Annual Report
June 30, 1996
STEIN ROE
BOND FUNDS
Intermediate Bond Fund
Income Fund
Photographic image of two men and a girl on a bridge.
Graphic: Stein Roe Logo
Stein Roe Mutual Funds
Building Wealth for Generations (sm)
Contents
From the President................................................ 1
Tim Armour's thoughts on the markets and investing
Performance....................................................... 4
How the Stein Roe bond funds have done over time
Q&A
Intermediate Bond Fund............................................ 7
Income Fund....................................................... 10
Interviews with the portfolio managers and a summary of major
shifts in the Funds' investments over the past 12 months
Investments....................................................... 16
A complete list of each Fund's investments with
market values
Financial Statements.............................................. 24
Balance sheets, statements of operations,
and changes in net assets
Notes to Financial Statements..................................... 28
Financial Highlights.............................................. 32
Selected per-share data
Report of Independent Auditors.................................... 36
General Information............................................... 37
A guide to products and services
From the President
TO OUR SHAREHOLDERS
We are pleased to present this annual report for the Stein Roe bond funds --
Stein Roe Intermediate Bond Fund and Stein Roe Income Fund.
CHANGING WINDS
After more than a year of monetary tightening that successfully slowed
economic growth and inhibited inflation, the Federal Reserve embarked on a new
interest rate strategy early in the Funds' fiscal year. Spurred by slowing
government spending, declining auto sales, fewer housing starts, and flatter
holiday retail sales, the Federal Reserve began to trim the benchmark federal
funds rate target, reducing it from 6.00 percent to 5.75 percent in July 1995,
then to 5.50 percent in December 1995, and finally to 5.25 percent in January
1996. The bond market rallied.
But the celebration was short-lived. As Washington failed to reach a
balanced budget agreement and currency speculators played U.S. and Japanese
interest rates against each other, the bond market weakened. Bond investors
seemed willing to brush off these events, however, as two government shutdowns
delayed key economic reports and hinted at continued economic sluggishness and
further rate cuts. In early March, however, an astonishing payroll report put
the number of jobs created at the highest level since January 1995. This data
suggested far stronger economic growth than anyone had anticipated, which in
turn implied a possible spike in inflation -- the bane of bondholders. As a
result, many believed the Federal Reserve would have to raise short-term
interest rates to keep inflation under control. The bond markets plummeted. In
fact, the sell-off was so sharp that it prompted comparisons to 1994, when a
sudden change in market sentiment regarding interest rates contributed to one
of the worst bear bond markets in history.
GOOD NEWS
The bond market ended an otherwise dismal first half of 1996 on a
positive note, however. The yield on the benchmark 30-year Treasury bond,
which had reached a mid-June peak of 7.2 percent, eased by month's end,
indicating the bond market finally may have brushed off the reverberations of
stronger-than-expected economic reports -- at least for the time being. This
was particularly good news for bond investors since, before this turnaround,
June figured to be the fifth consecutive losing month for bonds in terms of
total return. Previously, even in bear bond markets, stretches of four losing
months had invariably been followed by a rebound of at least one or two
months.
Photographic image of Tim Armour.
The fixed income markets remain volatile, however. And although the bond
market has, in effect, tightened monetary policy already, without the Federal
Reserve having to raise a hand -- or interest rates -- the possibility of a
rate hike remains. That's because the economy appears to be growing at a
fairly robust pace, with economic growth expected to top 3.5 percent for the
second quarter. At the same time, unemployment continues to hover at
near-record lows. But while recent economic reports increase the chance of a
rate hike, they in no way guarantee one. While we believe it's possible that
the Federal Reserve might raise interest rates a quarter to a half percentage
point at its next meeting, we think economic growth will slow later in the
year of its own accord, preventing the need for any further rate increases. So
while some volatility may continue in the near term, we believe the bond
market may stabilize by year-end 1996.
In fact, we believe bonds represent an attractive investment right now.
Because stocks are generally considered riskier than bonds, the stock market's
rate of return, as measured by the S&P 500, is usually about 2.5 percentage
points above the yield of the 10-year Treasury bond. Lately, however, the
spread has closed to less than 1.5 points, which is narrower than at any time
since the summer of 1987. Historically, whenever the stock market has moved
into this territory, it has usually foreshadowed either a stock market
correction or a period of relatively flat performance. Consequently, we think
bonds could be a safe refuge in the months ahead.
THE BASICS
While past performance is no guarantee of future results, and no one can
predict what might happen to bond funds or the markets in the future, we
believe investors must understand the factors that move the markets, not just
to profit from them, but to gain the patience to ride out short-term
volatility in their investments. As always, no matter what direction you think
the economy is heading, it is important to remember the basics. Think long
term and re-evaluate your investment portfolio from time to time to make sure
it continues to match your goals, risk tolerance and time horizon. And try to
follow a regular investment plan. By investing a certain amount of money each
month or quarter, you can take advantage of dollar-cost averaging. Of course,
not everyone is in a position to follow a regular investment plan. And it
neither ensures a profit nor protects against a loss in a declining market.
This simple strategy, however, can help you turn market volatility to your
advantage.
Please call us at 800-338-2550 with your comments and suggestions. As
always, we look forward to serving your investment needs.
Sincerely,
Timothy K. Armour
President
July 25, 1996
Fund Performance
There are several ways to evaluate a fund's historical performance. You can
look at the cumulative return percentage, the average annual return
percentage, or the growth of a hypothetical $10,000 investment. Each
performance figure includes changes in a fund's share price, plus reinvestment
of any dividends (net investment income) and capital gains (the profits the
fund earns when fixed income securities grow in value).
Average Annual Total Returns
Periods ended June 30, 1996
PAST 1 PAST 3 PAST 5 PAST 10
YEAR YEARS YEARS YEARS
INTERMEDIATE BOND FUND 5.76% 5.04% 7.88% 7.65%
Lehman Intermediate Government/
Corporate Index 5.01 4.95 7.65 8.00
INCOME FUND 5.70 5.79 9.37 8.65
Lehman Intermediate
Corporate Bond Index 5.34 5.74 8.71 8.76
<FN>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. Total
return performance includes changes in share price and reinvestment of income
and capital gains distributions. The Lehman Intermediate Government/Corporate
Index and the Lehman Intermediate Corporate Bond index are unmanaged groups of
fixed income securities that differs from the composition of each Stein Roe
Fund; they are not available for direct investment.
</FN>
Investment Comparison
COMPARISON of change in value of a $10,000 investment for the years ended June
30.
INTERMEDIATE BOND FUND
GRAPH:
YEAR ENDED INTERMEDIATE LEHMAN INTERMEDIATE GOVERNMENT/
BOND FUND CORPORATE INDEX
6/30/86 10000 10000
6/30/87 10340 10557
6/30/88 11060 11365
6/30/89 12270 12527
6/30/90 12920 13507
6/30/91 14290 14928
6/30/92 16290 16893
6/30/93 18020 18666
6/30/94 17940 18619
6/30/95 19750 20550
6/30/96 20892 21580
INCOME FUND
GRAPH:
YEAR ENDED INCOME FUND LEHMAN INTERMEDIATE
CORPORATE BOND INDEX
6/30/86 10000 10000
6/30/87 10770 10638
6/30/88 11780 11521
6/30/89 13080 13014
6/30/90 13400 14003
6/30/91 14650 15475
6/30/92 16890 17866
6/30/93 19360 20349
6/30/94 19230 19967
6/30/95 21690 22986
6/30/96 22934 24162
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. These
graphs compare the performance of Stein Roe's Funds to the Lehman Intermediate
Government/Corporate Index and the Lehman Intermediate Corporate Bond Index,
each an unmanaged group of fixed income securities that differs from the
composition of each Stein Roe Fund; they are not available for direct
investment. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions.
Investment Comparison Continued
MAKING THE MOST OF PERFORMANCE
The wide assortment of performance data available today can be a mixed
blessing. On one hand, a fund's performance results can be a valuable source
of information when considering an investment. On the other hand, even
seasoned investors may find the wide array of data and the different methods
of interpretation confusing.
That's why one of the most important pieces of advice we can give you is
to remember that a fund's past performance is just that -- past. While a
fund's past performance is not a guarantee of how it will perform in the
future, it can help you make rational decisions about the funds you currently
hold or about funds you might be considering. Owning bond funds helps to
provide diversification, and, as a result, can help to reduce a portfolio's
risks. And because bond funds have an income component, bond portfolio returns
tend to be less volatile than stock funds. Nonetheless, bond fund share prices
will fluctuate as interest rates change. The price and total return of a
mutual fund will change daily and if you sell your shares during a downturn in
the market, you might lose money. If you can ride out the market's ups and
downs, however, your fund might achieve a gain.
No one can make your financial decisions better than you. We hope this
annual report helps you to better understand and evaluate your fund's
performance, and serves as a helpful aid in making intelligent, appropriate
investment decisions. If you have any questions, please call a Stein Roe
account representative at 800-338-2550.
Q&A
FUND DATA
INVESTMENT OBJECTIVE:
Seeks high current income consistent with capital preservation by investing
primarily in a diversified portfolio of marketable debt securities. The
dollar-weighted average life of its portfolio is expected to be between
three and 10 years.
FUND INCEPTION:
December 5, 1978
TOTAL NET ASSETS:
$298.1 million
Photographic image of Mike Kennedy.
Q: HOW DID THE FUND PERFORM?
A: The Fund did well. At 5.76 percent, Intermediate Bond Fund's one-year total
return outstripped both the 5.01 percent return of the Lehman Intermediate
Government/ Corporate Index and the 4.31 percent median return of the Lipper
intermediate investment-grade debt peer group. As of June 30, 1996, the Fund's
30-day standardized yield was 6.65 percent.
Q: WHAT WERE THE STRONGEST CONTRIBUTORS TO YOUR PERFORMANCE?
A: Performance was led by the Fund's holdings of mortgage-backed securities,
which benefited from rising interest rates and a resulting drop in mortgage
prepayments. But our international exposure, in the form of Yankee bonds, also
has boosted the Fund's return -- these securities continue to perform well.
Finally, the Fund benefited when, prompted by credit rating pressure, we
eliminated our position in TCI. The security was downgraded shortly after we
sold it.
Q: ARE YANKEE BONDS STILL LOOKING ATTRACTIVE TO YOU?
A: Yes. Yankee bonds are foreign issues of dollar-denominated bonds. While our
economists are forecasting a slowing of growth in the United States, we're
still seeing positive trends in many foreign countries, particularly in Europe
and much of Asia, where markets are growing and environments appear favorable
to business. We think the outlook for international investing remains strong.
And we've found what we think are some very attractive issues, including
Sampoerna, an Indonesian tobacco company. Foreign issues are capped by what's
known as a "sovereign ceiling" -- the rating that Standard & Poor's or Moody's
has assigned to the country the issuer is based in. Without the sovereign
ceiling, we think Sampoerna would be a higher-rated company. With very little
debt and good market prospects, we think it's a solid company, and it is
attractively priced.
Foreign bonds generally offer a yield premium because they are less
familiar to investors than domestic issues. As investors become increasingly
comfortable with foreign issues, that yield premium is beginning to disappear.
We've already been able to benefit by buying early, but because we think the
spreads can tighten still more, we remain interested in these credits.
Q: HAVE YOU CHANGED YOUR INVESTMENT STRATEGY IN RECENT MONTHS?
A: We're expecting a slowdown in growth later in 1996 and, as a result, many
of our recent purchases have focused on issuers that we believe will perform
well in a slower-growth environment. These include Public Service of Colorado,
a low-cost electric utility that we think is unusually strong; and Loewen, a
funeral home company that was attractively priced after the company was
burdened by some legal issues. Prior to our purchase, the company rebounded
from its problems and we believe its prospects are good.
Q: WHAT'S YOUR OUTLOOK?
A: We don't believe we are being well compensated for taking on extra credit
risk, and, consequently, we expect to upgrade the credit quality of the
portfolio in coming months. And while we expect to trim our mortgage holdings
slightly, we plan to maintain a core holding of mortgages totaling roughly 20
percent to 25 percent of the portfolio. In addition, in preparation for the
"fourth quarter effect" -- a seasonal trend during which Treasuries typically
outperform corporate and mortgage-backed securities in the fourth quarter --
we expect to shift assets, on a strategic basis, from corporate and
mortgage-backed securities to Treasuries.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL SHARES.
Portfolio holdings as of June 30, 1996; portfolio data subject to change.
Total return performance includes changes in share price and reinvestment of
income and capital gains distributions. The Adviser currently limits expenses
to 0.70 percent of average net assets, subject to termination upon 30 days'
notice to the Fund. Absent past limits, the Fund's 30-day standardized yield
at June 30, 1996, would have been 6.60 percent and total return would have
been less. The Lehman Intermediate Government/ Corporate Index represents an
unmanaged group of intermediate-term bonds that differs from the composition
of the Fund; it is not available for direct investment. According to Lipper
Analytical Services, Inc., an independent monitor of mutual fund performance,
the median returns for the Fund's intermediate investment-grade debt fund peer
group for the one-, five- and 10-year periods ended June 30, 1996, were 4.31
percent, 7.54 percent and 7.61 percent, respectively. Foreign investments
involve currency, market and political risks not generally associated with
U.S. investments.
Fund Highlights
Intermediate Bond Fund
SECURITIES TYPE BREAKDOWN
PORTFOLIO PORTFOLIO
JUNE 30, 1995 JUNE 30, 1996
Corporate Bonds 32.1% 33.2%
Mortgage-Backed Securities 33.6 30.5
Yankee Bonds 4.3 24.0
Asset-Backed Securities 7.0 5.9
Federal Agency Securities 8.6 --
U.S. Treasury Securities 10.3 0.9
Cash and Equivalents 4.1 5.5
Total 100% 100%
AVERAGE LIFE
PIE CHART:
As of June 30, 1995 As of June 30, 1996
LESS THAN 1 YEAR (9.0%) LESS THAN 1 YEAR (9.1%)
1-5 YEARS (40.0%) 1-5 YEARS (28.6%)
5-10 YEARS (49.0%) 5-10 YEARS (55.7%)
OVER 10 YEARS (2.0%) OVER 10 YEARS (6.6%)
PORTFOLIO QUALITY
PIE CHART:
As of June 30, 1995 As of June 30, 1996
AAA/AGENCY (44.0%) AAA/U.S. GOVERNMENT (26.7%)
AA (4.0%) AA (11.1%)
A (16.0%) A (24.8%)
BBB (28.0%) BBB (23.4%)
BB (8.0%) BB (14.0%)
Q&A
AN INTERVIEW WITH ANN BENJAMIN, PORTFOLIO MANAGER OF INCOME FUND
FUND DATA
INVESTMENT OBJECTIVE:
Seeks high current income by investing principally in medium-quality debt
securities. The Fund also may invest in higher-quality securities and, to a
lesser extent, lower-quality securities which may involve greater credit
and other risk.
