Privilege. You may use the
Telephone Redemption by Check Privilege to redeem an amount of
$1,000 or more from your account by calling 800-338-2550. The
proceeds will be sent by check to your registered address.
Telephone Redemption by Wire Privilege. You may use this
Privilege to redeem an amount of $1,000 or more from your account
by calling 800-338-2550. The proceeds will be transmitted by wire
to your account at a commercial bank previously designated by you
that is a member of the Federal Reserve System. The fee for
wiring proceeds (currently $7.00 per transaction) will be deducted
from the amount wired.
Check-Writing Privilege. You may also redeem shares by
writing special checks in the amounts of $50 or more. Your checks
are drawn against a special checking account maintained with the
First National Bank of Boston, and you will be subject to the
bank's procedures and rules relating to its checking accounts and
to this Privilege.
Electronic Transfer Privilege. You may redeem shares by
calling 800-338-2550 and requesting an electronic transfer
("Special Redemption") of the proceeds to a bank account
previously designated by you at a bank that is a member of the
Automated Clearing House or at scheduled intervals ("Automatic
Redemptions"--see Shareholder Services). Electronic transfers are
subject to a $50 minimum and a $100,000 maximum. A Special
Redemption request received by telephone after 3:00 p.m., central
time, is deemed received on the next business day.
General Redemption Policies. You may not cancel or revoke your
redemption order once instructions have been received and
accepted. Income Trust cannot accept a redemption request that
specifies a particular date or price for redemption or any special
conditions. Please call 800-338-2550 if you have any questions
about requirements for a redemption before submitting your
request. If you wish to redeem shares held by a tax-sheltered
retirement plan sponsored by the Adviser, special procedures of
those plans apply. (See Shareholder Services--Tax-Sheltered
Retirement Plans.) Income Trust reserves the right to require a
properly completed application before making payment for shares
redeemed.
The price at which your redemption order will be executed is
the net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon the net asset value per
share at the time of redemption, it may be more or less than the
price you originally paid for the shares, even though Cash
Reserves Fund attempts to maintain its net asset value at $1.00
(rounded to the nearest one cent), and may result in a realized
capital gain or loss.
Income Trust normally intends to pay proceeds of a redemption
within two business days and generally no later than seven days
after proper instructions are received. If a request for
Telephone Redemption by Wire is received before 11:00 a.m.,
central time, the proceeds will be paid on the day the order is
received; proceeds of an order received at or after 11:00 a.m.,
central time, will be paid on the next business day. Income Trust
will not be responsible for the consequences of delays, including
delays in the mail, banking, or Federal Reserve wire systems. If
you attempt to redeem shares within 15 days after they have been
purchased by check or electronic transfer, Income Trust will delay
payment of the redemption proceeds to you until it can verify that
payment for the purchase of those shares has been (or will be)
collected. To reduce such delays, Income Trust recommends that
your purchase be made by federal funds wire through your bank.
Generally, you may not use any Special Redemption Privilege to
redeem shares purchased by check (other than certified or
cashiers' checks) or electronic transfer until 15 days after their
date of purchase.
Income Trust reserves the right at any time without prior
notice to suspend, limit, modify, or terminate any Privilege or
its use in any manner by any person or class.
Neither Income Trust, its transfer agent, nor their
respective officers, trustees, directors, employees, or agents
will be responsible for the authenticity of instructions provided
under the Privileges, nor for any loss, liability, cost or expense
for acting upon instructions furnished thereunder if they
reasonably believe that such instructions are genuine. Cash
Reserves Fund employs procedures reasonably designed to confirm
that instructions communicated by telephone under any Special
Redemption Privilege or the Special Electronic Transfer Redemption
Privilege are genuine. Use of any Special Redemption Privilege or
the Special Electronic Transfer Redemption Privilege authorizes
Cash Reserves Fund and its transfer agent to tape-record all
instructions to redeem. In addition, callers are asked to
identify the account number and registration, and may be required
to provide other forms of identification. Written confirmations
of transactions are mailed promptly to the registered address; a
legend on the confirmation requests that the shareholder review
the transactions and inform the Fund immediately if there is a
problem. If Cash Reserves Fund does not follow reasonable
procedures for protecting shareholders against loss on telephone
transactions, it may be liable for any losses due to unauthorized
or fraudulent instructions.
Income Trust reserves the right to redeem shares in any
account and send the proceeds to the owner of record if the shares
in the account do not have a value of at least $1,000. If the
value of the account is more than $10, a shareholder would be
notified that his account is below the minimum and would be
allowed 30 days to increase the account before the redemption is
processed. Income Trust reserves the right to redeem any account
with a value of $10 or less without prior written notice to the
shareholder. Due to the proportionately higher costs of
maintaining small accounts, the transfer agent may charge and
deduct from the account a $5 per quarter minimum balance fee if
the account is a regular account with a balance below $2,000 or an
UGMA account with a balance below $800. This minimum balance fee
does not apply to Stein Roe IRAs, other Stein Roe prototype
retirement plans, accounts with automatic investment plans (unless
regular investments have been discontinued), or omnibus or nominee
accounts. The transfer agent may waive the fee, at its
discretion, in the event of significant market corrections.
Shares in any account you maintain with Cash Reserves Fund or
any of the other Stein Roe Funds may be redeemed to the extent
necessary to reimburse any Stein Roe Fund for any loss you cause
it to sustain (such as loss from an uncollected check or
electronic transfer or any liability under the Internal Revenue
Code provisions on backup withholding).
SHAREHOLDER SERVICES
Reporting to Shareholders. You will receive a confirmation
statement reflecting each of your purchases and redemptions of
shares of Cash Reserves Fund, as well as periodic statements
detailing distributions made by the Fund. Shares purchased by
reinvestment of dividends, by cross-reinvestment of dividends from
another Stein Roe Fund, or through an automatic investment plan
will be confirmed to you quarterly. In addition, Income Trust
will send you semiannual and annual reports showing portfolio
holdings and will provide you annually with tax information.
To reduce the volume of mail you receive, only one copy of
certain materials, such as prospectuses and shareholder reports,
will be mailed to your household (same address). Please call 800-
338-2550 if you wish to receive additional copies free of charge.
This policy may not apply if you purchased shares through an
Intermediary.
Funds-on-Call [registered mark] Automated Telephone Service. To
access Stein Roe Funds-on-Call [registered mark], just call 800-
338-2550 on any touch-tone telephone and follow the recorded
instructions. Funds-on-Call [registered mark] provides yields,
prices, latest dividends, account balances, last transaction, and
other information 24 hours a day, seven days a week. You also may
use Funds-on-Call [registered mark] to make Special Investments
and Redemptions, Telephone Exchanges, and Telephone Redemptions by
Check. These transactions are subject to the terms and conditions
of the individual privileges. (See How to Purchase Shares and How
to Redeem Shares.) Information regarding your account is
available to you via Funds-on-Call [registered mark] only after
you follow an activation process the first time you call. Your
account information is protected by a personal identification
number (PIN) that you establish.
Stein Roe Counselor [service mark] Program. The Stein Roe
Counselor [service mark] program is a professional investment
advisory service available to shareholders. This program is
designed to provide investment guidance in helping investors to
select a portfolio of Stein Roe Funds.
Recordkeeping and Administration Services. If you oversee or
administer investments for a group of investors, we offer a
variety of services.
Tax-Sheltered Retirement Plans. Booklets describing the following
programs and special forms necessary for establishing them are
available on request. You may use all of the no-load Stein Roe
Funds, except those investing primarily in tax-exempt securities,
in these plans. Please read the prospectus for each Stein Roe
Fund in which you plan to invest before making your investment.
Individual Retirement Accounts ("IRAs") for employed persons
and their non-employed spouses.
Prototype Money Purchase Pension and Profit-Sharing Plans for
self-employed individuals, partnerships, and corporations.
Simplified Employee Pension Plans permitting employers to
provide retirement benefits to their employees by utilizing IRAs
while minimizing administration and reporting requirements.
Special Services. The following special services are available to
shareholders. Please call 800-338-2550 or write Income Trust for
additional information and forms.
Dividend Purchase Option--diversify your investments by
having distributions from one no-load Stein Roe Fund account
automatically invested in another no-load Stein Roe Fund account.
Before establishing this option, you should obtain and carefully
read the prospectus of the Stein Roe Fund into which you wish to
have your distributions invested. The account from which
distributions are made must be of sufficient size to allow each
distribution to usually be at least $25. The account into which
distributions are to be invested may be opened with an initial
investment of only $1,000.
Automatic Dividend Deposit (electronic transfer)--have
income dividends and capital gains distributions deposited
directly into your bank account.
Telephone Redemption by Check Privilege ($1,000 minimum) and
Telephone Exchange Privilege ($50 minimum)--established
automatically when you open your account unless you decline them
on your application. (See How to Redeem Shares--Special
Redemption Privileges.)
Telephone Redemption by Wire Privilege--redeem shares from
your account by phone and have the proceeds transmitted by wire to
your account ($1,000 minimum).
Check-Writing Privilege--redeem shares by writing special
checks against your Cash Reserves Fund account ($50 minimum per
check).
Special Redemption Option (electronic transfer)--redeem
shares at any time and have the proceeds deposited directly to
your bank account ($50 minimum; $100,000 maximum).
Regular Investments (electronic transfer)--purchase shares
at regular intervals directly from your bank account ($50 minimum;
$100,000 maximum).
Special Investments (electronic transfer)--purchase shares
by telephone and pay for them by electronic transfer of funds from
your bank account ($50 minimum; $100,000 maximum).
Automatic Exchange Plan--automatically redeem a fixed
dollar amount from your account and invest it in another no-load
Stein Roe Fund account on a regular basis ($50 minimum; $100,000
maximum).
Automatic Redemptions (electronic transfer)--have a fixed
dollar amount redeemed and sent at regular intervals directly to
your bank account ($50 minimum; $100,000 maximum).
Systematic Withdrawals--have a fixed dollar amount,
declining balance, or fixed percentage of your account redeemed
and sent at regular intervals by check to you or another payee.
NET ASSET VALUE
The purchase or redemption price of a share of Cash Reserves Fund
is the net asset value per share. The net asset value of a share
is normally determined twice each day: at 11:00 a.m., central
time, and as of the close of regular session trading on the New
York Stock Exchange ("NYSE") (currently 3:00 p.m., central time).
The net asset value per share is computed by dividing the
difference between the values of assets and liabilities by the
number of shares outstanding and rounding to the nearest cent.