FUND INCEPTION:
March 5, 1986
TOTAL NET ASSETS:
$309.6 million
Photographic image of Ann Benjamin.
Q: HOW DID THE FUND PERFORM?
A: For the year ended June 30, 1996, Income Fund posted a total return of 5.70
percent, outpacing both the 5.34 percent return of the Lehman Intermediate
Corporate Bond Index and the 4.05 percent median return of its Lipper
corporate debt BBB peer group. As of June 30, 1996, the Fund's 30-day
standardized yield was 7.36 percent.
Income Fund's solid performance was primarily driven by our significant
weighting in high-yield debt (31 percent of total net assets on June 30,
1996), which has dramatically outperformed investment-grade debt in the past
year.
Q: INCOME FUND'S ASSETS HAVE SWELLED BY MORE THAN $130 MILLION SINCE JUNE 30,
1995. WHAT DROVE THAT GROWTH?
A: High-yield corporate bonds tend to behave like equities, meaning they
generally are more sensitive to changes in the condition of the corporation
that issues them than to the interest rate environment. So when an issuing
company is benefiting from a strong economy, its bonds tend to benefit as
well. As a result, high-yield bonds have captured the attention of equity
investors as well as fixed income investors. In fact, funds in our Lipper peer
group -- funds that invest in a combination of investment-grade and high-yield
bonds -- have taken in more than $3.6 billion in new assets since June 30,
1995, an increase of 21 percent.(1)
But perhaps the most significant factor in the Fund's growth occurred in
January 1996, when Liberty Mutual Insurance Company -- the parent company of
Stein Roe's own parent, Liberty Financial Companies -- added Income Fund to
the investment choices available in its employee Thrift Incentive Plan (TIP).
This plan, which has 20,000 participants, is very similar to a 401(k) plan.
Liberty's decision to include us in its TIP sparked an $80 million cash
infusion for the Fund in the last two weeks of January.
Q: WHAT WAS YOUR STRATEGY FOR HANDLING THIS LARGE AN INFLOW?
A: Generally, an investment manager doesn't want to receive large cash
inflows during a rising-rate environment, because rising rates tend to depress
the yield of older bonds, which were issued at lower rates. And that makes
finding bonds with attractive yields more difficult, because everyone wants to
invest in them.
Still, a bond manager will usually prefer to be invested rather than hold
large sums in cash, so that he or she can benefit as much as possible from
favorable market movements. As a result, bond managers will often invest large
inflows into Treasury bonds until they can locate more promising issues. This
was precisely our situation early in 1996, when the most concentrated of the
inflows occurred. I invested those inflows into Treasuries, then swapped those
Treasuries into higher-yielding securities as they became available.
Q: HIGH-YIELD BONDS TURNED IN A RIVETING PERFORMANCE DURING THE FUND'S FISCAL
YEAR. DO YOU EXPECT THIS TO CONTINUE?
A: All investments experience cycles of performance -- often spurred by supply
and demand factors -- and high-yield securities are no exception. Typically,
high-yield bonds tend to outperform investment-grade issues in the first two
quarters of the calendar year. Then, in the second half of the year, spreads
tend to widen as demand subsides. I wouldn't be surprised to see high-yield
bonds underperform Treasuries in the third and fourth quarters of 1996. As a
result, we may trim our high-yield position somewhat in coming months.
The exception here is Yankee bonds. These bonds continue to offer a yield
premium, in part because they are foreign, which carries more risk than a
domestic issue. And, contrary to the current slowing economic trends in the
United States, we're still seeing a lot of growth potential overseas,
particularly in Europe and Asia.
Q: WHERE ARE YOU FINDING OPPORTUNITIES NOW?
A: The focus recently has been on casinos, Yankee bonds and broadcasting.
Broadcasting communications companies seem to be benefiting from recent
legislation. And because retail sales have been somewhat soft, we think people
are now spending their money on leisure activities rather than retail
products: casinos are enjoying record cash flows; the airports are jammed with
vacationers. We're following the consumer.
Among our recent purchases are Societe Generale, one of the largest banks
in France; the Export/Import Bank of Korea, a government-controlled financial
institution that promotes trade; Harvey Casino, a diversified casino entity;
JayCor Communications, a large radio broadcaster; and Greenwich Air Services,
the largest aircraft engine servicer worldwide. We also bought Loewen, a
funeral home operator. We think funeral homes are a very stable industry -- a
desirable characteristic if domestic economic growth slows, as our economists
are forecasting.
Q: HAVE YOU MADE ANY OTHER CHANGES TO THE PORTFOLIO?
A: With indications of soft retail sales and growing delinquencies in credit
card payments, we trimmed our holdings of consumer-related businesses.
Q: WHAT IS YOUR OUTLOOK FOR THE FUND?
A: We believe interest rates will rise in the near term. As a result, we're
shortening duration and buying shorter callable paper, which tends to be more
stable in a bear bond market. I'd say the Fund's position is neutral
to bearish.
1 Strategic Insight, May 31, 1996
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL SHARES.
Portfolio holdings as of June 30, 1996; portfolio data subject to change.
Total return performance includes changes in share price and reinvestment of
income and capital gains distributions. The Adviser currently limits expenses
to 0.82 percent of average net assets, effective through October 31, 1998.
Absent past limits, the Fund's 30-day standardized yield at June 30, 1996,
would have been 7.33 percent and total return would have been less. The Lehman
Intermediate Corporate Bond Index is an unmanaged group of intermediate- and
long-term bonds that differs from the composition of the Fund; it is not
available for direct investment. According to Lipper Analytical Services,
Inc., an independent monitor of mutual fund performance, the median returns
for the Fund's corporate debt BBB fund peer group for the one-, five- and
10-year periods ended June 30, 1996, were 4.05 percent, 8.96 percent and 8.45
percent, respectively.
Foreign investments involve currency, market and political risks not
generally associated with U.S. investments.
Investing in high-yield bonds involves greater credit and other risks not
associated with investing in higher-quality securities.
Fund Highlights
Income Fund
SECURITIES TYPE BREAKDOWN
PORTFOLIO PORTFOLIO
JUNE 30, 1995 JUNE 30, 1996
Industrial 16.0% 17.8%
Financial 14.1 20.5
Utilities 15.7 8.5
U.S. Government Securities 12.6 4.5
Foreign Sovereign Bonds 3.7 7.7
Miscellaneous 34.2 36.9
Cash and Equivalents 3.7 4.1
Total 100% 100%
MATURITY
PIE CHART:
As of June 30, 1995 As of June 30, 1996
LESS THAN 1 YEAR (5.0%) LESS THAN 1 YEAR (0.7%)
1-5 YEARS (9.0%) 1-5 YEARS (15.1%)
5-10 YEARS (64.1%) 5-10 YEARS (69.5%)
10-20 YEARS (18.6%) 10-20 YEARS (10.9%)
OVER 20 YEARS (3.3%) OVER 20 YEARS (3.8%)
PORTFOLIO QUALITY
PIE CHART:
As of June 30, 1995 As of June 30, 1996
A (11.0%) A (20.5%)
BBB (37.5%) BBB (30.2%)
BB (25.3%) BB (25.5%)
B/NR* (3.7%) B/NR* (7.7%)
TREASURY/AAA/AGENCY (16.1%) TREASURY/AAA/AGENCY (4.8%)
AA (6.4%) AA (11.3%)
*NONRATED
Shareholders Approve Four Proposals
At a special meeting on June 18, 1996, shareholders of Stein Roe
Intermediate Bond Fund and Stein Roe Income Fund voted to approve proposals
relating to an election of each Fund's Board of Trustees, modifications to
certain investment policies, and new management and administrative agreements.
The approved proposals include:
(A) Expansion of Board of Trustees
Each Fund's Board was expanded from seven to nine members; nine members were
elected to each Board. This expansion will help Stein Roe to facilitate the
transition of responsibilities from retiring board members to new board
members over an 18-month period.
(B) Interfund Borrowing
(C) Interfund Lending
Cash management is an important part of the investment process for mutual
funds. An interfund lending program -- a program that allows mutual funds to
borrow cash from and lend cash to each other -- gives the funds an additional
credit facility to meet emergency needs at terms that would be at least as
favorable as a third party transaction, such as a bank line of credit. Stein
Roe expects to engage in interfund borrowing only when we think it would be
more favorable to both funds than borrowing from a third party.
(D) Administrative and Management Agreements
Each Fund's Investment Advisory Agreement is replaced by separate a)
Administrative and b) Portfolio Management Agreements. These new agreements
essentially carry forward, under two separate agreements, the investment
advisory and management services Stein Roe & Farnham already provides to each
Fund. Separate agreements will facilitate, at a future date, the pooling of
each Fund's assets with assets of other funds that have identical investment
objectives. The resulting larger pool of assets would be managed by Stein Roe
& Farnham.
RECORD TOTAL SHARE
DATE SHARE POSITION
POSITION VOTED AFFIRMATIVE WITHHOLD
INTERMEDIATE BOND FUND..... 35,479,708 19,226,675
A) Expansion of Board of Trustees
Timothy K. Armour...... 18,883,179 343,496
Kenneth L. Block....... 18,866,988 359,687
William W. Boyd........ 18,891,969 334,706
Lindsay Cook........... 18,871,383 355,292
Douglas A. Hacker...... 18,823,231 403,444
Francis W. Morley...... 18,869,568 357,107
Charles R. Nelson...... 18,903,043 323,632
Thomas C. Theobald..... 18,858,589 368,086
Gordon R. Worley....... 18,801,832 424,843
FOR AGAINST ABSTENTIONS
B) Interfund Borrowing 17,127,906 933,647 1,165,122
C) Interfund Lending 17,048,228 1,016,803 1,161,644
D) Administrative and
Management Agreements
a) Administrative 17,094,245 850,845 1,281,585
b) Management 17,070,626 864,452 1,291,597
RECORD TOTAL SHARE
DATE SHARE POSITION
POSITION VOTED AFFIRMATIVE WITHHOLD
INCOME FUND................ 30,627,125 21,626,830
A) Expansion of Board of Trustees
Timothy K. Armour...... 21,498,156 128,674
Kenneth L. Block....... 21,486,398 140,432
William W. Boyd........ 21,498,450 128,380
Lindsay Cook........... 21,489,688 137,142
Douglas A. Hacker...... 21,455,796 171,034
Francis W. Morley...... 21,473,320 153,510
Charles R. Nelson...... 21,501,093 125,737
Thomas C. Theobald..... 21,462,760 164,070
Gordon R. Worley...... 21,473,150 153,680
FOR AGAINST ABSTENTIONS
B) Interfund Borrowing 18,790,080 478,354 2,358,396
C) Interfund Lending 18,783,414 485,685 2,357,731
D) Administrative and
Management Agreements
a) Administrative 18,967,343 265,253 2,394,234
b) Management 18,962,670 277,170 2,386,990
INTERMEDIATE BOND FUND
Investments as of June 30, 1996
(Dollar Amounts In Thousands)
Principal Market
LONG-TERM OBLIGATIONS (94.5%) Amount Value
U.S. GOVERNMENT OBLIGATION (0.9%)
U.S. Treasury Bond 7.125% 2/15/23.................... $ 2,750 $ 2,779
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (15.6%)
Federal Home Loan Mortgage Corporation Gold
12.000% 7/01/20................................... 4,440 5,006
Federal Home Loan Mortgage Corporation
Remic Trust Series 11-C 9.500% 4/15/19............ 315 327
Federal National Mortgage Association
9.148% 6/01/97 (Multi Family Housing) Floating Rate 156 156
8.500% 4/01/01.................................... 2 2
8.500% 5/01/03.................................... 25 26
8.500% 9/01/03.................................... 104 108
8.500% 11/01/03................................... 224 232
6.000% 4/01/09.................................... 13,025 12,376
11.250% 11/01/13 (FHA/VA guaranteed).............. 284 317
6.000% 1/01/24.................................... 948 868
6.000% 3/01/24.................................... 2,864 2,619
8.000% 9/01/24.................................... 955 963
8.500% 12/01/24................................... 3,166 3,251
8.000% 8/01/25.................................... 3,081 3,107
Federal National Mortgage Association Remic Trusts
14.400% (Effective Yield) 7/25/98 Series 1991-91-SA 50 336
9.250% 3/25/18 Series 88-4-Z...................... 4,487 4,630
Government National Mortgage Association
8.000% 1/15/08.................................... 679 697
8.000% 2/15/08.................................... 460 472
8.000% 4/15/08.................................... 493 506
8.000% 5/15/08.................................... 635 652
8.000% 6/15/08.................................... 2,891 2,967
8.000% 7/15/08.................................... 505 518
9.000% 6/15/16.................................... 171 181
9.000% 8/15/16.................................... 111 117
9.000% 10/15/16................................... 234 248
6.500% 7/20/25 ARM (Floating Rate)................ 5,720 5,774
--------
46,456
AIR TRANSPORTATION (2.4%)
Federal Express Corporation 1994 Pass-Through
Certificates Series A310-A1 7.530% 9/23/06........ 4,429 4,445
United Airline Corporation Series 1991-A1 9.200% 3/22/08 2,351 2,515
--------
6,960
INTERMEDIATE BOND FUND CONTINUED
Principal Market
Amount Value
ASSET-BACKED OBLIGATIONS (5.9%)
Airplane Pass-Through Trust Series 1 Class A 6.513% 3/15/19
Floating Rate..................................... $ 2,967 $ 2,978
ALPS Pass-Through Trust Series 1994-1 Class C2
9.350% 9/15/04.................................... 3,482 3,541
First Boston Home Equity Loan Pass-Through
Certificates Series 1993-H1 Class A-IO 12.820% (Effective
Yield) 9/28/13.................................... 28,216 1,094
Greentree Finance Manufactured Housing Series 1994-S-A3
7.600% 9/01/19.................................... 3,000 3,051
Greentree Home Improvement Loan Trust Series 1994-A
Class A 7.050% 3/15/14............................ 2,932 2,886
Greentree Securitized Net Interest Margin
6.900% 2/15/04 Series 1994-A...................... 2,052 2,027
6.900% 7/15/05 Series 1995-A...................... 2,025 2,021
--------
17,598
BUSINESS SERVICES (2.5%)
Xerox Corp. 6.500% 6/29/00........................... 7,500 7,438
CABLE/MEDIA (3.3%)
Le Groupe Videotron Ltee (Yankee Issue) 10.625% 2/15/05 3,000 3,131
Rogers Cablesystem Senior Secured Second Priority Note
(Yankee Issue) 9.625% 8/01/02..................... 3,000 2,970
Viacom 10.250% 9/15/01............................... 3,500 3,816
--------
9,917
COMMERCIAL BANKS (2.9%)
BBV International Finance Cayman Islands (Yankee Issue)
6.875% 10/27/05................................... 2,500 2,385
Bankers Trust, New York 8.250% 5/01/05............... 6,000 6,298
--------
8,683
CONTAINERS AND GLASS (1.1%)
Owens-Illinois, Inc. 11.000% 12/01/03................ 3,000 3,218
DRUGS (1.2%)
Glaxo Wellcome Plc (Yankee Issue) 6.125% 1/25/06..... 4,000 3,678
ENERGY SERVICES (3.2%)
YPF Sociedad Anonima (Yankee Issue) 7.500% 10/26/02.. 4,629 4,614
*Oslo Seismic Service (Yankee Issue) 8.280% 6/01/11.. 5,000 5,022
--------
9,636
FINANCIAL SERVICES (1.5%)
Credit Foncier Euro (Yankee Issue) 5.332% 9/25/02.... 5,000 4,544
FOOD & BEVERAGES (1.8%)
Grand Metropolitan Zero Coupon (Yankee Issue) (Effective Yield
6.409%) 1/06/04................................... 9,000 5,216
FOREIGN GOVERNMENT REGIONAL BONDS (1.8%)
*Corporacion Andina de Fomento (Yankee Issue) 6.625% 10/14/98 5,500 5,456
FOREIGN SOVEREIGN (1.6%)
The Republic of Columbia (Yankee Issue) 7.250% 2/15/03 5,000 4,731
FUNERAL HOME (1.5%)
Loewen Group International (Yankee Issue) 8.250% 4/15/03 4,500 4,464
INTERMEDIATE BOND FUND CONTINUED
Principal Market
Amount Value
HOTELS (2.0%)
Renaissance Hotel Group 8.875% 10/01/05.............. $ 5,750 $ 5,952
INSURANCE (4.4%)
*Equitable Life Surplus Notes 6.950% 12/01/05........ 5,000 4,803
*Metropolitan Life Insurance 7.700% 11/01/15......... 3,500 3,390
*Prudential Insurance Surplus Note 7.650% 7/01/07.... 5,000 4,957
--------
13,150
MINING (2.2%)
PT Alatief Freeport Finance Co. B.V. (Yankee Issue)
9.750% 4/15/01.................................... 3,500 3,752
Santa Fe Pacific Gold 8.375% 7/01/05................. 3,000 2,925
--------
6,677
MORTGAGE-BACKED SECURITIES (14.9%)
American Mortgage Trust Series 1993-3 Class 3B
8.190% 9/27/22.................................... 2,941 2,740
Countrywide Mortgage Backed Securities Inc.