Net asset value will not be determined on days when the NYSE is
closed unless, in the judgment of the Board of Trustees, the 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.
Cash Reserves Portfolio allocates net asset value, income, and
expenses to Cash Reserves Fund and any other of its feeder funds
in proportion to their respective interests in the Portfolio.
Cash Reserves Fund attempts to maintain its net asset value
at $1.00 per share. Portfolio securities are valued based on
their amortized cost, which does not take into account unrealized
gains or losses. Other assets and securities for which this
valuation method does not produce a fair value are valued at a
fair value determined by the Board. The extent of any deviation
between the net asset value based upon market quotations or
equivalents and $1.00 per share based on amortized cost will be
examined by the Board of Trustees. If such deviation were to
exceed 1/2 of 1%, the Board would consider what action, if any,
should be taken, including selling portfolio instruments,
increasing, reducing or suspending distributions, or redeeming
shares in kind.
DISTRIBUTIONS AND INCOME TAXES
Distributions. A dividend from net income of Cash Reserves Fund
is declared each business day to shareholders of record
immediately before 3:00 p.m., central time. (See How to Purchase
Shares.) Dividends are paid monthly and confirmed at least
quarterly. If the net asset value per share were to decline, or
were believed likely to decline, below $1.00 (rounded to the
nearest cent), the Board might temporarily reduce or suspend
dividends in an effort to maintain net asset value at $1.00 per
share.
All of your income dividends and capital gains distributions
will be reinvested in additional shares unless you elect to have
distributions either (1) paid by check; (2) deposited by
electronic transfer into your bank account; (3) applied to
purchase shares in your account with another no-load Stein Roe
Fund; or (4) applied to purchase shares in a no-load Stein Roe
Fund account of another person. (See Shareholder Services.)
Reinvestment normally occurs on the payable date. If a
shareholder elected to receive dividends and/or capital gains
distributions in cash and the postal or other delivery service
selected by the transfer agent is unable to deliver checks to the
shareholder's address of record, such shareholder's distribution
option will automatically be converted to having all dividend and
other distributions reinvested in additional shares. Income Trust
reserves the right to reinvest the proceeds and future
distributions in additional shares of Cash Reserves Fund if checks
mailed to you for distributions are returned as undeliverable or
are not presented for payment within six months. No interest will
accrue on amounts represented by uncashed distribution or
redemption checks.
Income Taxes. Your distributions will be taxable to you, under
income tax law, whether received in cash or reinvested in
additional shares. For federal income tax purposes, any
distribution that is paid in Jan. but was declared in the prior
calendar year is deemed paid in the prior calendar year.
You will be subject to federal income tax at ordinary rates
on income dividends and distributions of net short-term capital
gains. Distributions of net long-term capital gains will be
taxable to you as long-term capital gains regardless of the length
of time you have held your shares.
You will be advised annually as to the source of
distributions. If you are not subject to tax on your income, you
will not be required to pay tax on these amounts. Because
investment income consists primarily of interest, it is expected
that none of the dividends paid by Cash Reserves Fund will qualify
under the Internal Revenue Code for the dividends received
deduction available to corporations.
The Taxpayer Relief Act of 1997 (the "Act") reduced from 28%
to 20% the maximum tax rate on long-term capital gains. This
reduced rate generally applies to securities held for more than 18
months and sold after July 28, 1997, and securities held for more
than one year and sold between May 6, 1997 and July 29, 1997.
For federal income tax purposes, Cash Reserves Fund is
treated as a separate taxable entity distinct from the other
series of Income Trust.
This section is not intended to be a full discussion of
income tax laws and their effect on shareholders. You may wish to
consult your own tax advisor.
Backup Withholding. Income Trust may be required to withhold
federal income tax ("backup withholding") from certain payments to
you--generally redemption proceeds. Backup withholding may be
required if:
- - You fail to furnish your properly certified Social Security or
other tax identification number;
- - You fail to certify that your tax identification number is
correct or that you are not subject to backup withholding due to
the underreporting of certain income;
- - The Internal Revenue Service informs Income Trust that your tax
identification number is incorrect.
These certifications are contained in the application that
you should complete and return when you open an account. Cash
Reserves Fund must promptly pay to the IRS all amounts withheld.
Therefore, it is usually not possible for the Fund to reimburse
you for amounts withheld. You may, however, claim the amount
withheld as a credit on your federal income tax return.
MANAGEMENT
Trustees and Investment Adviser. The Board of Trustees of Income
Trust and the Board of Base Trust have overall management
responsibility for Cash Reserves Fund and Cash Reserves Portfolio,
respectively. See Management in the Statement of Additional
Information for the names of and other information about the
trustees and officers. Since Income Trust and Base Trust have the
same trustees, the trustees have adopted conflict of interest
procedures to monitor and address potential conflicts between the
interests of Cash Reserves Fund and Cash Reserves Portfolio.
The Adviser, Stein Roe & Farnham Incorporated, One South
Wacker Drive, Chicago, Illinois 60606, is responsible for managing
the investment portfolio of Cash Reserves Portfolio and the
business affairs of Cash Reserves Fund, Cash Reserves Portfolio,
Income Trust, and Base Trust, subject to the direction of the
respective Board. The Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940. The Adviser
and its predecessor have advised and managed mutual funds since
1949. The Adviser is a wholly owned indirect subsidiary of
Liberty Financial Companies, Inc. ("Liberty Financial"), which in
turn is a majority owned indirect subsidiary of Liberty Mutual
Insurance Company.
Fees and Expenses. The Adviser provides administrative services
to Cash Reserves Fund under an administrative agreement and
investment management services to Cash Reserves Portfolio under a
management agreement. The Adviser is entitled to receive a
monthly administrative fee from Cash Reserves Fund at an annual
rate of 0.250% of the first $500 million of average net assets,
0.200% of the next $500 million, and 0.150% thereafter; and a
monthly portfolio management fee from Cash Reserves Portfolio at
an annual rate of .250% of the first $500 million of average net
assets and .225% thereafter, each computed and accrued daily. The
annualized management and administrative fees for Cash Reserves
Fund for the year ended June 30, 1997, amounted to 0.50% of
average net assets.
Under a separate agreement with each Trust, the Adviser
provides certain accounting and bookkeeping services to Cash
Reserves Fund and Cash Reserves Portfolio, including computation
of net asset value and calculation of net income and capital gains
and losses on disposition of assets.
Portfolio Transactions. The Adviser places the orders for the
purchase and sale of portfolio securities. In doing so, the
Adviser seeks to obtain the best combination of price and
execution, which involves a number of judgmental factors.
Transfer Agent. SteinRoe Services Inc., One South Wacker Drive,
Chicago, Illinois 60606, a wholly owned subsidiary of Liberty
Financial, is the agent of Income Trust for the transfer of
shares, disbursement of dividends, and maintenance of shareholder
accounting records.
Distributor. Shares of Cash Reserves Fund are distributed by
Liberty Financial Investments, Inc. ("Distributor"), One Financial
Center, Boston, Massachusetts 02111. The Distributor is a
subsidiary of Colonial Management Associates, Inc., which is an
indirect subsidiary of Liberty Financial. Fund shares are offered
for sale without any sales commissions or charges to the Fund or
to its shareholders. All distribution and promotional expenses
are paid by the Adviser, including payments to the Distributor for
sales of Fund shares.
All correspondence (including purchase and redemption orders)
should be mailed to SteinRoe Services Inc. at P.O. Box 8900,
Boston, Massachusetts 02205. Participants in the Stein Roe
Counselor [service mark] program should send orders to SteinRoe
Services Inc. at P.O. Box 803938, Chicago, Illinois 60680.
Custodian. State Street Bank and Trust Company (the "Bank"), 225
Franklin Street, Boston, Massachusetts 02101, is the custodian for
Cash Reserves Fund and Cash Reserves Portfolio. Foreign
securities are maintained in the custody of foreign banks and
trust companies that are members of the Bank's Global Custody
Network or foreign depositories used by such members. (See
Custodian in the Statement of Additional Information.)
ORGANIZATION AND DESCRIPTION OF SHARES
Income Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
Jan. 3, 1986, which provides that each shareholder shall be deemed
to have agreed to be bound by the terms thereof. The Declaration
of Trust may be amended by a vote of either Income Trust's
shareholders or its trustees. Income Trust may issue an unlimited
number of shares, in one or more series as the Board may
authorize. Currently, four series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts
business trust such as Income Trust could, in some circumstances,
be held personally liable for unsatisfied obligations of the
trust. The Declaration of Trust provides that persons extending
credit to, contracting with, or having any claim against, Income
Trust or any particular series shall look only to the assets of
Income Trust or of the respective series for payment under such
credit, contract or claim, and that the shareholders, trustees and
officers shall have no personal liability therefor. The
Declaration of Trust requires that notice of such disclaimer of
liability be given in each contract, instrument or undertaking
executed or made on behalf of Income Trust. The Declaration of
Trust provides for indemnification of any shareholder against any
loss and expense arising from personal liability solely by reason
of being or having been a shareholder. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and Income
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of Income Trust
also is believed to be remote, because it would be limited to
claims to which the disclaimer did not apply and to circumstances
in which the other series was unable to meet its obligations.
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 any investment advisory contract.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Cash Reserves Fund, an open-end management investment
company, seeks to achieve its objective by investing all of its
assets in another mutual fund having an investment objective
identical to that of Cash Reserves Fund. The shareholders of Cash
Reserves Fund approved this policy of permitting Cash Reserves
Fund to act as a feeder fund by investing in Cash Reserves
Portfolio. Please refer to Investment Policies and Investment
Restrictions for a description of the investment objectives,
policies, and restrictions of Cash Reserves Fund and Cash Reserves
Portfolio. The management fees and expenses of both Cash Reserves
Fund and Cash Reserves Portfolio are described under Fee Table and
Management. Cash Reserves Fund bears its proportionate share of
Cash Reserves Portfolio's expenses.
The Adviser has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
SR&F Cash Reserves Portfolio is a separate series of SR&F
Base Trust ("Base Trust"), a Massachusetts common law trust
organized under an Agreement and Declaration of Trust
("Declaration of Trust") dated Aug. 23, 1993. The Declaration of
Trust of Base Trust provides that Cash Reserves Fund and other
investors in Cash Reserves Portfolio will be liable for all
obligations of Cash Reserves Portfolio that are not satisfied by
Cash Reserves Portfolio. However, the risk of Cash Reserves Fund
incurring financial loss on account of such liability is limited
to circumstances in which liability was inadequately insured and
Cash Reserves Portfolio was unable to meet its obligations.