Series 1994-F Class A4 6.000% 4/25/09............. 3,250 3,067
Kidder Peabody Series 1994-C3-A2 8.500% 4/01/07...... 3,500 3,699
*Lennar Central Partners L.P. Series 1994-1 Class C
8.120% 9/15/02.................................... 3,500 3,489
MDC Mortgage Funding Corporation Series Q
Class 5 8.850% 3/20/18............................ 1,844 1,899
PS CMO Trust Series 1994-C1-A2 7.920% 8/15/02........ 4,094 4,175
*Prudential Home Mortgage Finance Corp.
Series 1992-A Class B2-2 7.900% 11/25/22.......... 7,000 6,770
Resolution Trust Corporation Series 1992-5
Class A 3 8.850% 5/25/22.......................... 2,584 2,627
Merrill Lynch
8.000% 12/20/18 Series 20-D....................... 4,223 4,236
8.050% 4/25/23 Series 1994-M1 Class C............. 1,300 1,310
7.093% 12/26/25 Series 1995-C3 Class A3........... 4,000 3,870
Nomura Asset 96 MD 5 Class a-1B 7.120% 4/13/36....... 3,000 2,921
Sasco 1996-CFL Class C 6.525% 2/25/28................ 3,683 3,504
--------
44,307
PAPER (2.1%)
James River Corp 8.375% 11/15/01..................... 6,000 6,321
PUBLISHING & BROADCASTING (1.7%)
Time Warner Inc.
7.975% 8/15/04.................................... 1,862 1,860
8.110% 8/15/06.................................... 3,250 3,241
--------
5,101
REAL ESTATE OPERATIONS (1.8%)
Trinet Corp. Realty Trust 7.300% 5/15/01............. 5,250 5,225
RETAIL (1.7%)
Sears Roebuck & Co. 9.250% 4/15/98................... 5,000 5,240
SAVINGS AND LOAN (2.0%)
First Federal of Michigan Zero Coupon (Effective Yield
7.409%) 2/26/05................................... 11,000 5,894
TELECOMMUNICATIONS (1.7%)
Telecom New Zealand (Yankee Issue) 6.500% 10/11/01... 5,000 4,942
TOBACCO (1.7%)
Sampoerna International Finance Co. (Yankee Issue)
8.375% 6/15/06.................................... 5,000 5,096
INTERMEDIATE BOND FUND CONTINUED
Principal Market
Amount Value
UTILITIES (9.4%)
Financiera Energetica Nacional (Yankee Issue)
6.625% 12/13/96................................... $ 4,500 $ 4,504
Niagara Mohawk Power Corp. 7.375% 8/01/03............ 3,650 3,240
Public Service of Colorado 7.125% 6/01/06............ 7,500 7,440
Public Service Electric and Gas (New Jersey)
6.125% 8/01/02................................... 6,000 5,710
Shikoku Electric Power Corp. (Yankee Issue)
6.250% 8/12/03................................... 7,500 7,180
--------
28,074
WHOLESALE (1.7%)
Rite Aid Corp 7.625 4/15/05.......................... 5,000 5,032
--------
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $284,679)............................................. 281,785
SHORT-TERM OBLIGATION - (4.3%)
COMMERCIAL PAPER
Lehman Brothers Holding Inc. 5.700% 7/01/96
(Amortized cost $12,720)............................. 12,720 12,720
TOTAL INVESTMENTS (98.8%)
(Cost basis $297,399)............................................. 294,505
OTHER ASSETS, LESS LIABILITIES (1.2%)............................. 3,607
---------
TOTAL NET ASSETS (100.0%)......................................... $298,112
=========
<FN>
*These securities are subject to contractual or legal restrictions on their
resale. At June 30, 1996, the aggregate value of these securities represented
11.4% of net assets.
See accompanying notes to financial statements.
</FN>
INCOME FUND
Investments as of June 30, 1996
(Dollar Amounts In Thousands)
Principal Market
LONG-TERM OBLIGATIONS (95.9%) Amount Value
U.S. GOVERNMENT OBLIGATIONS (4.5%)
U.S. Treasury Bond
7.500% 11/15/16................................... $ 5,500 $ 5,776
U.S Treasury Notes
6.250% 2/15/03.................................... 4,000 3,935
7.250% 5/15/04.................................... 3,000 3,110
7.500% 2/15/05.................................... 1,000 1,052
--------
13,873
AIRCRAFT SERVICE (0.6%)
Greenwich Air Services 10.500% 6/01/06............... 2,000 1,988
AIRLINE (1.1%)
American Airlines Equipment Trust 9.710% 1/02/07..... 3,091 3,429
ASSET-BACKED OBLIGATIONS (0.3%)
ALPS Pass-Through Trust Series 1994-1 Class C2
9.350% 9/15/04.................................... 995 1,012
CABLE/MEDIA (13.0%)
Continental Cablevision Inc. 8.875% 9/15/05.......... 3,500 3,758
Cox Communications 6.500% 11/15/02................... 4,500 4,356
Heritage Media 8.750% 2/15/06........................ 3,000 2,783
JayCor Communications Inc. 10.125 6/15/06............ 1,500 1,485
Le Groupe Videotron Ltee (Yankee Issue)
10.625% 2/15/05.................................. 3,000 3,131
News America Holdings Inc. 8.625% 2/01/03............ 6,000 6,387
Rogers Cable Systems Senior Secured Second
Priority Note (Yankee Issue) 9.625% 8/01/02....... 3,000 2,970
Sinclair Broadcasting Group 10.000% 9/30/05.......... 2,000 1,905
Time Warner Entertainment
9.625% 5/01/02.................................... 3,000 3,300
8.875% 10/01/12................................... 3,000 3,151
Viacom International Inc.
10.250% 9/15/01................................... 3,000 3,271
7.750% 6/01/05.................................... 1,000 973
Young Broadcasting, Inc. 11.750% 11/15/04............ 2,500 2,619
--------
40,089
COMMERCIAL BANKS (12.1%)
Banca Commercial Italian (Yankee Issue) 8.250% 7/15/07 5,000 5,157
*Banko del Estado de Chile (Cayman Islands)
(Yankee Issue) 8.390% 8/01/01..................... 3,000 3,133
Banesto Delaware Inc. 8.250% 7/28/02................. 2,000 2,088
*Bangkok Bank Public Ltd. (Yankee Issue)
7.250% 9/15/05.................................... 5,000 4,822
BBV International Finance (Cayman Islands)
(Yankee Issue) 6.875% 10/27/05.................... 6,000 5,725
Dresdner Bank (Yankee Issue) 7.250% 9/15/15 ......... 6,000 5,788
Societe Generale (Yankee Issue) 7.400% 6/01/06....... 5,000 4,990
Swiss Bank Corp (Yankee Issue) 7.000% 10/15/15....... 4,000 3,758
United Mexican State (Yankee Issue) 9.750% 2/06/01... 2,000 1,988
--------
37,449
CONTAINERS & GLASS (1.5%)
Coca-Cola Bottling Company Medium-Term Note
8.560% 2/26/02.................................... 2,000 2,130
Owens-Illinois, Inc. 11.000% 12/01/03................ 2,300 2,467
--------
4,597
INCOME FUND CONTINUED
Principal Market
Amount Value
FINANCIAL (7.8%)
Ford Motor Credit 8.000% 6/15/02..................... $ 5,000 $ 5,228
General Motors Acceptance Corp. 6.625% 10/01/02...... 5,000 4,875
*Goldman Sachs 7.125% 3/01/03........................ 6,000 5,969
Polysindo International Finance (Yankee Issue)
11.375% 6/15/06................................... 1,000 1,013
Property Trust of America 6.875% 2/15/08............. 2,000 1,868
Sampoerna International Finance Co. (Yankee Issue)
8.375% 6/15/06.................................... 5,000 5,096
--------
24,049
FOOD, BEVERAGES & TOBACCO (2.6%)
Empresas La Moderna (Yankee Issue) 11.375% 1/25/99... 2,000 2,075
Philip Morris Companies 7.250% 1/15/03............... 6,000 6,059
--------
8,134
FOREIGN SOVEREIGN REGIONAL BONDS (7.7%)
China Global (Yankee Issue) 7.375% 7/03/01........... 5,000 5,039
Corporacion Andina de Fomento (Yankee Issue)
7.100% 2/01/03.................................... 2,500 2,415
7.375% 7/21/00.................................... 3,000 2,991
Export/Import Bank of Korea (Yankee Issue)
6.375% 2/15/06.................................... 5,000 4,639
The Republic of Columbia (Yankee Issue)
8.750 10/06/99.................................... 2,500 2,579
7.250% 2/15/03.................................... 2,500 2,366
*The Republic of Poland (Yankee Issue)
7.750% 7/13/00.................................... 2,000 2,033
The State of Israel (Yankee Issue) 6.375% 12/15/05... 2,000 1,854
--------
23,916
FUNERAL HOMES (1.6%)
Loewen Group International 8.250% 4/15/03............ 5,000 4,960
Service Corp. International 8.375% 12/15/04.......... 1,000 1,070
--------
6,030
HEALTH SERVICES & EQUIPMENT (1.8%)
Columbia/HCA Health Care Corp. 8.850% 1/01/07........ 2,000 2,219
Healthcare Properties 6.500% 2/15/06................. 3,500 3,207
-------
5,426
HOSPITALS, NURSING HOMES (2.2%)
Tenet Healthcare
9.625% 9/01/02.................................... 2,000 2,110
8.625% 12/01/03................................... 2,000 2,015
Universal Health Services, Inc. 8.750% 8/15/05....... 2,800 2,758
--------
6,883
HOTELS & ENTERTAINMENT (10.5%)
Boyd Gaming Corp. 10.750 9/01/03..................... 1,000 1,052
Caesars World Inc. 8.875% 8/15/02.................... 1,000 1,041
Cal Hotel Finance Corp. 11.000% 12/01/02............. 3,660 3,857
Circus Circus Enterprises, Inc.