Accordingly, the trustees of Income Trust believe that neither
Cash Reserves Fund nor its shareholders will be adversely affected
by reason of Cash Reserves Fund's investing in Cash Reserves
Portfolio.
The Declaration of Trust of Base Trust provides that Cash
Reserves Portfolio will terminate 120 days after the withdrawal of
Cash Reserves Fund or any other investor in Cash Reserves
Portfolio, unless the remaining investors vote to agree to
continue the business of Cash Reserves Portfolio. The trustees of
Income Trust may vote Cash Reserves Fund's interests in Cash
Reserves Portfolio for such continuation without approval of Cash
Reserves Fund's shareholders.
The common investment objective of Cash Reserves Fund and
Cash Reserves Portfolio is non-fundamental and may be changed
without shareholder approval, subject, however, to at least 30
days' advance written notice to Cash Reserves Fund's shareholders.
The fundamental policies of Cash Reserves Fund and the
corresponding fundamental policies of Cash Reserves Portfolio can
be changed only with shareholder approval.
If Cash Reserves Fund, as an investor in Cash Reserves
Portfolio, is requested to vote on a proposed change in a
fundamental policy of Cash Reserves Portfolio or any other matter
pertaining to Cash Reserves Portfolio (other than continuation of
the business of Cash Reserves Portfolio after withdrawal of
another investor), Cash Reserves Fund will solicit proxies from
its shareholders and vote its interest in Cash Reserves Portfolio
for and against such matters proportionately to the instructions
to vote for and against such matters received from Fund
shareholders. Cash Reserves Fund will vote shares for which it
receives no voting instructions in the same proportion as the
shares for which it receives voting instructions. There can be no
assurance that any matter receiving a majority of votes cast by
Fund shareholders will receive a majority of votes cast by all
Portfolio investors. If other investors hold a majority interest
in Cash Reserves Portfolio, they could have voting control over
Cash Reserves Portfolio.
In the event that Cash Reserves Portfolio's fundamental
policies were changed so as to be inconsistent with those of Cash
Reserves Fund, the Board of Trustees of Income Trust would
consider what action might be taken, including changes to Cash
Reserves Fund's fundamental policies, withdrawal of its assets
from Cash Reserves Portfolio and investment of such assets in
another pooled investment entity, or the retention of an
investment adviser to invest those assets directly in money market
instruments maturing in 13 months or less. Any of these actions
would require the approval of Cash Reserves Fund's shareholders.
Cash Reserves Fund's inability to find a substitute master fund or
comparable investment management could have a significant impact
upon its shareholders' investments. Any withdrawal of Cash
Reserves Fund's assets could result in a distribution in kind of
portfolio securities (as opposed to a cash distribution) to Cash
Reserves Fund. Should such a distribution occur, Cash Reserves
Fund would incur brokerage fees or other transaction costs in
converting such securities to cash. In addition, a distribution
in kind could result in a less diversified portfolio of
investments for Cash Reserves Fund and could affect the liquidity
of Cash Reserves Fund.
Each investor in Cash Reserves Portfolio, including Cash
Reserves Fund, may add to or reduce its investment in Cash
Reserves Portfolio on each day the NYSE is open for business. The
investor's percentage of the aggregate interests in Cash Reserves
Portfolio will be computed as the percentage equal to the fraction
(i) the numerator of which is the beginning of the day value of
such investor's investment in Cash Reserves Portfolio on such day
plus or minus, as the case may be, the amount of any additions to
or withdrawals from the investor's investment in Cash Reserves
Portfolio effected on such day; and (ii) the denominator of which
is the aggregate beginning of the day net asset value of Cash
Reserves Portfolio on such day plus or minus, as the case may be,
the amount of the net additions to or withdrawals from the
aggregate investment in Cash Reserves Portfolio by all investors
in Cash Reserves Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest
in Cash Reserves Portfolio as of the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in Cash Reserves Portfolio, but
members of the general public may not invest directly in Cash
Reserves Portfolio. Other investors in Cash Reserves Portfolio
are not required to sell their shares at the same public offering
price as the Fund, could incur different administrative fees and
expenses than Cash Reserves Fund, and their shares might be sold
with a sales commission. Therefore, Cash Reserves Fund
shareholders might have different investment returns than
shareholders in another investment company that invests
exclusively in Cash Reserves Portfolio. Investment by such other
investors in Cash Reserves Portfolio would provide funds for the
purchase of additional portfolio securities and would tend to
reduce Cash Reserves Portfolio's operating expenses as a
percentage of its net assets. Conversely, large-scale redemptions
by any such other investors in Cash Reserves Portfolio could
result in untimely liquidations of Cash Reserves Portfolio's
security holdings, loss of investment flexibility, and increases
in the operating expenses of Cash Reserves Portfolio as a
percentage of its net assets. As a result, Cash Reserves
Portfolio's security holdings may become less diverse, resulting
in increased risk.
Information regarding any other investors in Cash Reserves
Portfolio may be obtained by writing to SR&F Base Trust, Suite
3200, One South Wacker Drive, Chicago, IL 60606, or by calling
800-338-2550. The Adviser may provide administrative or other
services to one or more of such investors.
__________________
<PAGE>
Stein Roe Mutual Funds
Certificate of Authorization
for use by corporations and associations only
Corporations or associations must complete this Certificate and
submit it with the Fund Application, each written redemption,
transfer or exchange request, and each request to terminate or
change any of the Privileges or special service elections.
If the entity submitting the Certificate is an association, the
word "association" shall be deemed to appear each place the word
"corporation" appears. If the officer signing this Certificate is
named as an authorized person, another officer must countersign
the Certificate. If there is no other officer, the person signing
the Certificate must have his signature guaranteed. If you are
not sure whether you are required to complete this Certificate,
call a Stein Roe account representative at 800-338-2550 .
The undersigned hereby certifies that he is the duly elected
Secretary of ____________________________ (the "Corporation")
(name of Corporation/Association)
and that the following individual(s):
AUTHORIZED PERSONS
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title
_____________________________ __________________________
Name Title
is (are) duly authorized by resolution or otherwise to act on
behalf of the Corporation in connection with the Corporation's
ownership of shares of any mutual fund managed by Stein Roe &
Farnham Incorporated (individually, the "Fund" and collectively,
the "Funds") including, without limitation, furnishing any such
Fund and its transfer agent with instructions to transfer or
redeem shares of that Fund payable to any person or in any manner,
or to redeem shares of that Fund and apply the proceeds of such
redemption to purchase shares of another Fund (an "exchange"), and
to execute any necessary forms in connection therewith.
Unless a lesser number is specified, all of the Authorized Persons
must sign written instructions. Number of signatures required:
________.
If the undersigned is the only person authorized to act on behalf
of the Corporation, the undersigned certifies that he is the sole
shareholder, director, and officer of the Corporation and that the
Corporation's Charter and By-laws provide that he is the only
person authorized to so act.
Unless expressly declined on the Application (or other form
acceptable to the Funds), the undersigned further certifies that
the Corporation has authorized by resolution or otherwise the
establishment of the Telephone Exchange and Telephone Redemption
by Check Privileges for the Corporation's account with any Fund
offering any such Privilege. If elected on the Application (or
other form acceptable to the Funds), the undersigned also
certifies that the Corporation has similarly authorized
establishment of the Electronic Transfer, Telephone Redemption by
Wire, and Check-Writing Privileges for the Corporation's account
with any Fund offering said Privileges. The undersigned has
further authorized each Fund and its transfer agent to honor any
written, telephonic, or telegraphic instructions furnished
pursuant to any such Privilege by any person believed by the Fund
or its transfer agent or their agents, officers, directors,
trustees, or employees to be authorized to act on behalf of the
Corporation and agrees that neither the Fund nor its transfer
agent, their agents, officers, directors, trustees, or employees
will be liable for any loss, liability, cost, or expense for
acting upon any such instructions.
These authorizations shall continue in effect until five business
days after the Fund and its transfer agent receive written notice
from the Corporation of any change.
IN WITNESS WHEREOF, I have hereunto subscribed my name as
Secretary and affixed the seal of this Corporation this ____ day
of ________________, 19____.
________________________________
Secretary
_________________________________
Signature Guarantee*
*Only required if the person signing
the Certificate is the only person
named as "Authorized Person."
CORPORATE
SEAL
HERE
<PAGE>
[STEIN ROE MUTUAL FUNDS LOGO]
The Stein Roe Funds
Stein Roe Cash Reserves 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 Special Venture Fund
Stein Roe Capital Opportunities Fund
Stein Roe Growth Opportunities Fund
Stein Roe International Fund
Stein Roe Emerging Markets Fund
Stein Roe Mutual Funds
P. O. Box 8900
Boston, Massachusetts 02205-8900
Financial Advisors call: 1-800-322-0593
Shareholders call 1-800-338-2550
http://www.steinroe.com
In Chicago, visit our Fund Center at One South Wacker Drive,
Suite 3200
Liberty Financial Investments, Inc., Distributor
Member SIPC
<PAGE>
[STEIN ROE MUTUAL FUNDS LOGO]
Defined Contribution Plans
Stein Roe Cash Reserves Fund
Prospectus
March 2, 1998
Cash Reserves Fund seeks to obtain maximum current income
consistent with capital preservation and maintenance of liquidity.
Cash Reserves Fund seeks to achieve its objective by investing all
of its net investable assets in SR&F Cash Reserves Portfolio,
which has the identical investment objective and substantially the
same investment policies as the Fund. Cash Reserves Portfolio
invests solely in money market instruments maturing in thirteen
months or less from time of investment. The investment experience
of Cash Reserves Fund will correspond to Cash Reserves Portfolio.
(See Master Fund/Feeder Fund: Structure and Risk Factors.)
This prospectus relates only to shares of Cash Reserves Fund
purchased through eligible employer-sponsored defined contribution
plans ("defined contribution plans").
Cash Reserves Fund is a "no-load" money market fund and attempts
to maintain its net asset value at $1.00 per share. Shares of
Cash Reserves Fund are neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Fund will be
able to maintain a stable net asset value of $1.00 per share.
There are no sales or redemption charges, and the Fund has no 12b-
1 plan.
Cash Reserves Fund is a series of the Stein Roe Income Trust, an
open-end management investment company. This prospectus contains
information you should know before investing in the Fund. Please
read it carefully and retain it for future reference.
A Statement of Additional Information dated March 2, 1998,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the Stein
Roe Funds at Suite 3200, One South Wacker Drive, Chicago, IL 60606
or by calling 800-322-1130. The Statement of Additional
Information contains information relating to other series of the
Stein Roe Income Trust that may not be available as investment
vehicles for your defined contribution plan.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
TABLE OF CONTENTS
Page
Fee Table........................................... 2
Financial Highlights.................................2
The Fund.............................................3
Investment Policies..................................4
Investment Restrictions..............................5
Risks and Investment Considerations................. 6
How to Purchase Shares.............................. 6
How to Redeem Shares................................ 7
Net Asset Value..................................... 7
Distributions and Income Taxes.......................8
Management...........................................8
Organization and Description of Shares...............9
Master Fund/Feeder Fund: Structure and Risk Factors.10
For More Information................................11
___________________________
Fee Table
Shareholder Transaction Expenses
Sales Load Imposed on Purchases..................None
Sales Load Imposed on Reinvested Dividends.......None
Deferred Sales Load..............................None
Redemption Fees................................ None
Exchange Fees....................................None
Annual Fund Operating Expenses (as a
percentage of average net assets)
Management and Administrative Fees ............. 0.50%
12b-1 Fees.......................................None
Other Expenses.................................. 0.27%
-----
Total Fund Operating Expenses....................0.77%
=====
Example. You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption at the
end of each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
$8 $25 $43 $95
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in Cash Reserves Fund. The table is
based upon actual expenses incurred in the last fiscal year.
Cash Reserves Fund pays the Adviser an administrative fee based on
the Fund's average daily net assets and Cash Reserves Portfolio
pays the Adviser a management fee based on its average daily net
assets. The expenses of both Cash Reserves Fund and Cash Reserves
Portfolio are summarized in the Fee Table and are described under
Management. The Fund will bear its proportionate share of
Portfolio expenses. The trustees of Stein Roe Income Trust
("Income Trust") have considered whether the annual operating
expenses of Cash Reserves Fund, including its proportionate share
of the expenses of Cash Reserves Portfolio, would be more or less
than if the Fund invested directly in the securities held by Cash
Reserves Portfolio. The trustees concluded that the Fund's expenses
would not be greater in such case.
For purposes of the Example above, the figures assume that the
percentage amounts listed under Annual Fund Operating Expenses
remain the same during each of the periods; that all income
dividends and capital gains distributions are reinvested in
additional Fund shares; and that, for purposes of fee breakpoints,
the Fund's net assets remain at the same level as in the most
recently completed fiscal year. The figures in the Example are
not necessarily indicative of past or future expenses, and actual
expenses may be greater or less than those shown. Although
information such as that shown in the Fee Table and Example is
useful in reviewing the expenses and in providing a basis for
comparison with other mutual funds, it should not be used for
comparison with other investments using different assumptions or
time periods. The Example does not reflect any charges or
expenses related to your employer's plan.
__________________________
Financial Highlights
The following table reflects the results of operations of Cash
Reserves Fund on a per-share basis and has been audited by Ernst &
Young LLP, independent auditors. The table should be read in
conjunction with the financial statements and notes thereto, which
may be obtained from Income Trust without charge upon request.
<TABLE>
<CAPTION>
Six
Year Months
Ended Ended
Dec. 31, June 30, Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income. 0.060 0.032 0.081 0.079 0.068 0.044 0.028 0.028 0.048 0.050 0.048
Distributions from net
investment income.... (0.060) (0.032) (0.081) (0.079) (0.068) (0.044) (0.028) (0.028) (0.048) (0.050) (0.048)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets... 0.72% *0.70% 0.75% 0.76% 0.78% 0.78% 0.79% 0.79% 0.76% 0.78% 0.77%
Ratio of net investment
income to average
net assets........... 6.02% *6.36% 8.13% 7.94% 6.81% 4.40% 2.81% 2.77% 4.83% 4.98% 4.80%
Total return.......... 6.15% *6.43% 8.41% 8.20% 6.98% 4.49% 2.83% 2.81% 4.96% 5.07% 4.92%
Net assets, end of
period (000 omitted).$962,901 $930,074 $948,018 $949,803 $840,525 $711,087 $627,110 $554,713 $498,163 $476,840 $452,358
<FN>
*Annualized.
</TABLE>
___________________________
The Fund
Stein Roe Cash Reserves Fund ("Cash Reserves Fund") is a no-load
"mutual fund." Mutual funds sell their own shares to investors
and use the money they receive to invest in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping. Because Cash Reserves Fund invests only in
money market instruments, it is called a "money market fund." No-
load funds do not impose commissions or charges when shares are
purchased or redeemed.
Cash Reserves Fund is a series of Income Trust, an open-end
management investment company, which is authorized to issue shares
of beneficial interest in separate series. Each series represents
interests in a separate portfolio of securities and other assets,
with its own investment objectives and policies.
On March 2, 1998, Cash Reserves Fund became a "feeder fund"--that
is, it invested all of its assets in SR&F Cash Reserves Portfolio
("Cash Reserves Portfolio"), a "master fund" that has an
investment objective identical to that of the Fund. Cash Reserves
Portfolio is a series of SR&F Base Trust ("Base Trust"). Prior to
converting to a feeder fund, Cash Reserves Fund had invested its
assets in a diversified group of securities. Under the "master
fund/feeder fund structure," a feeder fund and one or more other
feeder funds pool their assets in a master portfolio that has the
same investment objective and substantially the same investment
policies as the feeder funds. The purpose of such an arrangement
is to achieve greater operational efficiencies and reduce costs.
The assets of Cash Reserves Portfolio, Cash Reserves Fund's master
fund, are managed by the Adviser in the same manner as the assets of
the Fund were managed before conversion to the master fund/feeder
fund structure. (For more information, see Master Fund/Feeder Fund:
Structure and Risk Factors.)
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory services to Cash Reserves Portfolio and
administrative services to Cash Reserves Fund and Cash Reserves
Portfolio. The Adviser also manages several other mutual funds
with different investment objectives, including other money market
funds, equity funds, international funds, and taxable and tax-
exempt bond funds. To obtain prospectuses and other information
on opening a regular account in any of these mutual funds, please
call 800-338-2550.
Although there can be no assurance that it will always be able to
do so, Cash Reserves Fund follows procedures designed to stabilize
its price per share at $1.00. The Statement of Additional
Information describes these procedures. Because Cash Reserves
Fund strives to maintain a $1.00 per share value, its return is
usually quoted either as a current seven-day yield, calculated by
totaling the dividends on a Fund share for the previous seven days
and restating that yield as an annual rate, or as an effective
yield, calculated by adjusting the current yield to assume daily
compounding. The current and effective yields for the seven-day
period ended Jan. 30, 1998, were 4.99% and 5.11%, respectively.
To obtain current yield information, you may call 800-338-2550.
From time to time, Cash Reserves Fund may also quote total return
figures. The total return from an investment in Cash Reserves
Fund is measured by the distributions received (assuming
reinvestment) plus or minus the change in the net asset value per
share for a given period. A total return percentage may be
calculated by dividing the value of a share at the end of the
period (including reinvestment of distributions) by the value of
the share at the beginning of the period and subtracting one. For
a given period, an average annual total return may be calculated
by finding the average annual compounded rate that would equate a
hypothetical $1,000 investment to the ending redeemable value.
Comparison of the yield or total return of Cash Reserves Fund with
those of alternative investments should consider differences
between the Fund and the alternative investments, the periods and
methods used in calculation of the return being compared, and the
impact of taxes on alternative investments. Cash Reserves Fund's
total return does not reflect any charges or expenses related to
your employer's plan. Past performance is no guarantee of future
results.
___________________________
Investment Policies
Cash Reserves Fund seeks to obtain maximum current income
consistent with the preservation of capital and the maintenance of
liquidity. It seeks to achieve its objective by investing all of
its net investable assets in Cash Reserves Portfolio, which has
the identical investment objective. Cash Reserves Portfolio
invests 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; /1/
(3) Certificates of deposit, bankers' acceptances and time
deposits of any bank (U.S. or foreign) having total assets in
excess of $1 billion, or the equivalent in other currencies
(as of the date of the most recent available financial
statements) or of any branches, agencies or subsidiaries (U.S.
or foreign) of any such bank;
(4) Commercial paper of U.S. or foreign issuers;
(5) Notes, bonds, and debentures rated at time of purchase A or
better (or equivalent rating) by at least one NRSRO;
(6) Repurchase agreements /2/ involving securities listed in (1)
above;
(7) Other high-quality short-term obligations.
- -----------
/1/ For a description of certain NRSRO commercial paper, note, and
bond ratings, see the Appendix to the Statement of Additional
Information.
/2/ A sale of securities to Cash Reserves Portfolio in which the
seller (a bank or securities dealer that the Adviser believes to
be financially sound) agrees to repurchase the securities at a
higher price, which includes an amount representing interest on
the purchase price, within a specified time.
- ----------
In accordance with its investment objectives and policies, Cash
Reserves Portfolio may invest in variable and floating rate money
market instruments which provide for periodic or automatic
adjustment in coupon interest rates that are reset based on
changes in amount and directions of specified short-term interest
rates.
Under normal market conditions, Cash Reserves Portfolio will
invest at least 25% of its total assets in securities of issuers
in the financial services industry (which includes, but is not
limited to, banks, personal credit and business credit
institutions, and other financial services institutions).
Cash Reserves Portfolio maintains a dollar-weighted average
portfolio maturity appropriate to its objective of maintaining a
stable net asset value per share, and not in excess of 90 days.
It is a fundamental policy that the maturity of any instrument
that grants the holder an optional right to redeem at par plus
interest and without penalty will be deemed at any time to be the
next date provided for payment on exercise of such optional
redemption right.
___________________________
Investment Restrictions
Each of Cash Reserves Fund and Cash Reserves Portfolio is
diversified as that term is defined in the Investment Company Act
of 1940.
Neither Cash Reserves Fund nor Cash Reserves Portfolio will, with
respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any one issuer--this restriction
does not apply to U.S. Government Securities or repurchase
agreements for such securities./3/ Notwithstanding the limitation
on investment in a single issuer, Cash Reserves Fund may invest
all or substantially all of its assets in another investment
company having the identical investment objective under a master
fund/feeder fund structure.
- -----------
/3/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Cash
Reserves Portfolio 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.