10.625% 6/15/97................................... 2,000 2,078
6.450% 2/01/06.................................... 2,000 1,857
Grand Casino, Inc. 10.125% 12/01/03.................. 3,000 3,090
Harvey Casino 10.625% 6/01/06........................ 3,000 3,038
ITT Corp. 6.250% 11/15/00............................ 6,000 5,815
MGM Grand Hotel 12.000% 5/01/02...................... 4,000 4,360
Renaissance Hotel Group 8.875% 10/01/05.............. 5,000 5,176
Trump Atlantic City 11.250% 5/01/06.................. 1,000 1,003
--------
32,367
INCOME FUND CONTINUED
Principal Market
Amount Value
INSURANCE (0.6%)
Equitable Life Surplus Notes 6.950% 12/01/05......... $ 2,000 $ 1,922
MACHINERY & FABRICATED METAL PRODUCTS (6.1%)
AGCO Corporation 8.500% 3/15/06...................... 3,000 2,985
Cincinnati Milacron 8.375% 3/15/04................... 2,000 2,016
EKCO Group 9.250% 4/01/06............................ 4,000 3,880
Giddings and Lewis 7.500% 10/01/05................... 3,000 2,914
Rexnord Corp. 10.750% 7/01/02........................ 2,000 2,178
Ryerson Tull Inc. 8.500% 7/15/01 .................... 5,000 4,988
--------
18,961
MINING AND AGRICULTURE (2.6%)
PT Alatief Freeport Financial Co. B.V. (Yankee Issue)
9.750% 4/15/01.................................... 3,000 3,216
Santa Fe Pacific Gold 8.375% 7/01/05................. 5,000 4,876
--------
8,092
MISCELLANEOUS TRANSPORTATION (1.6%)
Hong Kong Mass Transit Railway Corp. (Yankee Issue)
7.250% 10/01/05................................... 5,000 4,881
MORTGAGE-BACKED SECURITY (0.2%)
Resolution Trust Corporation Series 1992-C1 Class A1
8.800% 8/25/23.................................... 719 733
NATURAL GAS & OIL (4.2%)
Colorado Interstate Gas 10.000% 6/15/05.............. 1,500 1,752
Columbia Gas Systems 6.390% 11/28/00................. 5,000 4,892
Texas Eastern Transmission Corporation
10.375% 11/15/00.................................. 2,000 2,251
Transco Energy Co. 9.125% 5/01/98.................... 2,000 2,084
Transport De Gas Del Sur (Yankee Issue)
10.250% 4/25/01................................... 2,000 2,003
--------
12,982
PAPER (1.0%)
PT Riau Andalan Pulp and Paper (Yankee Issue)
11.500% 12/15/00.................................. 3,000 3,071
PETROLEUM (0.7%)
*Lyondell Petroleum 9.750% 9/04/03................... 2,000 2,245
REAL ESTATE OPERATIONS (1.9%)
Meditrust 7.375% 7/15/00............................. 2,000 1,984
Trinet Corp. Realty Trust 7.300% 5/15/01............. 4,000 3,981
--------
5,965
RETAIL (1.9%)
Hook-SuperX, Inc. 10.125% 6/01/02.................... 2,000 2,141
Kroger Company 9.750% 2/15/04........................ 1,000 1,060
Michaels Stores 10.875% 6/15/06...................... 1,500 1,541
--------
4,742
SERVICES (2.6%)
ARA Services, Inc. 10.625% 8/01/00................... 1,600 1,761
Aramark Services 8.150% 5/01/05...................... 2,000 2,049
Cobblestone Golf Group Inc. 11.500% 6/01/03.......... 2,000 2,010
--------
5,820
TELEPHONE (1.6%)
Rogers Cantel, Inc. 9.375% 6/01/08 .................. 3,000 2,910
Teleport Communications 9.875% 7/01/06............... 2,000 2,005
--------
4,915
INCOME FUND CONTINUED
Principal Market
Amount Value
UTILITIES (4.3%)
CTC Mansfield Funding Corporation 11.125% 9/30/16.... $ 1,500 $ 1,511
Kentucky Power First Mortgage Medium-Term Note
8.900% 5/21/01.................................... 2,000 2,133
Louisiana Power & Light Company Series A
10.670% 1/02/17................................... 1,000 1,071
*National Power Corp. Medium-Term Note 9.000% 7/05/02 1,500 1,541
North Atlantic Energy Corporation Series A First
Mortgage 9.050% 6/01/02........................... 2,662 2,618
Texas Utilities Company 9.750% 5/01/21............... 2,000 2,222
Utilicorp United, Inc. 8.200% 1/15/07................ 2,000 2,061
---------
13,157
---------
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $300,229)............................................. $296,728
SHORT-TERM OBLIGATION (3.1%)
COMMERCIAL PAPER (3.1%)
Lehman Brothers Holding Inc. 5.700% 7/01/96
(Amortized Cost $9,720).............................. 9,720 9,720
TOTAL INVESTMENTS (99.0%)
(Cost basis $309,949)............................................. 306,448
OTHER ASSETS, LESS LIABILITIES (1.0%)............................. 3,116
---------
TOTAL NET ASSETS (100.0%)......................................... $309,564
=========
<FN>
*These securities are subject to contractual or legal restrictions on their
resale. At June 30, 1996, the aggregate value of these securities represented
6.4% of net assets.
See accompanying notes to financial statements.
</FN>
Balance Sheets
June 30, 1996
(Amounts In Thousands, except per-share amounts)
INTERMEDIATE
BOND INCOME
FUND FUND
ASSETS
Investments, at market value ............................ $ 294,505 $ 306,448
Receivable for investments sold ......................... -- 9,484
Receivable for fund shares sold ......................... 242 335
Accrued interest receivable ............................. 4,619 5,999
Cash and other assets ................................... 255 362
--------- ---------
Total Assets ......................................... $ 299,621 $ 322,628
========= =========
LIABILITIES
Payable for investments purchased ....................... $ -- $ 11,964
Payable for fund shares redeemed ........................ 521 226
Dividends payable ....................................... 651 602
Payable to investment adviser and transfer agent ........ 136 192
Other liabilities ....................................... 201 80
--------- ---------
Total Liabilities .................................... 1,509 13,064
--------- ---------
CAPITAL
Paid-in capital ......................................... 313,998 319,189
Net unrealized depreciation of investments .............. (2,894) (3,501)
Accumulated undistributed net investment income ......... 327 78
Accumulated net realized losses on investments .......... (13,319) (6,202)
--------- ---------
Total Capital (Net Assets) ........................... 298,112 309,564
--------- ---------
Total Liabilities and Capital ........................ $ 299,621 $ 322,628
========= =========
Shares Outstanding (Unlimited Number Authorized) ........ 34,729 32,129
========= =========
Net Asset Value (Capital) Per Share ..................... $ 8.58 $ 9.63
========= =========
See accompanying notes to financial statements
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED
JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
INTERMEDIATE
BOND INCOME
FUND FUND
INVESTMENT INCOME
Interest income ........................................ $ 22,971 $ 19,271
-------- --------
EXPENSES
Management fees ........................................ 1,533 1,483
Transfer agent fees .................................... 430 334
Printing and postage ................................... 96 71
SEC and state registration fees ........................ 25 60
Legal and audit fees ................................... 34 35
Accounting fees ........................................ 32 30
Trustees' fees ......................................... 25 18
Custodian fees ......................................... 42 22
Other .................................................. 87 50
-------- --------
2,304 2,103
Reimbursement of expenses by investment advisor ........ (157) (150)
-------- --------
Total Expenses ...................................... 2,147 1,953
-------- --------
Net Investment Income ............................... 20,824 17,318
REALIZED AND UNREALIZED GAINS (LOSSES) ON
INVESTMENTS
Net realized gains on investments ...................... 3,857 1,846
Net change in unrealized appreciation or
depreciation on investments ......................... (7,549) (10,391)
-------- --------
Net Losses on Investments ........................... (3,692) (8,545)
-------- --------
Net Increase in Net Assets Resulting from
Operations .......................................... $ 17,132 $ 8,773
======== ========
See accompanying notes to financial statements.
STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended June 30, 1995 and 1996
(Amounts In Thousands)
Intermediate
Bond Fund Income Fund
1995 1996 1995 1996
Operations
Net investment income ............................................... $ 20,703 $ 20,824 $ 12,087 $ 17,318
Net realized gains (losses) on investments .......................... (11,716) 3,857 (2,294) 1,846
Net change in unrealized appreciation or depreciation
of investments ................................................ 18,957 (7,549) 10,187 (10,391)
--------- --------- --------- ---------
Net Increase in Net Assets Resulting from Operations ....... 27,944 17,132 19,980 8,773
--------- --------- --------- ---------
Distributions To Shareholders
Dividends from net investment income ................................ (20,726) (20,525) (12,126) (17,246)
--------- --------- --------- ---------
Share Transactions
Subscriptions to fund shares ........................................ 109,708 91,892 62,511 216,512
Investment income dividends reinvested .............................. 16,092 16,753 7,966 12,786
Redemptions of fund shares .......................................... (133,792) (108,873) (62,890) (85,588)
--------- --------- --------- ---------
Net Increase (Decrease) from Share Transactions ............ (7,992) (228) 7,587 143,710
--------- --------- --------- ---------
Net Increase (Decrease) in Net Assets ...................... (774) (3,621) 15,441 135,237
Total Net Assets
Beginning of Period ................................................. 302,507 301,733 158,886 174,327
--------- --------- --------- ---------
End of Period ....................................................... 301,733 298,112 174,327 309,564
========= ========= ========= =========
Accumulated Undistributed Net Investment Income at
End of Period ................................................. $ 28 $ 327 $ 6 $ 78
========= ========= ========= =========
Analyses of Changes in Shares of Beneficial Interest
Subscriptions to fund shares ........................................ 13,047 10,517 6,703 21,751
Investment income dividends reinvested .............................. 1,920 1,920 853 1,305
--------- --------- --------- ---------
14,967 12,437 7,556 23,056
Redemptions of fund shares .......................................... (16,019) (12,495) (6,720) (8,734)
--------- --------- --------- ---------
Net increase (decrease) in fund shares .............................. (1,052) (58) 836 14,322
Shares outstanding at beginning of period ........................... 35,839 34,787 16,971 17,807
--------- --------- --------- ---------
Shares outstanding at end of period ................................. 34,787 34,729 17,807 32,129
========= ========= ========= =========
See accompanying notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of Stein Roe
Intermediate Bond Fund and Stein Roe Income Fund (the "Funds"), each a series
of the Stein Roe Income Trust (a Massachusetts business trust) (the "Trust").
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of financial
statements and the reported amounts of increases and decreases in net assets
from operations during the reporting period. Actual results could differ from
those estimates.
SECURITY VALUATIONS
All securities are valued as of June 28, 1996, the last business day of the
period. Long-term debt securities are valued using market quotations if readily
available at the time of valuation. If market quotations are not readily
available, they are valued at a fair value using a procedure determined in good
faith by the Board of Trustees, which has authorized the use of market
valuations provided by a pricing service. Short-term debt securities with
remaining maturities of 60 days or less are valued at their amortized cost.
Those with remaining maturities of more than 60 days for which market
quotations are not readily available are valued by use of a matrix, prepared by
the Adviser, based on quotations for comparable securities. Other assets are
valued by a method that the Board of Trustees believes represents a fair value.
FUTURES CONTRACTS
The Funds may enter into U.S. Treasury bond futures contracts to either hedge
against expected declines of their portfolio securities or as a temporary
substitute for the purchase of individual bonds. Risks of entering into futures
contracts include the possibility that there may be an illiquid market at the
time the Fund seeks to close out a contract, and changes in the value of the
futures contract may not correlate with changes in the value of the portfolio
securities being hedged.
Upon entering into a futures contract, the Fund deposits cash or securities
with its custodian in an amount sufficient to meet the initial margin
requirement. Subsequent payments are made or received by the Fund equal to the
daily change in the contract value and are recorded as unrealized gains or
losses. The Fund recognizes a realized gain or loss when the contract is
closed or expires. Neither Fund entered into futures contracts during the year
ended June 30, 1996.
FEDERAL INCOME TAXES
No provision is made for federal income taxes, since the Funds elect to
be taxed as "regulated investment companies" and make such distributions to
their shareholders as to be relieved of all federal income taxes under
provisions of current federal tax law.
The Funds intend to utilize provisions of the federal income tax laws that
allow them to carry a realized capital loss forward for eight years following
the year of the loss and offset such losses against any future realized gains.
At June 30, 1996, the Funds had capital loss carryforwards as follows:
YEAR OF
FUND AMOUNT EXPIRATION
Intermediate
Bond $12,753 2003-2004
Income 6,108 1999-2001
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly.
Capital gain distributions, if any, are distributed annually. Distributions in
excess of tax basis earnings are reported in the financial statements as a
return of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings that result in temporary
over-distributions are classified as distributions in excess of net investment
income or net realized gains, and all permanent differences are reclassified
to paid-in capital.
None of the Funds had distributions in excess of net investment income or
net realized gains for the year ended June 30, 1996. OTHER INFORMATION
Realized gains or losses from sales of securities are determined on the
specific identified cost basis.
Securities purchased on a when-issued or delayed delivery basis may be
settled a month or more after the transaction date. These securities are
subject to market fluctuation during this period. The Funds had no when-issued
or delayed delivery purchase commitments as of June 30, 1996.
All amounts, except per-share amounts, are shown in thousands.
NOTE 2. PORTFOLIO COMPOSITION
Intermediate Bond Fund invests primarily in marketable debt securities and
Income Fund in medium-quality debt securities.
See each Fund's schedule of investments for information on individual
securities as well as industry diversification, and see Fund Highlights for
each Fund's portfolio quality.
NOTE 3. TRUSTEES' FEES AND TRANSACTIONS WITH AFFILIATES
The Funds pay a monthly management fee, computed and accrued daily, to Stein
Roe & Farnham Incorporated (the "Adviser"), an indirect, majority-owned
subsidiary of Liberty Mutual Insurance Company, for its services as
investment adviser and manager. The management fee for Intermediate Bond Fund
is computed at an annual rate of .50 of 1 percent of average net assets; and
Income Fund is computed at an annual rate of .65 of 1 percent of the first
$100 million of average net assets and .60 of 1 percent thereafter.
Effective July 1, 1996, as a result of shareholder vote, each of the Funds'
investment advisory agreements was replaced by separate administrative and
management agreements. The administrative fee for the Income Fund will be .15
of 1 percent of the first $100 million of average daily net assets, .125 of
1 percent of 1 percent thereafter. The administrative fee for the Intermediate
Bond Fund will be .15 of 1 percent of the first $100 million of average daily
net assets. The management fee for the Income Fund will be .50 of 1 percent of
the first $100 million of average daily net assets, and .475 of 1 percent
thereafter. The management fee for the Intermediate Bond Fund will be .35 of 1
percent of the average daily net assets. There is no increase in the aggregate
fee paid to the Adviser due to these changes.
The investment advisory agreements of the Funds provide that the Adviser
will reimburse each Fund to the extent that its annual expenses, excluding
certain expenses, exceed the applicable limits prescribed by any state in
which each Fund's shares are offered for sale. In addition, the Adviser has
agreed to reimburse Intermediate Bond Fund and Income Fund to the extent that
expenses incurred exceed .70 percent and .82 percent of average net assets,
respectively. The expense limitation for Intermediate Bond Fund expires
October 31, 1997, subject to earlier termination by the Adviser on 30 days'
notice. The expense limitation for Income Fund expires October 31, 1998.
The transfer agent fees of the Funds are paid to SteinRoe Services Inc.
(SSI), an indirect, majority-owned subsidiary of Liberty Mutual Insurance
Company. Effective July 3, 1996, SSI entered into an agreement with Colonial
Investors Service Center, Inc., an indirect, majority-owned subsidiary of
Liberty Mutual Insurance Company, to act as a sub-transfer agent for the
Funds.
The Adviser also provides certain accounting services. For the year ended
June 30, 1996, Intermediate Bond Fund and Income Fund incurred charges of $32
and $30, respectively for these services.
Certain officers and trustees of the Trust are also officers of the
Adviser. The compensation of trustees not affiliated with the Adviser for
Intermediate Bond Fund and Income Fund for the year ended June 30, 1996, was
$25 and $18, respectively. No remuneration was paid to any other trustee or
officer of the Trust.
NOTE 4. SHORT-TERM DEBT
To facilitate portfolio liquidity, the Funds maintain borrowing arrangements
under which they can borrow against portfolio securities. There were no borrow
ings for either of the Funds during the year ended June 30, 1996.