- -----------
While neither Cash Reserves Fund nor Cash Reserves Portfolio may
make Loans, each may (1) purchase money market instruments
and enter into repurchase agreements; (2) acquire publicly
distributed or privately placed debt securities; and (3)
participate in an interfund lending program with other Stein Roe
Funds and Portfolios. Cash Reserves Fund and Cash Reserves
Portfolio may not borrow money, except for nonleveraging,
temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither the
aggregate borrowings (including reverse repurchase agreements) nor
aggregate loans at any one time may exceed 33 1/3% of the value of
total assets. Additional securities may not be purchased when
borrowings, less proceeds receivable from sales of portfolio
securities, exceed 5% of total assets.
Cash Reserves Portfolio will not invest more than 10% of its net
assets in illiquid securities, including repurchase agreements
maturing in more than seven days (however, there is otherwise no
limitation on the percentage of assets which may be invested in
repurchase agreements).
The policies described in the second and third paragraphs of this
section, which summarize certain important investment restrictions
of Cash Reserves Fund and Cash Reserves Portfolio, and the policy
with respect to concentration of investment in the financial
services industry, can be changed only with the approval of a
"majority of the outstanding voting securities," as defined in the
Investment Company Act of 1940. All of the investment
restrictions are set forth in the Statement of Additional
Information.
___________________________
Risks and Investment Considerations
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. There can be no
guarantee that Cash Reserves Fund or Cash Reserves Portfolio will
achieve its objective or be able at all times to maintain its net
asset value per share at $1.00.
In the event of a bankruptcy or other default of a seller of a
repurchase agreement, Cash Reserves Portfolio could experience
both delays in liquidating the underlying securities and losses,
including: (a) possible decline in the value of the collateral
during the period in which it seeks to enforce its rights thereto;
(b) possible subnormal levels of income and lack of access to
income during this period; and (c) expenses of enforcing its
rights.
The investment objective of Cash Reserves Fund and Cash Reserves
Portfolio is not fundamental and may be changed by the Board of
Trustees without a vote of shareholders. If there is a change in
the investment objective, shareholders should consider whether
Cash Reserves Fund remains an appropriate investment in light of
their then-current financial position and needs.
The investment policy of investing at least 25% of its assets in
securities of issuers in the financial services industry may cause
it to be more adversely affected by changes in market or economic
conditions and other circumstances affecting the financial
services industry. Because the investment policy permits Cash
Reserves Portfolio 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 Fund might involve risks that are different in some
respects from an investment in a fund that invests only in debt
obligations of U.S. domestic issuers. Such risks may include
future political and economic developments; the possible
imposition of foreign withholding taxes on interest income payable
on securities held in the portfolio; possible seizure or
nationalization of foreign deposits; the possible establishment of
exchange controls; or the adoption of other foreign governmental
restrictions that might adversely affect the payment of principal
and interest on securities in the portfolio. Additionally, there
may be less public information available about foreign banks and
their branches. Foreign banks and foreign branches of foreign
banks are not regulated by U.S. banking authorities, and generally
are not bound by accounting, auditing, and financial reporting
standards comparable to U.S. banks.
Cash Reserves Portfolio may invest in securities purchased on a
when-issued or delayed-delivery basis. Although the payment terms
of these securities are established at the time Cash Reserves
Portfolio enters into the commitment, the securities may be
delivered and paid for a month or more after the date of purchase,
when their value may have changed and the yields then available in
the market may be greater. It will make such commitments only
with the intention of actually acquiring the securities, but may
sell the securities before settlement date if it is deemed
advisable for investment reasons.
Cash Reserves Portfolio may also invest in securities purchased on
a standby commitment basis, which is a delayed-delivery agreement
in which it binds itself to accept delivery of a security at the
option of the other party to the agreement.
___________________________
How to Purchase Shares
All shares must be purchased through your employer's defined
contribution plan. For more information about how to purchase
shares of Cash Reserves Fund through your employer or limitations
on the amount that may be purchased, please consult your employer.
Shares are sold to eligible defined contribution plans at the net
asset value (see Net Asset Value) next determined after receipt of
payment by Cash Reserves Fund. Each purchase of shares through a
broker-dealer, bank or other Intermediary ("Intermediary") that is
an authorized agent of Income Trust for the receipt of orders is
made at the net asset value next determined after receipt of the
order by the Intermediary. An Intermediary, who accepts orders
that are processed at the net asset value next determined after
receipt of the order by the Intermediary, accepts such orders as
agent of Cash Reserves Fund. The Intermediary is required to
segregate any orders received on a business day after the close of
regular session trading on the New York Stock Exchange and
transmit those orders separately for execution at the net asset
value next determined after that business day.
Each purchase order must be accepted by an authorized officer of
Income Trust in Chicago and is not binding until accepted and
entered on the books of Cash Reserves Fund. Once your purchase
order has been accepted, you may not cancel or revoke it; however,
you may redeem the shares. Income Trust reserves the right not to
accept any purchase order that it determines not to be in the best
interests of Income Trust or of Cash Reserves Fund's shareholders.
Shares purchased by reinvestment of dividends will be confirmed at
least quarterly. All other purchases and redemptions will be
confirmed as transactions occur.
___________________________
How to Redeem Shares
Subject to restrictions imposed by your employer's plan, Fund
shares may be redeemed any day the New York Stock Exchange is
open. For more information about how to redeem your shares of
Cash Reserves Fund through your employer's plan, including any
charges that may be imposed by the plan, please consult with your
employer.
Exchange Privilege.
Subject to your plan's restrictions, you may redeem all or any
portion of your Fund shares and use the proceeds to purchase
shares of any other no-load Stein Roe Fund available through your
employer's defined contribution plan. (An exchange is commonly
referred to as a "transfer.") Before exercising the Exchange
Privilege, you should obtain the prospectus for the no-load Stein
Roe Fund in which you wish to invest and read it carefully.
Contact your plan administrator for instructions on how to
exchange your shares or to obtain prospectuses of other no-load
Stein Roe Funds available through your plan. Cash Reserves Fund
reserves the right to suspend, limit, modify, or terminate the
Exchange Privilege or its use in any manner by any person or
class; shareholders would be notified of such a change.
General Redemption Policies.
Redemption instructions may not be cancelled or revoked once they
have been received and accepted by Income Trust. Income Trust
cannot accept a redemption request that specifies a particular
date or price for redemption or any special conditions. The price
at which your redemption order will be executed is the net asset
value next determined after proper redemption instructions are
received. (See Net Asset Value.) Because the redemption price
you receive depends upon Cash Reserves Fund's net asset value per
share at the time of redemption, it may be more or less than the
price you originally paid for the shares.
___________________________
Net Asset Value
The purchase or redemption price of Cash Reserves Fund's shares is
its net asset value per share. The net asset value of a Fund
share is normally determined twice each day: at 11:00 a.m.,
central time, and as of the close of regular session trading on
the New York Stock Exchange ("NYSE") (currently 3:00 p.m., central
time). The net asset value per share is computed by dividing the
difference between the values of Cash Reserves Fund's assets and
liabilities by the number of shares outstanding and rounding to
the nearest cent. Net asset value will not be determined on days
when the NYSE is closed unless, in the judgment of the Board of
Trustees, the 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. Cash Reserves Portfolio allocates net asset value,
income, and expenses to Cash Reserves Fund and any other of its
feeder funds in proportion to their respective interests in the
Portfolio.
Cash Reserves Fund attempts to maintain its net asset value at
$1.00 per share. Portfolio securities are valued based on their
amortized cost, which does not take into account unrealized gains
or losses. Other assets and securities for which this valuation
method does not produce a fair value are valued at a fair value
determined by the Board. The extent of any deviation between the
net asset value based upon market quotations or equivalents and
$1.00 per share based on amortized cost will be examined by the
Board of Trustees. If such deviation were to exceed 1/2 of 1%,
the Board would consider what action, if any, should be taken,
including selling portfolio instruments, increasing, reducing or
suspending distributions, or redeeming shares in kind.
___________________________
Distributions and Income Taxes
Distributions.
A dividend from net income of Cash Reserves Fund is declared each
business day to shareholders of record immediately before 3:00
p.m., central time. Dividends credited to your account are
distributed monthly. If Cash Reserves Fund's net asset value per
share were to decline, or were believed likely to decline, below
$1.00 (rounded to the nearest cent), the Board might temporarily
reduce or suspend dividends in an effort to maintain net asset
value at $1.00 per share.
The terms of your plan will govern how you may receive
distributions from Cash Reserves Fund. Generally, dividend and
capital gain distributions will be reinvested in additional Fund
shares.
Income Taxes.
Cash Reserves Fund intends to qualify as a "regulated investment
company" for federal income tax purposes and to meet all other
requirements that are necessary for it to be relieved of federal
taxes on income and gain it distributes. Cash Reserves Fund will
distribute substantially all of its ordinary income and net
capital gains on a current basis. Generally, Fund distributions
are taxable as ordinary income, except that any distributions of
net long-term capital gains will be taxed as such. However,
distributions by Cash Reserves Fund to employer-sponsored defined
contribution plans that qualify for tax-exempt treatment under
federal income tax laws will not be taxable. Special tax rules
apply to investments through such plans. You should consult your
tax advisor to determine the suitability of Cash Reserves Fund as
an investment through such a plan and the tax treatment of
distributions (including distributions of amounts attributable
through an investment in Cash Reserves Fund) from such a plan.
This section is not intended to be a full discussion of income tax
laws and their effect on shareholders.
___________________________
Management
Trustees and Investment Adviser.
The Board of Trustees of Income Trust and the Board of Base Trust
have overall management responsibility for Cash Reserves Fund and
Cash Reserves Portfolio, respectively. See the Statement of
Additional Information for the names of and other information
about the trustees and officers. Since Income Trust and Base
Trust have the same trustees, the trustees have adopted conflict
of interest procedures to monitor and address potential conflicts
between the interests of Cash Reserves Fund and Cash Reserves
Portfolio.
The Fund's Adviser, Stein Roe & Farnham Incorporated, One South
Wacker Drive, Chicago, Illinois 60606, is responsible for managing
the investment portfolio of Cash Reserves Portfolio and the
business affairs of Cash Reserves Fund, Cash Reserves Portfolio,
Income Trust and Base Trust, subject to the direction of the
respective Boards. The Adviser is registered as an investment
adviser under the Investment Advisers Act. The Adviser and its
predecessor have advised and managed mutual funds since 1949. The
Adviser is a wholly owned indirect subsidiary of Liberty Financial
Companies, Inc. ("Liberty Financial"), which in turn is a majority
owned indirect subsidiary of Liberty Mutual Insurance Company.
Fees and Expenses.
The Adviser provides administrative services to Cash Reserves Fund
under an administrative agreement and investment management
services to Cash Reserves Portfolio under a management agreement.
The Adviser is entitled to receive a monthly administrative fee
from Cash Reserves Fund at an annual rate of 0.250% of the first
$500 million of average net assets, 0.200% of the next $500
million, and 0.150% thereafter; and a monthly portfolio management
fee from Cash Reserves Portfolio at an annual rate of .250% of
the first $500 million of average net assets and .225% thereafter,
each computed and accrued daily. The annualized management and
administrative fees for Cash Reserves Fund for the year ended June
30, 1997, amounted to 0.50% of average net assets.
Under a separate agreement with each Trust, the Adviser provides
certain accounting and bookkeeping services to Cash Reserves Fund
and Cash Reserves Portfolio, including computation of net asset
value and calculation of net income and capital gains and losses
on disposition of assets.
Portfolio Transactions.
The Adviser places the orders for the purchase and sale of
portfolio securities. In doing so, the Adviser seeks to obtain
the best combination of price and execution, which involves a
number of judgmental factors.
Transfer Agent.
SteinRoe Services Inc. ("SSI"), One South Wacker Drive, Chicago,
Illinois 60606, a wholly owned subsidiary of Liberty Financial, is
the agent of Income Trust for the transfer of shares, disbursement
of dividends, and maintenance of shareholder accounting records.
Distributor.
The shares of Cash Reserves Fund are offered for sale through
Liberty Financial Investments, Inc. ("Distributor") without any
sales commissions or charges to Cash Reserves Fund or to its
shareholders. The Distributor is a subsidiary of Colonial
Management Associates, Inc., which is an indirect subsidiary of
Liberty Financial. The business address of the Distributor is One
Financial Center, Boston, Massachusetts 02111; however, all Fund
correspondence (including purchase and redemption orders) should
be mailed to SteinRoe Services Inc., P.O. Box 8900, Boston,
Massachusetts 02205. All distribution and promotional expenses
are paid by the Adviser, including payments to the Distributor for
sales of Fund shares.
Custodian.
State Street Bank and Trust Company (the "Bank"), 225 Franklin
Street, Boston, Massachusetts 02101, is the custodian for Cash
Reserves Fund and Cash Reserves Portfolio. Foreign securities are
maintained in the custody of foreign banks and trust companies
that are members of the Bank's Global Custody Network or foreign
depositories used by such members. (See Custodian in the
Statement of Additional Information.)
___________________________
Organization and Description of Shares
Income Trust is a Massachusetts business trust organized under an
Agreement and Declaration of Trust ("Declaration of Trust") dated
Jan. 3, 1986, which provides that each shareholder shall be deemed
to have agreed to be bound by the terms thereof. The Declaration
of Trust may be amended by a vote of either Income Trust's
shareholders or its trustees. Income Trust may issue an unlimited
number of shares, in one or more series as the Board may
authorize. Currently, four series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as Income Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, Income Trust or any
particular series shall look only to the assets of Income Trust or
of the respective series for payment under such credit, contract
or claim, and that the shareholders, trustees and officers shall
have no personal liability therefor. The Declaration of Trust
requires that notice of such disclaimer of liability be given in
each contract, instrument or undertaking executed or made on
behalf of Income Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or
having been a shareholder. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is
believed to be remote, because it would be limited to
circumstances in which the disclaimer was inoperative and Income
Trust was unable to meet its obligations.
The risk of a particular series incurring financial loss on
account of unsatisfied liability of another series of Income Trust
also is believed to be remote, because it would be limited to
claims to which the disclaimer did not apply and to circumstances
in which the other series was unable to meet its obligations.
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 any investment advisory contract.
___________________________
Master Fund/Feeder Fund: Structure and Risk Factors
Cash Reserves Fund, an open-end management investment company,
seeks to achieve its objective by investing all of its assets in
another mutual fund having an investment objective identical to
that of Cash Reserves Fund. The shareholders of Cash Reserves
Fund approved this policy of permitting Cash Reserves Fund to act
as a feeder fund by investing in Cash Reserves Portfolio. Please
refer to Investment Policies and Investment Restrictions for a
description of the investment objectives, policies, and restrictions
of Cash Reserves Fund and Cash Reserves Portfolio. The management
fees and expenses of both Cash Reserves Fund and Cash Reserves
Portfolio are described under Fee Table and Management. Cash
Reserves Fund bears its proportionate share of Cash Reserves
Portfolio's expenses.
The Adviser has provided investment management services in
connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
SR&F Cash Reserves Portfolio is a separate series of SR&F Base
Trust ("Base Trust"), a Massachusetts common law trust organized
under an Agreement and Declaration of Trust ("Declaration of
Trust") dated Aug. 23, 1993. The Declaration of Trust of Base
Trust provides that Cash Reserves Fund and other investors in Cash
Reserves Portfolio will be liable for all obligations of Cash
Reserves Portfolio that are not satisfied by Cash Reserves
Portfolio. However, the risk of Cash Reserves Fund incurring
financial loss on account of such liability is limited to
circumstances in which liability was inadequately insured and Cash
Reserves Portfolio was unable to meet its obligations.
Accordingly, the trustees of Income Trust believe that neither
Cash Reserves Fund nor its shareholders will be adversely affected
by reason of Cash Reserves Fund's investing in Cash Reserves
Portfolio.
The Declaration of Trust of Base Trust provides that Cash Reserves
Portfolio will terminate 120 days after the withdrawal of Cash
Reserves Fund or any other investor in Cash Reserves Portfolio,
unless the remaining investors vote to agree to continue the
business of Cash Reserves Portfolio. The trustees of Income Trust
may vote Cash Reserves Fund's interests in Cash Reserves Portfolio
for such continuation without approval of Cash Reserves Fund's
shareholders.
The common investment objective of Cash Reserves Fund and Cash
Reserves Portfolio is non-fundamental and may be changed without
shareholder approval, subject, however, to at least 30 days'
advance written notice to Cash Reserves Fund's shareholders. The
fundamental policies of Cash Reserves Fund and the corresponding
fundamental policies of Cash Reserves Portfolio can be changed
only with shareholder approval.
If Cash Reserves Fund, as an investor in Cash Reserves Portfolio,
is requested to vote on a proposed change in a fundamental policy
of Cash Reserves Portfolio or any other matter pertaining to Cash
Reserves Portfolio (other than continuation of the business of
Cash Reserves Portfolio after withdrawal of another investor),
Cash Reserves Fund will solicit proxies from its shareholders and
vote its interest in Cash Reserves Portfolio for and against such
matters proportionately to the instructions to vote for and
against such matters received from Fund shareholders. Cash
Reserves Fund will vote shares for which it receives no voting
instructions in the same proportion as the shares for which it
receives voting instructions. There can be no assurance that any
matter receiving a majority of votes cast by Fund shareholders
will receive a majority of votes cast by all Portfolio investors.
If other investors hold a majority interest in Cash Reserves
Portfolio, they could have voting control over Cash Reserves
Portfolio.
In the event that Cash Reserves Portfolio's fundamental policies
were changed so as to be inconsistent with those of Cash Reserves
Fund, the Board of Trustees of Income Trust would consider what
action might be taken, including changes to Cash Reserves Fund's
fundamental policies, withdrawal of its assets from Cash Reserves
Portfolio and investment of such assets in another pooled
investment entity, or the retention of an investment adviser to
invest those assets directly in money market instruments maturing
in 13 months or less. Any of these actions would require the
approval of Cash Reserves Fund's shareholders. Cash Reserves
Fund's inability to find a substitute master fund or comparable
investment management could have a significant impact upon its
shareholders' investments. Any withdrawal of Cash Reserves Fund's
assets could result in a distribution in kind of portfolio
securities (as opposed to a cash distribution) to Cash Reserves
Fund. Should such a distribution occur, Cash Reserves Fund would
incur brokerage fees or other transaction costs in converting such
securities to cash. In addition, a distribution in kind could
result in a less diversified portfolio of investments for Cash
Reserves Fund and could affect the liquidity of Cash Reserves
Fund.
Each investor in Cash Reserves Portfolio, including Cash Reserves
Fund, may add to or reduce its investment in Cash Reserves
Portfolio on each day the NYSE is open for business. The
investor's percentage of the aggregate interests in Cash Reserves
Portfolio will be computed as the percentage equal to the fraction
(i) the numerator of which is the beginning of the day value of
such investor's investment in Cash Reserves Portfolio on such day
plus or minus, as the case may be, the amount of any additions to
or withdrawals from the investor's investment in Cash Reserves
Portfolio effected on such day; and (ii) the denominator of which
is the aggregate beginning of the day net asset value of Cash
Reserves Portfolio on such day plus or minus, as the case may be,
the amount of the net additions to or withdrawals from the
aggregate investment in Cash Reserves Portfolio by all investors
in Cash Reserves Portfolio. The percentage so determined will
then be applied to determine the value of the investor's interest
in Cash Reserves Portfolio as of the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in Cash Reserves Portfolio, but
members of the general public may not invest directly in Cash
Reserves Portfolio. Other investors in Cash Reserves Portfolio
are not required to sell their shares at the same public offering
price as the Fund, could incur different administrative fees and
expenses than Cash Reserves Fund, and their shares might be sold
with a sales commission. Therefore, Cash Reserves Fund
shareholders might have different investment returns than
shareholders in another investment company that invests
exclusively in Cash Reserves Portfolio. Investment by such other
investors in Cash Reserves Portfolio would provide funds for the
purchase of additional portfolio securities and would tend to
reduce Cash Reserves Portfolio's operating expenses as a
percentage of its net assets. Conversely, large-scale redemptions
by any such other investors in Cash Reserves Portfolio could
result in untimely liquidations of Cash Reserves Portfolio's
security holdings, loss of investment flexibility, and increases
in the operating expenses of Cash Reserves Portfolio as a
percentage of its net assets. As a result, Cash Reserves
Portfolio's security holdings may become less diverse, resulting
in increased risk.
Information regarding any other investors in Cash Reserves
Portfolio may be obtained by writing to SR&F Base Trust, Suite
3200, One South Wacker Drive, Chicago, IL 60606, or by calling
800-338-2550. The Adviser may provide administrative or other
services to one or more of such investors.
___________________________
For More Information
Contact a Stein Roe Retirement Plan Representative at 800-322-1130
for more information about Cash Reserves Fund.