NOTE 5. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales of securities other
than short-term obligations for the year ended June 30, 1996, were:
FUND PURCHASES SALES
Intermediate Bond Fund................ $596,506 $595,497
Income Fund .......................... 448,037 310,444
At June 30, 1996, unrealized appreciation and depreciation of investments
on a tax basis and the cost of investments for financial reporting purposes
and for federal income tax purposes were as follows:
COST OF INVESTMENTS
FEDERAL
NET FINANCIAL INCOME
FUND APPRECIATION DEPRECIATION DEPRECIATION REPORTING TAX
Intermediate Bond Fund...... $2,598 5,518 (2,920) 297,399 297,425
Income Fund ................ 3,337 6,932 (3,595) 309,949 310,043
FINANCIAL HIGHLIGHTS
INTERMEDIATE BOND FUND
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
Years Ended June 30,
1987 1988 1989 1990
Net Asset Value, Beginning of Period ............................... $ 9.92 $ 8.77 $ 8.51 $ 8.65
----------- ----------- ----------- -----------
Income From Investment Operations
Net investment income ..................................... .74 .68 .74 .73
Net realized and unrealized gains (losses) on investments . (.41) (.12) .14 (.28)
----------- ----------- ----------- -----------
Total from investment operations .............. .33 .56 .88 .45
----------- ----------- ----------- -----------
Distributions
Net investment income ..................................... (.74) (.68) (.74) (.72)
Net realized capital gains ................................ (.74) (.14) -- --
In excess of realized gains ............................... -- -- -- --
----------- ----------- ----------- -----------
Total distributions ........................... (1.48) (.82) (.74) (.72)
----------- ----------- ----------- -----------
Net Asset Value, End of Period ..................................... $ 8.77 $ 8.51 $ 8.65 $ 8.38
=========== =========== =========== ===========
Ratio of net expenses to average net assets (a) .................... 0.68% 0.73% 0.73% 0.74%
Ratio of net investment income to average net assets (b) ........... 7.94% 7.97% 8.71% 8.60%
Portfolio turnover rate ............................................ 230% 273% 197% 296%
Total return (b) ................................................... 3.40% 6.92% 10.97% 5.33%
Net assets, end of period (000s) ................................... $ 188,674 $ 162,225 $ 165,056 $ 161,439
Years Ended June 30,
1991 1992 1993
Net Asset Value, Beginning of Period ...................................... $ 8.38 $ 8.53 $ 8.99
----------- ----------- -----------
Income From Investment Operations
Net investment income ............................................ .69 .69 .65
Net realized and unrealized gains (losses) on investments ........ .16 .46 .27
----------- ----------- -----------
Total from investment operations ..................... .85 1.15 .92
----------- ----------- -----------
Distributions
Net investment income ............................................ (.70) (.69) (.65)
Net realized capital gains ....................................... -- -- --
In excess of realized gains ...................................... -- -- --
----------- ----------- -----------
Total distributions .................................. (.70) (.69) (.65)
----------- ----------- -----------
Net Asset Value, End of Period ............................................ $ 8.53 $ 8.99 $ 9.26
=========== =========== ===========
Ratio of net expenses to average net assets (a) ........................... 0.73% 0.70% 0.67%
Ratio of net investment income to average net assets (b) .................. 8.17% 7.87% 7.22%
Portfolio turnover rate ................................................... 239% 202% 214%
Total return (b) .......................................................... 10.62% 14.02% 10.59%
Net assets, end of period (000s) .......................................... $ 184,444 $ 242,948 $ 311,728
Years Ended June 30,
1994 1995 1996
Net Asset Value, Beginning of Period ...................................... $ 9.26 $ 8.44 $ 8.67
----------- ----------- -----------
Income From Investment Operations
Net investment income ............................................ 56 .58 .58
Net realized and unrealized gains (losses) on investments ........ (.59) .23 (.09)
----------- ----------- -----------
Total from investment operations ..................... (.03) .81 .49
----------- ----------- -----------
Distributions
Net investment income ............................................ (.56) (.58) (.58)
Net realized capital gains ....................................... (.08) -- --
In excess of realized gains ...................................... (.15) -- --
----------- ----------- -----------
Total distributions .................................. (.79) (.58) (.58)
----------- ----------- -----------
Net Asset Value, End of Period ............................................ 8.44 $ 8.67 $ 8.58
=========== =========== ===========
Ratio of net expenses to average net assets (a) ........................... 0.70% 0.70% 0.70%
Ratio of net investment income to average net assets (b) .................. 6.20% 6.94% 6.79%
Portfolio turnover rate ................................................... 206% 162% 202%
Total return (b) .......................................................... (0.47%) 10.11% 5.76%
Net assets, end of period (000s) .......................................... $ 302,507 $ 301,733 $ 298,112
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have been 0.71 and
0.75 percent for the years ended June 30, 1995 and 1996, respectively.
(b) Computed giving effect to investment adviser's expense limitation
undertaking.
</FN>
FINANCIAL HIGHLIGHTS
INCOME FUND
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
Years Ended June 30,
1987 1988 1989 1990
Net Asset Value, Beginning of Period ............................. $ 9.94 $ 9.71 $ 9.60 $ 9.65
---------- ---------- ----------- ----------
Income From Investment Operations
Net investment income ................................... .98 .95 .95 .92
Net realized and unrealized gains (losses) on investments (.23) (.11) .05 (.70)
---------- ---------- ----------- ----------
Total from investment operations ............... .75 .84 1.00 .22
Distributions from net investment income ......................... (.98) (.95) (.95) (.92)
---------- ---------- ----------- ----------
Net Asset Value, End of Period ................................... $ 9.71 $ 9.60 $ 9.65 $ 8.95
========== ========== =========== ==========
Ratio of net expenses to average net assets (a) .................. 0.96% 0.91% 0.90% 0.93%
Ratio of net investment income to average net assets (b) ......... 9.90% 10.08% 9.97% 10.02%
Portfolio turnover rate .......................................... 153% 158% 94% 90%
Total return (b) ................................................. 7.70% 9.38% 11.06% 2.48%
Net assets, end of period (000s) ................................. $ 91,916 $ 96,611 $ 110,376 $ 89,023
Years Ended June 30,
1991 1992 1993
Net Asset Value, Beginning of Period ............................. $ 8.95 $ 8.95 $ 9.51
---------- ----------- -----------
Income From Investment Operations
Net investment income ................................... .80 .76 .75
Net realized and unrealized gains (losses) on investments -- .56 .59
---------- ----------- -----------
Total from investment operations ............... .80 1.32 1.34
Distributions from net investment income ......................... (.80) (.76) (.75)
---------- ----------- -----------
Net Asset Value, End of Period ................................... $ 8.95 $ 9.51 $ 10.10
========== =========== ===========
Ratio of net expenses to average net assets (a) .................. 0.95% 0.90% 0.82%
Ratio of net investment income to average net assets (b) ......... 8.98% 8.20% 7.62%
Portfolio turnover rate .......................................... 77% 76% 39%
Total return (b) ................................................. 9.30% 15.30% 14.64%
Net assets, end of period (000s) ................................. $ 93,952 $ 112,706 $ 151,594
Years Ended June 30,
1994 1995 1996
Net Asset Value, Beginning of Period ............................. $ 10.10 $ 9.36 $ 9.79
----------- ----------- -----------
Income From Investment Operations
Net investment income ................................... .69 .71 .71
Net realized and unrealized gains (losses) on investments (.74) .43 (.16)
----------- ----------- -----------
Total from investment operations ............... (.05) 1.14 .55
Distributions from net investment income ......................... (.69) (.71) (.71)
----------- ----------- -----------
Net Asset Value, End of Period ................................... $ 9.36 $ 9.79 $ 9.63
=========== =========== ===========
Ratio of net expenses to average net assets (a) .................. 0.82% 0.82% 0.82%
Ratio of net investment income to average net assets (b) ......... 6.94% 7.55% 7.26%
Portfolio turnover rate .......................................... 53% 64% 135%
Total return (b) ................................................. (0.69%) 12.79% 5.70%
Net assets, end of period (000s) ................................. $ 158,886 $ 174,327 $ 309,564
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have been 0.83, 0.85
and 0.88 percent for the years ended June 30, 1994, 1995 and 1996,
respectively.
(b) Computed giving effect to investment adviser's expense limitation
undertaking.
</FN>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Trustees of Stein Roe Income Trust
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
We have audited the accompanying balance sheets, including the schedules of
investments, of Stein Roe Intermediate Bond Fund and Stein Roe Income Fund as
of June 30, 1996, and the related statements of operations for the year then
ended, the state ments of changes in net assets for each of the two years in
the period then ended, and the financial highlights for the periods indicated
thereon. These financial statements and financial highlights are the
responsibility of the Funds' manage ment. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of June 30, 1996, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial positions of
Stein Roe Intermediate Bond Fund and Stein Roe Income Fund at June 30, 1996,
the results of their operations for the year then ended, the changes in their
net assets for each of the two years in the period then ended, and the
financial highlights for the periods indicated thereon, in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
August 8, 1996
FUNDS FOR EVERY INVESTMENT OBJECTIVE
The Stein Roe family of 100 percent no-load mutual funds offers a variety of
funds so you can select the right fund, or combination of funds, to meet your
investment objec tives. Call us at 800-338-2550 for a prospectus and more
complete information on any of the funds, including management fees and
expenses. Please read the pro spectus carefully before you invest or send
money.
MONEY MARKET FUNDS
Money market funds seek to provide income while preserving principal and
maintaining liquidity. These funds offer free check writing.
o Government Reserves Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies and
instrumentalities.*
o Cash Reserves Fund -- Invests in high-quality, short-term money market
securities such as certificates of deposit, banker's acceptances and
commercial paper.*
BOND FUNDS
Bond funds seek high current income by investing pri marily in fixed income
securities.
o Limited Maturity Income Fund -- Invests primarily in U.S. government and
other high-quality debt securities. The dollar -weighted average
effective maturity will not exceed three years.
o Government Income Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies.*
o Intermediate Bond Fund-- Invests primarily in marketable debt securities
with an average life of three to 10 years.
o Income Fund -- Pursues a higher level of current income by investing
primarily in medium- and lower-quality bonds.
TAX-EXEMPT FUNDS
These funds help investors keep more of their earnings by investing in
instruments that earn income free from federal income tax. Income may be
subject to federal alternative minimum tax and state and local taxes; capital
gains are subject to state, local and federal taxes.
o Municipal Money Market Fund -- Seeks to provide the liquidity and
stability of a money market fund plus current tax-free income. Free
check writing available.*
*Money market mutual funds strive to maintain a $1 per share net asset value,
but there is no assurance that the fund will be able to maintain a stable net
asset value. The net asset value of a fund that invests in securities issued
or guaranteed by the U.S. government is not guaranteed.
o Intermediate Municipals Fund -- Seeks high current yield through
investments primarily in the three highest grades of intermediate-term
municipal securities.
o Managed Municipals Fund -- Pursues high tax-free income by investing in a
quality-conscious portfolio of long-term municipal bonds.
o High-Yield Municipals Fund -- Seeks a higher level of tax-free income
from long-term municipal securities, primarily of medium or lower
quality.
GROWTH AND INCOME FUNDS
These funds seek to provide a conservative investment that is well positioned
for long-term growth and current income. Each fund's approach is designed to
limit the effects of market volatility.
o Balanced Fund +-- Seeks long-term growth of capital and current income
consistent with reasonable investment risk by investing in equities, debt
securities and cash equivalents.
o Growth & Income Fund -- Pursues income and long-term capital growth by
investing primarily in large, well-established companies.
GROWTH FUNDS
Growth funds offer long-term capital appreciation potential by investing
primarily in various types of stocks.
o Growth Stock Fund -- Pursues long-term capital appreciation from stocks
with strong growth potential.
o Special Fund -- Invests in securities believed to have limited downside
risk relative to their potential for above-average growth, including
securities of undervalued, under followed or out-of-favor companies.
o Special Venture Fund -- Seeks capital appreciation through equity
securities of entre preneurially managed companies.
o Young Investor Fund -- Invests in securities of companies that affect the
lives of children or teenagers.
o Capital Opportunities Fund -- Takes a long-term approach to emerging
growth by selecting quality companies with the potential to generate high
levels of earnings growth over a three- to five-year period.
o International Fund -- Invests in a diversified portfolio of foreign
securities.
+Formerly Total Return Fund; name and investment objective changed effective
April 17, 1996.
TO CONTACT US. . .
BY PHONE 800-338-2550
You can discuss your investment questions with a Stein Roe account
representative by calling us toll free. We'll be happy to answer questions
about your current account, or to provide you with information about opening a
Stein Roe account, including Stein Roe IRAs. We're available seven days a
week, from 7 a.m. to 8 p.m. weekdays and from 8 a.m. to 5 p.m. Saturday and
Sunday (central time).
STEIN ROE'S FUNDS-ON-CALL(R)
24-HOUR SERVICE LINE
Using a touch-tone phone, call our toll-free number, day or night, for your
current account balance, the latest Stein Roe prices and yields, and other
information. In addition, if you have a Personal Identification Number (PIN),
you may place orders for the following transactions 24 hours a day:
o Exchange shares between your Stein Roe accounts;
o Purchase shares by electronic transfer;
o Order additional account statements and money market fund checks;
o Redeem shares by check, wire or electronic transfer.
RETIREMENT PLAN ACCOUNTS
Call us for information about how we can assist you with your defined
contribution plan, including 401(k) plans. You can reach us toll free at
800-322-1130.
For information on IRA plans, call us toll free at 800-338-2550.
BY MAIL
If you prefer to contact us by mail, please address all correspondence
to: P.O. Box 8900, Boston, MA 02205-8900. You also may visit our Internet
web site -- www.steinroe.com -- to contact us by e-mail.
IN PERSON
If you are in the Chicago area, please visit our Investor Center located in
downtown Chicago at One South Wacker Drive, 32nd Floor. Our account
representatives can answer questions about your current Fund investments or
provide you infor mation about any of the Stein Roe Funds and retirement
plans. Stop by weekdays between 8 a.m. and 5:15 p.m.
This report must be preceded or accompanied by a prospectus.
INCOME TRUST
TRUSTEES
Timothy K. Armour
President, Mutual Fund Division and
Director, Stein Roe & Farnham Incorporated
Kenneth L. Block
Chairman Emeritus, A.T. Kearney, Inc.
William W. Boyd
Chairman and Director, Sterling Plumbing
Group Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Douglas A. Hacker
Senior Vice President and Chief Financial Officer, United Airlines
Francis W. Morley
Chairman, Employer Plan Administrators
and Consultants Co.
Charles R. Nelson
Van Voorhis Professor of Political Economy, University of Washington
Thomas C. Theobald
Managing Partner, William Blair Capital Partners
Gordon R. Worley
Private investor
OFFICERS
Timothy K. Armour, President
Jilaine H. Bauer, Executive Vice President,
Secretary
N. Bruce Callow, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Ann H. Benjamin, Vice President
Thomas W. Butch, Vice President
Philip J. Crosley, Vice President
Philip D. Hausken, Vice President
Michael T. Kennedy, Vice President
Steven P. Luetger, Vice President
Lynn C. Maddox, Vice President
Anne E. Marcel, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Cynthia A. Prah, Vice President
Thomas P. Sorbo, Vice President
Sharon R. Robertson, Controller
Margaret O. Zwick, Treasurer
Janet B. Rysz, Assistant Secretary
AGENTS AND ADVISERS
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
SteinRoe Services Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
Logo: Stein Roe
Stein Roe Mutual Funds
Building Wealth for Generations (sm)
THE STEIN ROE FUNDS
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Limited Maturity Income Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe 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 International Fund
P.O. Box 8900
Boston, Massachusetts 02205-8900
800-338-2550
In Chicago, visit our Fund Center at One South Wacker Drive
Liberty Securities Corporation, Distributor
Member SIPC. 7/96
BD11A
Annual Report
June 30, 1996
STEIN ROE
BOND FUND
Limited Maturity Income Fund
Photographic image of two men and a girl on a bridge.
Graphic: Stein Roe Logo
Stein Roe Mutual Funds
Building Wealth for Generations (SM)
Contents
From the President................................................ 1
Tim Armour's thoughts on the markets and investing
Performance....................................................... 3
How Stein Roe Limited Maturity Income Fund has done over time
Q&A
Limited Maturity Income Fund...................................... 6
Interview with the portfolio manager and a summary of major
shifts in the Fund's investments over the past 12 months
Investments....................................................... 11
A complete list of the Fund's investments with market values
Financial Statements.............................................. 13
Balance sheet, statement of operations
and changes in net assets
Notes to the Financial Statements................................. 16
Financial Highlights.............................................. 20
Selected per-share data
Report of Independent Auditors.................................... 22
General Information............................................... 23
A guide to products and services
From the President
TO OUR SHAREHOLDERS
We are pleased to present this annual report for Stein Roe Limited Maturity
Income Fund.
CHANGING WINDS
After more than a year of monetary tightening that successfully slowed
economic growth and inhibited inflation, the Federal Reserve embarked on a new
interest rate strategy early in the Fund's fiscal year. Spurred by slowing
government spending, declining auto sales, fewer housing starts, and flatter
holiday retail sales, the Federal Reserve began to trim the benchmark federal
funds rate target, reducing it from 6.00 percent to 5.75 percent in July 1995,
then to 5.50 percent in December 1995, and finally to 5.25 percent in January
1996. The bond market rallied.
But the celebration was short-lived. As Washington failed to reach a
balanced budget agreement and currency speculators played U.S. and Japanese
interest rates against each other, the bond market weakened. Bond investors
seemed willing to brush off these events, however, as two government shutdowns
delayed key economic reports and hinted at continued economic sluggishness and
further rate cuts. In early March, however, an astonishing payroll report put
the number of jobs created at the highest level since January 1995. This data
suggested far stronger economic growth than anyone had anticipated, which in
turn implied a possible spike in inflation -- the bane of bondholders. As a
result, many believed the Federal Reserve would have to raise short-term
interest rates to keep inflation under control. The bond markets plummeted.
The bond market ended an otherwise dismal first half of 1996 on a positive
note, however. The yield on the benchmark 30-year Treasury bond, which had
reached a mid-June peak of 7.20 percent, eased by month's end, indicating the
bond market finally may have brushed off the reverberations of
stronger-than-expected economic reports -- at least for the time being. This
was particularly good news for bond investors since, before this turnaround,
June figured to be the fifth consecutive losing month for bonds in terms of
total return. Previously, even in bear bond markets, stretches of four losing
months had invariably been followed by a rebound of at least one or two
months.
Photographic image of Tim Armour.
The fixed income markets remain volatile, however. And although the bond
market has, in effect, tightened monetary policy already, without the Federal
Reserve having to raise a hand -- or interest rates -- the possibility of a
rate hike remains. That's because the economy appears to be growing at a
fairly robust pace, with economic growth expected to top 3.50 percent for the
second quarter. At the same time, unemployment continues to hover at
near-record lows. But while recent economic reports increase the chance of a
rate hike, they in no way guarantee one. While we believe it's possible that
the Federal Reserve might raise interest rates a quarter to a half percentage
point at its next meeting, we think economic growth will slow later in the
year of its own accord, preventing the need for any further rate increases. So
while some volatility may continue in the near term, we believe the bond
market may stabilize by year-end 1996.
In fact, we believe bonds represent an attractive investment right now.
Because stocks are generally considered riskier than bonds, the stock market's
rate of return, as measured by the S&P 500, is usually about 2.5 percentage
points above the yield of the 10-year Treasury bond. Lately, however, the
spread has closed to less than 1.5 points, which is narrower than at any time
since the summer of 1987. Historically, whenever the stock market has moved
into this territory, it has usually foreshadowed either a stock market
correction or a period of relatively flat performance. Consequently, we think
bonds could be a safe refuge in the months ahead.
THE BASICS
While past performance is no guarantee of future results, and no one can
predict what might happen to bond funds or the markets in the future, we
believe investors must understand the factors that move the markets, not just
to profit from them, but to gain the patience to ride out short-term
volatility in their investments. As always, no matter what direction you think
the economy is heading, it is important to remember the basics. Think long
term and re-evaluate your investment portfolio from time to time to make sure
it continues to match your goals, risk tolerance and time horizon.
Please call us at 800-338-2550 with your comments and suggestions. As
always, we look forward to serving your investment needs.
Sincerely,
Timothy K. Armour
President
July 25, 1996
Fund Performance
There are several ways to evaluate a fund's historical performance. You can
look at the cumulative return percentage, the average annual return
percentage, or the growth of a hypothetical $10,000 investment. Each
performance figure includes changes in a fund's share price, plus reinvestment
of any dividends (net investment income) and capital gains (the profits the
fund earns when fixed income securities grow in value).
AVERAGE ANNUAL TOTAL RETURNS
Periods ended June 30, 1996
PAST 1 PAST 3 LIFE
YEAR YEARS OF FUND
LIMITED MATURITY INCOME FUND 5.21% 4.24% 4.30%
Lehman 1- to 3-Year
Government Bond Index 5.47 4.86 4.83
<FN>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. Life of Fund is from
the Fund's inception on March 11, 1993. Because index returns are calculated
on a monthly basis, index returns marked "Life of Fund" are calculated from
the month-end results that fall closest to the Fund's inception date.
</FN>
Investment Comparison
COMPARISON of change in value of a $10,000 investment for the quarters indicated
LIMITED MATURITY INCOME FUND
GRAPH:
YEAR ENDED LIMITED MATURITY LEHMAN 1- TO 3-YEAR
INCOME FUND GOVERNMENT BOND INDEX
3/31/93 10000 10000
6/30/93 10104 10111
9/30/93 10211 10250
12/31/93 10255 10315
3/31/94 10230 10265
6/30/94 10170 10265
9/30/94 10255 10368
12/31/94 10267 10368
3/31/95 10574 10713
6/30/95 10877 11052
9/30/95 11026 11217
12/31/95 11284 11492
3/31/96 11330 11536
6/30/96 11443 11657
<FN>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. This graph compares the performance of Stein Roe Limited Maturity
Income Fund to the Lehman 1- to 3-Year Government Index, an unmanaged group of
fixed income securities that differs from the composition of the Fund; it is
not available for direct investment. Total return performance includes changes
in share price and reinvestment of income and capital gains distributions.
</FN>
Investment Comparison CONTINUED
MAKING THE MOST OF PERFORMANCE
The wide assortment of performance data available today can be a mixed
blessing. On one hand, a fund's performance results can be a valuable source
of information when considering an investment. On the other hand, even
seasoned investors may find the wide array of data and the different methods
of interpretation confusing.
That's why one of the most important pieces of advice we can give you is to
remember that a fund's past performance is just that -- past. While a fund's
past performance is not a guarantee of how it will perform in the future, it
can help you make rational decisions about the funds you currently hold or
about funds you might be considering. Owning bond funds helps to provide
diversification, and, as a result, can help to reduce a portfolio's risks. And
because bond funds have an income component, bond portfolio returns tend to be
less volatile than stock funds. Nonetheless, bond fund share prices will
fluctuate as interest rates change. The price and total return of a mutual
fund will change daily and if you sell your shares during a downturn in the
market, you might lose money. If you can ride out the market's ups and downs,
however, your fund might achieve a gain.
No one can make your financial decisions better than you. We hope this annual
report helps you to better understand and evaluate your fund's performance,
and serves as a helpful aid in making intelligent, appropriate investment
decisions. If you have any questions, please call a Stein Roe account
representative at 800-338-2550.
Q&A
AN INTERVIEW WITH STEVE LUETGER, PORTFOLIO MANAGER OF
LIMITED MATURITY INCOME FUND
Photographic image of Steve Luetger.
FUND DATA
INVESTMENT OBJECTIVE:
Seeks high current income and capital preservation by investing primarily
in U.S. government and other high-quality debt securities. The Fund pursues
a higher level of income than is usually available from money market funds
with stable prices and shorter maturities. While the price will fluctuate,
it is expected to be less volatile than the price of longer-term funds with
higher yield potential.
FUND INCEPTION:
March 11, 1993
TOTAL NET ASSETS:
$25.6 million
Q: HOW DID THE FUND PERFORM?
A: The Fund finished its fiscal year with a 5.21 percent total return, which
outpaced the 4.78 percent median return of its Lipper U.S. government fund
peer group, but lagged the 5.47 percent return of the Lehman 1- to 3-Year
Government Bond Index. As of June 30, 1996, the Fund's 30-day standardized
yield was 6.26 percent.
Q: WHAT CONTRIBUTED TO YOUR PERFORMANCE?
A: The investment guidelines for Limited Maturity Income Fund have generally
led us to maintain a slightly shorter average duration than our peer group. As
a result, the Fund generally outperforms the peer group in a bear market and
underperforms in a bull market.
The Fund's most powerful performers have been our corporate and
asset-backed holdings. We continue to like high-quality credit card
securities, and have recently purchased issues from Banc One and Norwest
Corporation.
Q: WHAT OTHER FACTORS HAVE AFFECTED THE FUND?
A: One major factor was a change in the level of the Fund's assets held in the
Stein Roe Counselor (SM) program -- an investment advisory and asset
allocation program for mutual fund shareholders. The program recommends a mix
of no-load Stein Roe funds to suit the investor's individual goals, investment
time frame and risk tolerance, and then provides ongoing recommendations based
on our investment strategists' views of the changing economy and investment
markets. Changes in Counselor recommendations typically occur just once or
twice a year. One such move occurred in the past three months and involved a
shift of roughly $5 million from Limited Maturity Income Fund into longer-term
bond funds.
As a result, it has been necessary for us to maintain a high degree of
liquidity in the Fund. That means we were not able to invest in
mortgage-backed securities as much as we'd like, because, under certain
circumstances, they can be less liquid. With interest rates rising and
prepayment risks dropping dramatically, mortgage-backed securities have
performed extremely well in the past several months. We haven't been able to
participate in those gains.
Q: WHERE ARE YOU FINDING OPPORTUNITIES NOW?
A: We like the higher yields offered by asset-backed securities, particularly
credit card receivables rated AAA by Standard & Poor's or Aaa by Moody's.
These are the highest credit ratings that can be earned by an issuer. And
while there have recently been some indications of rising delinquencies among
credit card holders, we believe that the integrity of AAA-rated asset-backed
securities will be maintained.
Q: WHAT'S YOUR OUTLOOK?
A: We expect rates to rise in the near term, with a possible decline occurring
by the end of 1996. We expect to keep our duration either even with or
slightly longer than that of the Lehman 1- to 3-Year Government Index. That's
a normal positioning for us, and it usually results in a slightly shorter
duration than that of the peer group -- something we expect to benefit our
performance versus the peer group in the near term.
We believe the Fund is positioned well for the current environment. We
expect to continue to maintain high liquidity in the Fund as we search for
opportunities to boost yield. In keeping with this strategy, we may
substantially increase our holdings of A-rated corporate securities.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL
SHARES. Portfolio holdings as of June 30, 1996; portfolio data subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Adviser currently
limits expenses to 0.65 percent, subject to termination upon 30 days' notice
to the Fund. Absent past limits, the Fund's 30-day standardized yield at June
30, 1996, would have been 5.50 percent and total return would have been less.
The Lehman 1- to 3-Year Government Bond Index is an unmanaged group of
short-term bonds that differs from the composition of the Fund; it is not
available for direct investment. According to Lipper Analytical Services,
Inc., an independent monitor of mutual fund performance, the median returns
for the Fund's short-term U.S. government fund peer group for the one-year and
Life of Fund periods ended June 30, 1996, were 4.78 percent and 4.21 percent,
respectively.
Fund Highlights
Limited Maturity Income Fund
SECURITIES TYPE BREAKDOWN
PORTFOLIO PORTFOLIO
JUNE 30, 1995 JUNE 30, 1996
Corporate Bonds 28.9% 41.4%
Asset-Backed Securities 20.8 26.7
U.S. Treasury and Agency Securities 19.8 26.5
Mortgage-Backed Securities 27.1 3.9
Cash and Equivalents 3.4 1.5
Total 100% 100%
AVERAGE LIFE
PIE CHARTS:
As of June 30, 1995 As of June 30, 1996
OVER 3 YEARS (21.9%) OVER 3 YEARS (17.0%)
1-3 YEARS (44.8%) 1-3 YEARS (62.3%)
LESS THAN ONE YEAR (33.3%) LESS THAN ONE YEAR (20.7%)
PORTFOLIO QUALITY
PIE CHART:
As of June 30, 1995 As of June 30, 1996
U.S. TREASURY (16.0%) U.S. TREASURY (22.7%)
BBB (13.0%) BBB (5.8%)
A (11.0%) A (25.0%)
AA (13.0%) AA (5.0%)
AAA/AGENCY (47.0%) AAA/AGENCY (41.5%)
Shareholders Approve Four Proposals
At a special meeting on June 18, 1996, shareholders of Stein Roe Limited
Maturity Income Fund voted to approve proposals relating to an election of the
Fund's Board of Trustees, modifications to certain investment policies, and
new management and administrative agreements. The approved proposals include:
(A) Expansion of Board of Trustees
The Fund's Board was expanded from seven to nine members; nine members were
elected to the Board. This expansion will help Stein Roe to facilitate the
transition of responsibilities from retiring board members to new board
members over an 18-month period.
(B) Interfund Borrowing
(C) Interfund Lending
Cash management is an important part of the investment process for mutual
funds. An interfund lending program -- a program that allows mutual funds to
borrow cash from and lend cash to each other -- gives funds an additional
credit facility to meet emergency needs at terms that would be at least as
favorable as a third party transaction, such as a bank line of credit. Stein
Roe expects to engage in interfund borrowing only when we think it would be
more favorable to both funds than borrowing from a third party.