___________________________
<PAGE>
Statement of Additional Information Dated March 2, 1998
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 Cash Reserves Fund's Prospectus dated March 2,
1998 and any supplements thereto. A Prospectus may be obtained at
no charge by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History...........................2
Investment Policies.......................................3
Portfolio Investments and Strategies......................6
Investment Restrictions...................................8
Additional Investment Considerations.....................11
Purchases and Redemptions................................12
Management...............................................13
Financial Statements.....................................16
Principal Shareholders...................................16
Investment Advisory Services.............................17
Distributor..............................................19
Transfer Agent...........................................20
Custodian................................................20
Independent Auditors.....................................21
Portfolio Transactions.............,.....................21
Additional Income Tax Considerations.....................22
Additional Information on the Determination of Net
Asset Value............................................23
Investment Performance...................................24
Appendix--Ratings........................................29
GENERAL INFORMATION AND HISTORY
Stein Roe Cash Reserves Fund is a series of 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 Fund"
refers to the series of Income Trust designated Stein Roe Cash
Reserves Fund. On Nov. 1, 1995, the names of Income Trust and
Cash Reserves Fund were 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 Cash
Reserves Fund and Cash Reserves Portfolio and provides investment
advisory services to Cash Reserves Portfolio.
Special Considerations Regarding Master Fund/Feeder Fund Structure
On March 2, 1998, Cash Reserves Fund became a "feeder fund"--
that is, it invested all of its assets in SR&F Cash Reserves
Portfolio ("Cash Reserves Portfolio"), a "master fund" that has an
investment objective identical to that of Cash Reserves Fund.
Cash Reserves Portfolio is a series of SR&F Base Trust ("Base
Trust"). Before converting to a feeder fund, Cash Reserves Fund
invested its assets in a diversified group of securities. Under
the "master fund/feeder fund structure," a feeder fund and one or
more other feeder funds pool their assets in a master portfolio
that has the same investment objective and substantially the same
investment policies as the feeder funds. The purpose of such an
arrangement is to achieve greater operational efficiencies and
reduce costs. The assets of Cash Reserves Portfolio, Cash
Reserves Fund's master fund, are managed by the Adviser in the
same manner as the assets of Cash Reserves Fund were managed
before conversion to the master fund/feeder fund structure. (For
more information, see Master Fund/Feeder Fund: Structure and Risk
Factors in the Prospectus.)
INVESTMENT POLICIES
The following information supplements the discussion of the
investment objective and policies described in the Prospectus. In
pursuing its objective, Cash Reserves Portfolio 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.
- ---------
Cash Reserves Fund seeks to obtain maximum current income
consistent with the preservation of capital and the maintenance of
liquidity. It invests all of its net investable assets in Cash
Reserves Portfolio, which has the identical investment objective.
Cash Reserves Portfolio seeks to achieve its objective 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, Cash Reserves Portfolio could experience both delays in
liquidating the underlying securities and losses.
- --------
Cash Reserves Portfolio 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 intention of Cash Reserves Portfolio, as a general
policy, to hold securities to maturity. However, Cash Reserves
Portfolio 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 shares
of Cash Reserves Fund could necessitate the sale of portfolio
securities and these sales may occur when such sales would not
otherwise be desirable. While Cash Reserves Portfolio 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 portfolio investments and a
decline in interest rates will generally increase the market value
of portfolio investments. Investments in instruments other than
U.S. Government Securities are also subject to default by the
issuer.
Because the investment policy permits Cash Reserves Portfolio
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
Fund might involve risks that are different in some respects from
an investment in a fund that invests only in debt obligations of
U.S. domestic issuers. Such risks may include future political
and economic developments, the possible imposition of foreign
withholding taxes on interest income payable on securities held in
the portfolio, possible seizure or nationalization of foreign
deposits, the possible establishment of exchange controls, or the
adoption of other foreign governmental restrictions that might
adversely affect the payment of principal and interest on
securities in the investment 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.
Cash Reserves Portfolio 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 Cash Reserves Portfolio to invest
fluctuating amounts, which may change daily without penalty,
pursuant to direct arrangements between Cash Reserves Portfolio,
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, Cash Reserves Portfolio'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 it 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 it may invest.
Cash Reserves Portfolio may purchase from financial
institutions participation interests in securities. A
participation interest gives Cash Reserves Portfolio an undivided
interest in the security in the proportion that its participation
interest bears to the total principal amount of the security. It
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, 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 Cash Reserves Portfolio may invest.
Under normal market conditions, Cash Reserves Portfolio will
invest at least 25% of its assets in securities of issuers in the
financial services industry. This policy may cause Cash Reserves
Portfolio 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 Cash
Reserves Portfolio 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, Cash Reserves Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio and held by
the custodian throughout the period of the obligation.
Standby commitment agreements create an additional risk for
Cash Reserves Portfolio 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 Portfolio 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 Portfolio. 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 Portfolio 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 Portfolio 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 Portfolio 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 Portfolio, to the
purchaser of such securities. Cash Reserves Portfolio 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
Portfolio 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 Portfolio is said
to have a short position in the securities sold until it delivers
to the broker-dealer the securities sold. Cash Reserves Portfolio
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 Portfolio 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 Portfolio replaces the borrowed
security, it will incur a loss and if the price declines during
this period, Cash Reserves Portfolio 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 Portfolio 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
Portfolio 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 Portfolio 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 Portfolio has received
permission to lend money to, and borrow money from, other mutual
funds advised by the Adviser. Cash Reserves Portfolio 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 Fund and Cash Reserves Portfolio operate under
the following investment restrictions. They 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 [Cash Reserves Fund only] 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 [Cash Reserves Fund
only] 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 Portfolio 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, [Cash
Reserves Fund only] 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, [Cash
Reserves Fund only] 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 Fund and Cash Reserves 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 Cash Reserves 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. Cash Reserves Fund and Cash
Reserves 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/ 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 Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
Net Asset Value, and Shareholder Services, and that information is
incorporated herein by reference. The Prospectus discloses that
you may purchase (or redeem) shares through investment dealers,
banks, or other institutions. It is the responsibility of any
such institution to establish procedures insuring the prompt
transmission to Income Trust of any such purchase order. The
state of Texas has asked that Income Trust disclose in its
Statement of Additional Information, as a reminder to any such
bank or institution, that it must be registered as a dealer in
Texas.
The 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 shares of Cash Reserves 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 not reasonably practicable.
Although Cash Reserves Fund 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 Fund pays for the cost of printing
and mailing checks to its shareholders and pays charges of the
bank for payment of each check. Income 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 of Cash Reserves Fund solely in cash up
to the lesser of $250,000 or one percent of the net assets of the
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.
Income Trust reserves the right to redeem shares in any
account and send the proceeds to the owner of record if the shares
in the account do not have a value of at least $1,000. If the
value of the account is more than $10, a shareholder would be
notified that his account is below the minimum and would be
allowed 30 days to increase the account before the redemption is
processed. Income Trust reserves the right to redeem any account
with a value of $10 or less without prior written notice to the
shareholder. Due to the proportionately higher costs of
maintaining small accounts, the transfer agent may charge and
deduct from the account a $5 per quarter minimum balance fee if
the account is a regular account with a balance below $2,000 or an
UGMA account with a balance below $800. This minimum balance fee
does not apply to Stein Roe IRAs and other Stein Roe prototype
retirement plans, accounts with automatic investment plans (unless
regular investments have been discontinued), and omnibus and
nominee accounts. The transfer agent may waive the fee, at its
discretion, in the event of significant market corrections. 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
William W. Boyd 71 Trustee Chairman and director of Sterling Plumbing Group, Inc.
(2)(3)(4) (manufacturer of plumbing products)
Thomas W. Butch (4) 41 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) 46 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 40 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 57 Vice-President Senior vice president of the Adviser
Anne E. Marcel 40 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
Jane M. Naeseth 48 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) 33 Vice-President Senior legal counsel for the Adviser since Oct. 1996;
and Secretary 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) 57 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. Ms. Walter is also a vice president of
Liberty Financial Investments, Inc., the Fund's transfer agent.
The address 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. 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 Portfolio since its inception
in Mar. 1998 and had managed Cash Reserves Fund 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 the 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.
**Messrs. Block and Morley retired as trustees on Dec. 31, 1997.
FINANCIAL STATEMENTS
Please refer to the 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 Fund. 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 Dec. 31, 1997, the only person known by Income Trust to
own of record or "beneficially" 5% or more of outstanding shares
of Cash Reserves 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 APPROXIMATE % OF
OUTSTANDING
SHARES HELD
- ---------------------- -----------------
First Bank National Association* 14.63%
410 N. Michigan Avenue
Chicago, IL 60611
_______________________
*Shares held of record, but not beneficially.
The following table shows shares of Cash Reserves Fund held
by the categories of persons indicated as of Dec. 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
----------- ------- ----------- -------
79,907,448 15.71% 1,128,920 **
_____________
*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 Cash Reserves Fund and Cash Reserves Portfolio and
portfolio management services to Cash Reserves Portfolio. The
Adviser is a wholly owned subsidiary of SteinRoe Services Inc.
("SSI"), transfer agent of Cash Reserves Fund, 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 Prospectus, which is 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 Income Trust and bears any sales or promotional
expenses. Cash Reserves 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.
The administrative agreement provides that the Adviser shall
reimburse Cash Reserves Fund to the extent that 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 its
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 under that agreement for such year. In addition, in
the interest of further limiting expenses, the Adviser may
voluntarily waive its management fee and/or absorb certain
expenses for Cash Reserves Fund, as described in the Prospectus
under Fee Table. Any such reimbursements will enhance the yield
of the Fund.
The management agreement 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
Fund or Cash Reserves 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 Cash Reserves Fund shall
be paid solely out of its assets. Any expenses incurred by Income
Trust that are not solely attributable to a particular series 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 Cash Reserves Fund. 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 Fund are distributed by Liberty
Financial Investments, Inc. ("Distributor"), One Financial Center,
Boston, MA 02111, under a Distribution Agreement. The Distributor
is a subsidiary of Colonial Management Associates, Inc., which is
an indirect subsidiary 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 Fund. 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 the 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
Fund. The Board of Trustees believes the charges by SSI to Cash
Reserves Fund 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 Cash Reserves 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 Cash Reserves Fund, Cash Reserves
Portfolio, and their shareholders to maintain assets in each
custodial institution. However, with respect to foreign sub-
custodians, there can be no assurance that the 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 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 Portfolio may invest in obligations of the Bank
and may purchase or sell securities from or to the Bank.
INDEPENDENT AUDITORS
The independent auditors for Cash Reserves Fund and Cash
Reserves 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
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
Portfolio. Transactions placed through dealers reflect the spread
between the bid and asked prices. Occasionally, Cash Reserves
Portfolio 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 Portfolio
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 Portfolio, 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 Portfolio, 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 Portfolio), 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 Portfolio 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 Portfolio
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 the Portfolio.