(D) Administrative and Management Agreements
The Fund's Investment Advisory Agreement is replaced by separate a)
Administrative and b) Portfolio Management Agreements. These new agreements
essentially carry forward, under two separate agreements, the investment
advisory and management services Stein Roe & Farnham already provides to the
Fund. Separate agreements will facilitate, at a future date, the pooling of
the Fund's assets with assets of another fund that has an identical investment
objective. The resulting larger pool of assets would be managed by Stein Roe &
Farnham.
RECORD TOTAL SHARE
DATE SHARE POSITION
POSITION VOTED AFFIRMATIVE WITHHOLD
LIMITED MATURITY INCOME FUND 3,417,019 2,177,751
A) Expansion of Board of Trustees
Timothy K. Armour....... 2,159,399 18,352
Kenneth L. Block........ 2,154,813 22,938
William W. Boyd......... 2,159,399 18,352
Lindsay Cook............ 2,159,399 18,352
Douglas A. Hacker....... 2,142,949 34,802
Francis W. Morley....... 2,157,352 20,399
Charles R. Nelson....... 2,159,399 18,352
Thomas C. Theobald...... 2,150,216 27,535
Gordon R. Worley........ 2,152,865 24,886
FOR AGAINST ABSTENTIONS
B) Interfund Borrowing 1,979,106 27,356 171,289
C) Interfund Lending 1,970,043 31,981 175,727
D) Administrative and
Management Agreements
a) Administrative 1,983,657 14,698 179,396
b) Management 1,982,202 15,376 180,173
Limited Maturity Income Fund
Investments as of June 30, 1996
(Dollar Amounts In Thousands)
Principal Market
LONG-TERM OBLIGATIONS (97.4%) Amount Value
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (26.2%)
Federal Agricultural Mortgage Association
Medium-Term Note 7.710% 7/16/01................... $1,000 $ 1,046
U.S. Treasury Notes
8.500% 4/15/97.................................... 800 817
8.500% 7/15/97.................................... 1,000 1,027
9.000% 5/15/98.................................... 1,750 1,838
7.750% 12/31/99................................... 1,900 1,981
--------
6,709
ASSET-BACKED OBLIGATIONS (26.4%)
Banc One Credit Card MasterTrust Series 1994
7.800% 12/15/00.................................... 1,500 1,544
First Deposit Master Trust Series 1993 Class 2A
5.750% 6/15/01..................................... 1,000 990
Premier Auto Trust Series 1995-3 Class A-3
5.950% 12/06/98.................................... 1,000 999
Prime Credit Trust Series 1992-2-A2 7.450% 11/15/02.. 750 765
Signet Master Trust Services 1993-1 Class A
5.200% 2/15/02..................................... 1,500 1,463
Standard Credit Card Trust 1995-6A 6.750% 6/07/00.... 1,000 1,006
--------
6,767
COMMERCIAL BANK (3.9%)
Corporacion Andina de Fomento 6.625% 10/14/98........ 1,000 992
ENERGY SERVICES (1.8%)
YPF Sociedad Anonima 7.500% 10/26/02................. 463 461
FINANCIAL (26.4%)
American Reinsurance Corp. 10.875% 9/15/04........... 1,000 1,091
Ford Motor Credit Corp. 9.250% 6/15/98............... 1,000 1,050
General Electric Capital Corp. 7.950% 2/02/98........ 1,500 1,537
General Motors Acceptance Corp. 8.625% 6/15/99....... 1,000 1,051
Lehman Brothers Holdings Inc. 5.040% 12/15/96
8.000% thereafter until maturity of 12/15/03...... 1,000 997
Norwest Corp. 9.250% 5/01/97......................... 1,000 1,027
--------
6,753
FOOD AND BEVERAGES (4.9%)
Coca Cola Enterprises 6.500% 11/15/97................ 1,250 1,255
MORTGAGE-BACKED SECURITIES (3.9%)
General Electric Capital Mortgage Services Series 1994
Class A4 6.500% 8/25/24........................... 1,000 997
SUPRANATIONAL BANK (3.9%)
Korean Development Bank Medium-Term Note 7.950% 3/25/97 1,000 1,013
--------
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $25,348).............................................. 24,947
Limited Maturity Income Fund CONTINUED
Principal Market
Amount Value
SHORT-TERM OBLIGATION - (1.5%)
COMMERCIAL PAPER (1.5%)
Lehman Brothers Holding Inc. 5.700% 7/01/96
(Amortized Cost $390) ............................... $390 $ 390
TOTAL INVESTMENTS (98.9%)
(Cost basis $25,738).............................................. 25,337
OTHER ASSETS, LESS LIABILITIES (1.1%)............................. 272
--------
TOTAL NET ASSETS (100%)........................................... $25,609
========
See accompanying notes to financial statements.
Balance Sheet
June 30, 1996
(Amounts In Thousands)
LIMITED
MATURITY
INCOME
FUND
ASSETS
Investments, at market value..................................... $25,337
Receivable for fund shares sold.................................. 7
Accrued interest receivable...................................... 366
Cash and other assets............................................ 61
--------
Total Assets.................................................. $25,771
=======
LIABILITIES
Payable for fund shares redeemed................................. 81
Dividends payable................................................ 51
Payable to investment adviser and transfer agent................. 5
Other liabilities................................................ 25
--------
Total Liabilities ............................................ 162
--------
CAPITAL
Paid-in capital ................................................. 26,963
Net unrealized depreciation of investments....................... (401)
Accumulated undistributed net investment income.................. 1
Accumulated net realized losses on investments................... (954)
--------
Total Capital (Net Assets).................................... 25,609
--------
Total Liabilities and Capital................................. $25,771
=======
Shares Outstanding (Unlimited Number Authorized)................. 2,669
=======
Net Asset Value (Capital) Per Share.............................. $ 9.59
=======
See accompanying notes to financial statements.
Statement of Operations
FOR THE YEAR ENDED
JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
LIMITED
MATURITY
INCOME
FUND
INVESTMENT INCOME
Interest income.................................................. $2,149
-------
EXPENSES
Management fees.................................................. 190
Transfer agent fees.............................................. 44
Printing and postage............................................. 31
SEC and state registration fees.................................. 23
Legal and audit fees............................................. 32
Accounting fees.................................................. 25
Trustees' fees................................................... 18
Custodian fees................................................... 9
Amortization of organization expenses............................ 2
Other............................................................ 18
-------
392
Reimbursement of expenses by investment advisor.................. (207)
-------
Total Expenses................................................ 185
-------
Net Investment Income......................................... 1,964
REALIZED AND UNREALIZED LOSSES ON INVESTMENTS
Net realized losses on investments............................... (204)
Net change in unrealized appreciation or depreciation on investments (135)
-------
Net Losses on Investments..................................... (339)
-------
Net Increase in Net Assets Resulting from Operations............. $1,625
======
See accompanying notes to financial statements.
Statements of Changes in Net Assets
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
LIMITED MATURITY
INCOME FUND
1995 1996
OPERATIONS
Net investment income ..................................... $ 1,673 $ 1,964
Net realized losses on investments ........................ (548) (204)
Net change in unrealized appreciation or
depreciation of investments ............................ 736 (135)
-------- --------
Net Increase in Net Assets Resulting from
Operations ........................................... 1,861 1,625
-------- --------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ...................... (1,664) (1,974)
-------- --------
SHARE TRANSACTIONS
Subscriptions to fund shares .............................. 17,366 23,254
Investment income dividends reinvested .................... 1,160 1,491
Redemptions of fund shares ................................ (26,199) (26,694)
-------- --------
Net Decrease from Share Transactions ................... (7,673) (1,949)
-------- --------
Net Decrease in Net Assets ............................. (7,476) (2,298)
TOTAL NET ASSETS
Beginning of Period ....................................... 35,383 27,907
-------- --------
End of Period ............................................. 27,907 25,609
======== ========
Accumulated Undistributed Net Investment
Income at end of period ................................ $ 11 $ 1
======== ========
ANALYSES OF CHANGES IN SHARES OF BENEFICIAL
INTEREST
Subscriptions to fund shares .............................. 1,814 2,398
Investment income dividends reinvested .................... 121 154
-------- --------
1,935 2,552
Redemptions of fund shares ................................ (2,739) (2,760)
-------- --------
Net decrease in fund shares ............................... (804) (208)
Shares outstanding at beginning of period ................. 3,681 2,877
-------- --------
Shares outstanding at end of period ....................... 2,877 2,669
======== ========
See accompanying notes to financial statements.
Notes to the Financial Statements
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of the Stein Roe Limited
Maturity Income Fund (the "Fund"), a series of the Stein Roe Income Trust (a
Massachusetts business trust). The policies are in conformity with generally
accepted accounting principles. The prepara tion of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
SECURITY VALUATIONS
All securities are valued as of June 28, 1996, the last business day in the
period. Long-term debt securities are valued using market quotations if
readily available at the time of valuation. If market quotations are not
readily available, they are valued at a fair value using a procedure
determined in good faith by the Board of Trustees, which has authorized the
use of market valuations provided by a pricing service. Short-term debt
securities with remaining maturities of 60 days or less are valued at their
amortized cost. Those with remaining maturities of more than 60 days for which
market quotations are not readily available are valued by use of a matrix,
prepared by the Adviser, based on quotations for comparable securities. Other
assets and securities of the Fund are valued by a method that the Board of
Trustees believes represents a fair value.
FEDERAL INCOME TAXES
No provision is made for federal income taxes since the Fund elects to be
taxed as a "regulated investment company" and makes such distributions to its
shareholders as to be relieved of all federal income taxes under provisions of
current federal tax law. The Fund intends to utilize provisions of the federal
income tax laws, which allows it to carry a realized capital loss forward up
to eight years following the year of the loss, and offset such losses against
any future realized gains. At June 30, 1996, the Fund had capital loss
carryforwards of $744, expiring in the years 2002 through 2004.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly.
Capital gain distributions, if any, are distributed annually. Distribu tions
in excess of tax basis earnings are reported in the financial state ments as a
return of capital. Differences in the recognition or classifica tion of income
between the financial statements and tax earnings that result in temporary
overdistribu tions are classified as distributions in excess of net investment
income or net realized gains, and any permanent differences are reclassified
to paid-in-capital. The Fund did not have distributions in excess of net
investment income or net realized gains for the year ended June 30, 1996.
OTHER INFORMATION
Realized gains or losses from sales of securities are determined on the
specific identified cost basis. Securities purchased on a when-issued or
delayed delivery basis may be settled a month or more after the transaction
date. These securities are subject to market fluctuation during this period.
The Fund had no when-issued or delayed delivery purchased commitments as of
June 30, 1996. All amounts, except per-share amounts, are shown in thousands.
NOTE 2. PORTFOLIO COMPOSITION
The Fund invests primarily in U.S. Government and other high-quality debt
securities. See the Fund's schedule of investments for information on
individual securities as well as industry diversification, and see Fund
Highlights for the Fund's portfolio quality.
NOTE 3. TRUSTEES' FEES AND TRANSACTIONS WITH AFFILIATES
The Fund pays a monthly management fee to Stein Roe & Farnham Incorporated
(the "Adviser"), an indirect, majority-owned subsidiary of Liberty Mutual
Insurance Company, for its services as investment adviser and manager. The
management fee for the Fund is computed at an annual rate of .60 of 1 percent
of the first $100 million of average net assets, .55 of 1 percent of the next
$100 million and .50 of 1 percent thereafter.
Effective July 1, 1996, as a result of shareholder vote, the Fund's
investment advisory agreement was replaced by separate administrative and
management agreements. The administrative fee for the Fund will be .15 of 1
percent of the first $100 million of average daily net assets, .125 of 1
percent of the next $100 million, and .10 of 1 percent thereafter. The
management fee for the Fund will be .45 of 1 percent of the first $100 million
of average daily net assets, .425 of 1 percent of the next $100 million, and
.40 of 1 percent thereafter. There is no increase in the aggregate fee paid to
the Adviser due to these changes.
The investment advisory agreements of the Fund provide that the Adviser
will reimburse the Fund to the extent that its annual expenses, excluding
certain expenses, exceed the applicable limits prescribed by any state in
which the Fund's shares are offered for sale. Effective November 1, 1995, the
Adviser agreed to reimburse the Fund to the extent that its expenses exceed
.65 percent of average net assets. Prior to November 1, 1995, the expense
limitation was .45 percent of average net assets. The expense limitation for
the Fund expires October 31, 1997, subject to earlier termination by the
Adviser on 30 days' notice.
The transfer agent fees of the Fund are paid to SteinRoe Services, Inc.
(SSI), an indirect, majority-owned subsidiary of Liberty Mutual Insurance
Company. Effective July 3, 1996, SSI entered into an agreement with Colonial
Investors Service Center, Inc., an indirect, majority-owned subsidiary of
Liberty Mutual Insurance Company, to act as sub-transfer agent for the Funds.
The Adviser also provides certain accounting services. For the year ended
June 30, 1996, the Fund incurred charges of $25 for these services.
Certain officers and trustees of the Trust are also officers of the
Adviser. The compensation of trustees not affiliated with the Adviser for the
Fund for the year ended June 30, 1996, was $18. No remuneration was paid to
any other trustee or officer of the Trust.
NOTE 4. SHORT-TERM DEBT
To facilitate portfolio liquidity, the Fund maintains borrowing arrangements
under which it can borrow against portfolio securities. The Fund had no
borrowings during the year ended June 30, 1996.
NOTE 5. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales other than short-term
obligations for the year June 30, 1996, were $27,542 and $26,749,
respectively.
At June 30, 1996, unrealized appreciation and depreciation on a tax basis
were $15 and $422, respectively. Cost of investments for federal income tax
purposes and for financial reporting purposes were $25,744 and $25,738,
respectively.
Financial Highlights
Limited Maturity Income Fund
Selected per-share data (for a share outstanding throughout each period),
ratios and supplemental data.
Period Ended
June 30, Years Ended June 30,
1993(a) 1994 1995 1996
Net Asset Value, Beginning of Period .................................. $ 10.00 $ 10.01 $ 9.61 $ 9.70
--------- ---------- ---------- ----------
Income From Investment Operations
Net investment income ........................................ .12 .47 .56 .61
Net realized and unrealized gains (losses) on investments .... .01 (.40) .09 (.11)
--------- ---------- ---------- ----------
Total from investment operations ............................. .13 .07 .65 .50
Distributions from net investment income .............................. (.12) (.47) (.56) (.61)
--------- ---------- ---------- ----------
Net Asset Value, End of Period ........................................ $ 10.01 $ 9.61 $ 9.70 $ 9.59
========= ========== ========== ==========
Ratio of net expenses to average net assets (b) ....................... 0.45%* 0.45% 0.45% 0.59%
Ratio of net investment income to average net assets (c) .............. 4.18%* 4.81% 5.83% 6.23%
Portfolio turnover rate ............................................... 20%** 122% 64% 91%
Total return (c) ...................................................... 1.43%** 0.66% 6.96% 5.21%
Net assets, end of period (000s) ...................................... $ 7,619 $ 35,383 $ 27,907 $ 25,609
<FN>
*Annualized
**Not annualized
(a) The Fund commenced operations on March 11, 1993.