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 Portfolio will not attempt to recapture underwriting
discounts or selling concessions.
Income 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 Fund 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 Held
Broker-Dealer (in thousands)
----------------------- --------------
Associates Corp. of N.A. $16,250
Merrill Lynch 3,996
ADDITIONAL INCOME TAX CONSIDERATIONS
Cash Reserves Fund and Cash Reserves 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.
Cash Reserves Fund expects that none of its dividends will
qualify for the deduction for dividends received by corporate
shareholders.
ADDITIONAL INFORMATION ON THE DETERMINATION OF NET ASSET VALUE
Please refer to Net Asset Value in the Prospectus, which is
incorporated herein by reference. Cash Reserves Fund values its
portfolio by the "amortized cost method" by which it attempts to
maintain its net asset value at $1.00 per share. This involves
valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium,
regardless of the impact of fluctuating interest rates on the
market value of the instrument. Although this method provides
certainty in valuation, it may result in periods during which
value as determined by amortized cost is higher or lower than the
price Cash Reserves Fund would receive if it sold the instrument.
Other assets are valued at a fair value determined in good faith
by the Board of Trustees.
In connection with the use of amortized cost and the
maintenance of a per share net asset value of $1.00, Income Trust
has agreed, with respect to Cash Reserves Fund: (i) to seek to
maintain a dollar-weighted average portfolio maturity appropriate
to its objective of maintaining relative stability of principal
and not in excess of 90 days; (ii) not to purchase a portfolio
instrument with a remaining maturity of greater than thirteen
months; and (iii) to limit its purchase of portfolio instruments
to those instruments that are denominated in U.S. dollars which
the Board of Trustees determines present minimal credit risks and
that are of eligible quality as determined by any major rating
service as defined under SEC Rule 2a-7 or, in the case of any
instrument that is not rated, of comparable quality as determined
by the Board.
Cash Reserves Fund 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 Fund's 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 Fund may quote a "Current Yield" or "Effective
Yield" or both from time to time. The Current Yield is an
annualized yield based on the actual total return for a seven-day
period. The Effective Yield is an annualized yield based on a
daily compounding of the Current Yield. These yields are each
computed by first determining the "Net Change in Account Value"
for a hypothetical account having a share balance of one share at
the beginning of a seven-day period ("Beginning Account Value"),
excluding capital changes. The Net Change in Account Value will
always equal the total dividends declared with respect to the
account, assuming a constant net asset value of $1.00.
The yields are then computed as follows:
Net Change in Account Value 365
--------------------------- ----
Current Yield = Beginning Account Value x 7
[1 + Net Change in Account Value]365/7
--------------------------------------
Effective Yield = Beginning Account Value - 1
For example, the yields of 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 Fund for the seven days ended June 30, 1997, was 44 days.
In addition to fluctuations reflecting changes in net income
of Cash Reserves Fund resulting from changes in income earned on
its portfolio securities and in its expenses, yield also would be
affected if Cash Reserves Fund were to restrict or supplement its
dividends in order to maintain its net asset value at $1.00. (See
Net Asset Value in the Prospectus and Additional Information on
the Determination of Net Asset Value herein.) Portfolio changes
resulting from net purchases or net redemptions of Fund shares may
affect yield. Accordingly, the yield of Cash Reserves Fund 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 Fund 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 the yield of Cash Reserves Fund 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 Cash Reserves 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 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 Cash Reserves 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
------------ ------------- --------------
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 Fund is a result of
conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information
is useful in reviewing 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.
Cash Reserves Fund may note its mention in newspapers,
magazines, or other media from time to time. However, Income
Trust assumes no responsibility for the accuracy of such data.
Newspapers and magazines that might mention the Fund include, but
are not limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Atlantic Monthly
Associated Press
Barron's
Bloomberg
Boston Globe
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Investment Advisor
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Marketing Alert
Gourmet
Individual Investor
Investment Dealers' Digest
Investment News
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Money on Line
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
Newsday
Newsweek
New York Daily News
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
Reuters
The San Francisco Chronicle
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Street.com
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 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 Cash Reserves 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.
Cash Reserves Fund may compare their performance to the
Consumer Price Index (All Urban), a widely-recognized measure of
inflation.
The performance of Cash Reserves Fund 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. The Fund 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 Fund to a different
category or develop (and place it into) a new category, the 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.
Cash Reserves Fund may compare its after-tax yield (computed
by multiplying the yield by one minus the highest marginal federal
individual tax rate) to the average yield for the tax-free
categories of the aforementioned services.
Investors may desire to compare the performance and features
of Cash Reserves Fund to those of various bank products. Cash
Reserves Fund may compare its yield to the average rates of bank
and thrift institution money market deposit accounts, Super N.O.W.
accounts, and certificates of deposit. The rates published weekly
by the BANK RATE MONITOR [copyright], a North Palm Beach (Florida)
financial reporting service, in its BANK RATE MONITOR [copyright]
National Index are averages of the personal account rates offered
on the Wednesday prior to the date of publication by one hundred
leading banks and thrift institutions in the top ten Consolidated
Standard Metropolitan Statistical Areas. Account minimums range
upward from $2,500 in each institution and compounding methods
vary. Super N.O.W. accounts generally offer unlimited checking,
while money market deposit accounts generally restrict the number
of checks that may be written. If more than one rate is offered,
the lowest rate is used. Rates are subject to change at any time
specified by the institution. Bank account deposits may be
insured. Shareholder accounts in Cash Reserves Fund are not
insured. Bank passbook savings accounts compete with money market
mutual fund products with respect to certain liquidity features
but may not offer all of the features available from a money
market mutual fund, such as check writing. Bank passbook savings
accounts normally offer a fixed rate of interest while the yield
of Cash Reserves Fund fluctuates. Bank checking accounts normally
do not pay interest but compete with money market mutual funds
with respect to certain liquidity features (e.g., the ability to
write checks against the account). Bank certificates of deposit
may offer fixed or variable rates for a set term. (Normally, a
variety of terms are available.) Withdrawal of these deposits
prior to maturity will normally be subject to a penalty. In
contrast, shares of Cash Reserves Fund are redeemable at the next
determined net asset value (normally, $1.00 per share) after a
request is received, without charge.
Of course, past performance is not indicative of future
results.
____________________
To illustrate the historical returns on various types of
financial assets, the Funds may use historical data provided by
Ibbotson Associates, Inc. ("Ibbotson"), a Chicago-based investment
firm. Ibbotson constructs (or obtains) very long-term (since
1926) total return data (including, for example, total return
indexes, total return percentages, average annual total returns
and standard deviations of such returns) for the following asset
types:
Common stocks
Small company stocks
Long-term corporate bonds
Long-term government bonds
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
____________________
Cash Reserves 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, Cash Reserves
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, Cash Reserves Fund may offer in its
advertising and sales literature to send an investment strategy
guide, a tax guide, or other supplemental information to investors
and shareholders. It may also mention the Stein Roe Counselor
[service mark] and Stein Roe Personal Counselor [service mark]
programs and asset allocation and other investment strategies.
APPENDIX--RATINGS
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion
as to the credit quality of the security being rated. However,
the ratings are general and are not absolute standards of quality
or guarantees as to the creditworthiness of an issuer.
Consequently, the Adviser believes that the quality of debt
securities should be continuously reviewed and that individual
analysts give different weightings to the various factors involved
in credit analysis. A rating is not a recommendation to purchase,
sell or hold a security because it does not take into account
market value or suitability for a particular investor. When a
security has received a rating from more than one service, each
rating should be evaluated independently. Ratings are based on
current information furnished by the issuer or obtained by the
rating services from other sources that they consider reliable.
Ratings may be changed, suspended or withdrawn as a result of
changes in or unavailability of such information, or for other
reasons.
The following is a description of the characteristics of
ratings used by Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Corporation ("S&P").
CORPORATE BOND RATINGS
Ratings By Moody's
Aaa. Bonds rated Aaa are judged to be the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or an exceptionally stable margin and
principal is secure. Although the various protective elements are
likely to change, such changes as can be visualized are more
unlikely to impair the fundamentally strong position of such
bonds.
Aa. Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa bonds or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured.
Often the protection of interest and principal payments may be
very moderate and thereby not well safeguarded during both good
and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa. Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of
danger with respect to principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
NOTE: Moody's applies numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate
bond rating system. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic
rating category.
Ratings By S&P
AAA. Debt rated AAA has the highest rating. Capacity to pay
interest and repay principal is extremely strong.
AA. Debt rated AA has a very strong capacity to pay interest
and repay principal and differs from the highest rated issues only
in small degree.
A. Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories.
BBB. Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay interest and repay principal for debt in
this category than for debt in higher rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is
regarded, on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in accordance with
the terms of the obligation. BB indicates the lowest degree of
speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. This rating is reserved for income bonds on which no
interest is being paid.
D. Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears. The D rating is also
used upon the filing of a bankruptcy petition if debt service
payments are jeopardized.
NOTES:
The ratings from AA to CCC may be modified by the addition of a
plus (+) or minus (-) sign to show relative standing within the
major rating categories. Foreign debt is rated on the same basis
as domestic debt measuring the creditworthiness of the issuer;
ratings of foreign debt do not take into account currency exchange
and related uncertainties.
The "r" is attached to highlight derivative, hybrid, and certain
other obligations that S&P believes may experience high volatility
or high variability in expected returns due to non-credit risks.
Examples of such obligations are: securities whose principal or
interest return is indexed to equities, commodities, or
currencies; certain swaps and options; and interest only and
principal only mortgage securities. The absence of an "r" symbol
should not be taken as an indication that an obligation will
exhibit no volatility or variability in total return.
COMMERCIAL PAPER RATINGS
Ratings By Moody's
Moody's employs the following three designations, all judged
to be investment grade, to indicate the relative repayment
capacity of rated issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or
entities, Moody's, in assigning ratings to such issuers, evaluates
the financial strength of the indicated affiliated corporations,
commercial banks, insurance companies, foreign governments or
other entities, but only as one factor in the total rating
assessment.
Ratings By S&P
A brief description of the applicable rating symbols and
their meaning follows:
A. Issues assigned this highest rating are regarded as
having the greatest capacity for timely payment. Issues in this
category are further refined with the designations 1, 2, and 3 to
indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong. Those issues determined
to possess overwhelming safety characteristics will be denoted
with a plus (+) sign designation.
____________