(b) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have been 3.63
percent for the period ended June 30, 1993, 1.14, 1.27 and 1.24 percent for
the years ended June 30, 1994, 1995 and 1996, respectively.
(c) Computed giving effect to investment adviser's expense limitation undertaking.
</FN>
Report of Independent Auditors
To the Shareholders and Board of Trustees of Stein Roe Income Trust
Stein Roe Limited Maturity
Income Fund
We have audited the accompanying balance sheet, including the schedule of
investments, of Stein Roe Limited Maturity Income Fund as of June 30, 1996,
and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for the periods indicated thereon.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of June 30, 1996, by correspondence with the custodian. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Stein Roe Limited Maturity Income Fund at June 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for the
periods indicated thereon, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
August 2, 1996
Funds for Every Investment Objective
The Stein Roe family of 100 percent no-load mutual funds offers a variety of
funds so you can select the right fund, or combination of funds, to meet your
investment objec tives. Call us at 800-338-2550 for a prospectus and more
complete information on any of the funds, including management fees and
expenses. Please read the pro spectus carefully before you invest or send
money.
MONEY MARKET FUNDS
Money market funds seek to provide income while preserving principal and
maintaining liquidity. These funds offer free check writing.
o Government Reserves Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies and
instrumentalities.*
o Cash Reserves Fund -- Invests in high-quality, short-term money market
securities such as certificates of deposit, banker's acceptances and
commercial paper.*
BOND FUNDS
Bond funds seek high current income by investing pri marily in fixed income
securities.
o Limited Maturity Income Fund -- Invests primarily in U.S. government and
other high-quality debt securities. The dollar -weighted average
effective maturity will not exceed three years.
o Government Income Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies.*
o Intermediate Bond Fund-- Invests primarily in marketable debt securities
with an average life of three to 10 years.
o Income Fund -- Pursues a higher level of current income by investing
primarily in medium- and lower-quality bonds.
TAX-EXEMPT FUNDS
These funds help investors keep more of their earnings by investing in
instruments that earn income free from federal income tax. Income may be
subject to federal alternative minimum tax and state and local taxes; capital
gains are subject to state, local and federal taxes.
o Municipal Money Market Fund -- Seeks to provide the liquidity and
stability of a money market fund plus current tax-free income. Free
check writing available.*
*Money market mutual funds strive to maintain a $1 per share net asset value,
but there is no assurance that the fund will be able to maintain a stable net
asset value. The net asset value of a fund that invests in securities issued
or guaranteed by the U.S. government is not guaranteed.
o Intermediate Municipals Fund -- Seeks high current yield through
investments primarily in the three highest grades of intermediate-term
municipal securities.
o Managed Municipals Fund -- Pursues high tax-free income by investing in a
quality-conscious portfolio of long-term municipal bonds.
o High-Yield Municipals Fund -- Seeks a higher level of tax-free income
from long-term municipal securities, primarily of medium or lower
quality.
GROWTH AND INCOME FUNDS
These funds seek to provide a conservative investment that is well positioned
for long-term growth and current income. Each fund's approach is designed to
limit the effects of market volatility.
o Balanced Fund+ -- Seeks long-term growth of capital and current income
consistent with reasonable investment risk by investing in equities, debt
securities and cash equivalents.
o Growth & Income Fund -- Pursues income and long-term capital growth by
investing primarily in large, well-established companies.
GROWTH FUNDS
Growth funds offer long-term capital appreciation potential by investing
primarily in various types of stocks.
o Growth Stock Fund -- Pursues long-term capital appreciation from stocks
with strong growth potential.
o Special Fund -- Invests in securities believed to have limited downside
risk relative to their potential for above-average growth, including
securities of undervalued, under followed or out-of-favor companies.
o Special Venture Fund -- Seeks capital appreciation through equity
securities of entre preneurially managed companies.
o Young Investor Fund -- Invests in securities of companies that affect the
lives of children or teenagers.
o Capital Opportunities Fund -- Takes a long-term approach to emerging
growth by selecting quality companies with the potential to generate high
levels of earnings growth over a three- to five-year period.
o International Fund -- Invests in a diversified portfolio of foreign
securities.
+Formerly Total Return Fund; name and investment objective changed effective
April 17, 1996.
To Contact Us. . .
BY PHONE 800-338-2550
You can discuss your investment questions with a Stein Roe account
representative by calling us toll free. We'll be happy to answer questions
about your current account, or to provide you with information about opening a
Stein Roe account, including Stein Roe IRAs. We're available seven days a
week, from 7 a.m. to 8 p.m. weekdays and from 8 a.m. to 5 p.m. Saturday and
Sunday (central time).
STEIN ROE'S FUNDS-ON-CALL(R)
24-HOUR SERVICE LINE
Using a touch-tone phone, call our toll-free number, day or night, for your
current account balance, the latest Stein Roe prices and yields, and other
information. In addition, if you have a Personal Identification Number (PIN),
you may place orders for the following transactions 24 hours a day:
o Exchange shares between your Stein Roe accounts;
o Purchase shares by electronic transfer;
o Order additional account statements and money market fund checks;
o Redeem shares by check, wire or electronic transfer.
RETIREMENT PLAN ACCOUNTS
Call us for information about how we can assist you with your defined
contribution plan, including 401(k) plans. You can reach us toll free at
800-322-1130.
For information on IRA plans, call us toll free at 800-338-2550.
BY MAIL
If you prefer to contact us by mail, please address all correspondence
to: P.O. Box 8900, Boston, MA 02205-8900. You also may visit our Internet web
site -- www.steinroe.com -- to contact us by e-mail.
IN PERSON
If you are in the Chicago area, please visit our Investor Center located in
downtown Chicago at One South Wacker Drive, 32nd Floor. Our account
representatives can answer questions about your current Fund investments or
provide you infor mation about any of the Stein Roe Funds and retirement
plans. Stop by weekdays between 8 a.m. and 5:15 p.m.
This report must be preceded or accompanied by a prospectus.
A Guide to Stein Roe Services
We encourage you to take advantage of our free shareholder services. If you
would like additional information about how to establish or use a Stein Roe
service, just call us at 800 338-2550.
PURCHASES
In addition to sending us a check or wire to purchase additional fund shares,
you can take advantage of these convenient automatic services:
o Automatic Investment Plan -- Make regular investments ($50 minimum) in
your Stein Roe account directly from your bank checking account. You
select monthly, quarterly, semiannual or annual purchases.
o Special Investments -- Purchase shares by telephone and pay for them by
electronic transfer from your bank checking account.
EXCHANGES
o Telephone Exchange -- Call us to exchange $50 or more from your existing
account in one Stein Roe fund to an identically registered existing
account in another Stein Roe fund. You receive this service when you open
a Stein Roe fund account, unless you elect not to.*
o Automatic Exchange -- Stein Roe will regularly exchange shares
from your account in one Stein Roe fund to your account in another. You
select twice-monthly, monthly, quarterly, semiannual or annual exchanges.
REDEMPTIONS
o Telephone Redemption by Check -- Call to redeem $1,000 or more from your
account. A check will be sent to your registered address. You
automatically receive this service when you open a Stein Roe account,
unless you elect not to.
o Telephone Redemption by Wire -- Redeem shares by phone from your account
($1,000 minimum) and wire the proceeds to your bank checking account. A
small fee for wiring proceeds will be deducted from the amount wired.
o Special Redemption Option -- If you do not want to preschedule your
redemptions, you can redeem shares by telephone ($50 minimum/ $100,000
maximum) and have the proceeds sent directly to your bank checking
account.
o Automatic Redemption Plan -- Redeem either a fixed dollar or
share amount, or a fixed percentage of your account automatically on a
schedule you establish. You select monthly, quarterly, semiannual or
annual withdrawals ($50 minimum/ $100,000 max imum), and the proceeds are
sent either to your bank checking account or to an address you specify.
o Money Market Fund Check Writing -- Write checks for $50 or more on your
money market fund account.
*Stein Roe reserves the right to discontinue or modify the exchange privilege,
and certain restrictions apply. Please refer to your prospectus for details.
DISTRIBUTIONS
Most investors like to reinvest their dividends and capital gains
distributions and put them back to work. If, however, you do not want them
reinvested, consider these alternatives:
o Dividend Purchase Option -- Use the distributions from one Stein Roe fund
account ($25 minimum) to automatically purchase shares in your account
with another Stein Roe fund.
o Automatic Dividend Deposit -- Instead of receiving your dividends by
check, your distributions are deposited automatically into your bank
checking account.
RECORDKEEPING
o Summary of Investments -- Consolidates quarterly transaction and
investment infor mation for any or all of your household's Stein Roe
accounts on one easy-to-read statement. At year end, Stein Roe provides a
complete summary of all account activity for the year.
Stein Roe Income Trust
TRUSTEES
Timothy K. Armour
President, Mutual Fund Division and
Director, Stein Roe & Farnham Incorporated
Kenneth L. Block
Chairman Emeritus, A.T. Kearney, Inc.
William W. Boyd
Chairman and Director, Sterling Plumbing
Group Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Douglas A. Hacker
Senior Vice President and Chief Financial Officer, United Airlines
Francis W. Morley
Chairman, Employer Plan Administrators
and Consultants Co.
Charles R. Nelson
Van Voorhis Professor of Political Economy, University of Washington
Thomas C. Theobald
Managing Partner, William Blair Capital Partners
Gordon R. Worley
Private investor
OFFICERS
Timothy K. Armour, President
Jilaine H. Bauer, Executive Vice President,
Secretary
N. Bruce Callow, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Ann H. Benjamin, Vice President
Thomas W. Butch, Vice President
Philip J. Crosley, Vice President
Philip D. Hausken, Vice President
Michael T. Kennedy, Vice President
Steven P. Luetger, Vice President
Lynn C. Maddox, Vice President
Anne E. Marcel, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Cynthia A. Prah, Vice President
Thomas P. Sorbo, Vice President
Sharon R. Robertson, Controller
Margaret O. Zwick, Treasurer
Janet B. Rysz, Assistant Secretary
AGENTS AND ADVISERS
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
SteinRoe Services Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
Logo: Stein Roe
Stein Roe Mutual Funds
Building Wealth for Generations (sm)
THE STEIN ROE FUNDS
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Limited Maturity Income Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe 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 International Fund
P.O. Box 8900
Boston, Massachusetts 02205-8900
800-338-2550
In Chicago, visit our Fund Center at One South Wacker Drive
Liberty Securities Corporation, Distributor
Member SIPC. 7/96
LM11A
Annual Report
June 30, 1996
STEIN ROE
BOND FUND
Government Income Fund
Photographic image of two men and girl on a bridge.
Graphic: Stein Roe Logo
Stein Roe Mutual Funds
Building Wealth for Generations (SM)
Contents
From the President................................................ 1
Tim Armour's thoughts on the markets and investing
Performance....................................................... 3
How Stein Roe Government Income Fund has done over time
Q&A
Government Income Fund............................................ 6
Interview with the portfolio manager and a
summary of major shifts in the Fund's investments
over the past 12 months
Investments....................................................... 11
A complete list of the Fund's investments with
market values
Financial Statements.............................................. 13
Balance sheet, statement of operations,
and changes in net assets
Notes to Financial Statements..................................... 16
Financial Highlights.............................................. 20
Selected per-share data
Report of Independent Auditors.................................... 22
General Information............................................... 23
A guide to products and services
From the President
TO OUR SHAREHOLDERS
We are pleased to present this annual report for Stein Roe Government Income
Fund.
CHANGING WINDS
After more than a year of monetary tightening that successfully slowed
economic growth and inhibited inflation, the Federal Reserve embarked on a new
interest rate strategy early in the Fund's fiscal year. Spurred by slowing
government spending, declining auto sales, fewer housing starts, and flatter
holiday retail sales, the Federal Reserve began to trim the benchmark federal
funds rate target, reducing it from 6.00 percent to 5.75 percent in July 1995,
then to 5.50 percent in December 1995, and finally to 5.25 percent in January
1996. The bond market rallied.
But the celebration was short-lived. As Washington failed to reach a
balanced budget agreement and currency speculators played U.S. and Japanese
interest rates against each other, the bond market weakened. Bond investors
seemed willing to brush off these events, however, as two government shutdowns
delayed key economic reports and hinted at continued economic sluggishness and
further rate cuts. In early March, however, an astonishing payroll report put
the number of jobs created at the highest level since January 1995. This data
suggested far stronger economic growth than anyone had anticipated, which in
turn implied a possible spike in inflation -- the bane of bondholders. As a
result, many believed the Federal Reserve would have to raise short-term
interest rates to keep inflation under control. The bond markets plummeted.
GOOD NEWS
The bond market ended an other wise dismal first half of 1996 on a
positive note, however. The yield on the benchmark 30-year Treasury bond,
which had reached a mid-June peak of 7.2 percent, eased by month's end,
indicating the bond market finally may have brushed off the reverberations of
stronger-than-expected economic reports -- at least for the time being. This
was particularly good news for bond investors since, before this turn-around,
June figured to be the fifth consecutive losing month for bonds in terms of
total return. Previously, even in bear bond markets, stretches of four losing
months had invariably been followed by a rebound of at least one or two
months.
Photographic image of Tim Armour.
The fixed income markets remain volatile, however. And although the bond
market has, in effect, tightened monetary policy already, without the Federal
Reserve having to raise a hand -- or interest rates -- the possibility of a
rate hike remains. That's because the economy appears to be growing at a
fairly robust pace, with economic growth expected to top 3.5 percent for the
second quarter. At the same time, unemploy ment continues to hover at
near-record lows. But while recent economic reports increase the chance of a
rate hike, they in no way guarantee one. While we believe it's possible that
the Federal Reserve might raise interest rates a quarter to a half percentage
point at its next meeting, we think economic growth will slow later in the
year of its own accord, preventing the need for any further rate increases. So
while some volatility may continue in the near term, we believe the bond
market may stabilize by year-end 1996.
In fact, we think bonds represent an attractive investment right now.
Because stocks are generally considered riskier than bonds, the stock market's
rate of return, as measured by the S&P 500, is usually about 2.5 percentage
points above the yield of the 10-year Treasury bond. Lately, however, the
spread has closed to less than 1.5 points, which is narrower than at any time
since the summer of 1987. Historically, whenever the stock market has moved
into this territory, it has usually foreshadowed either a stock market
correction or a period of relatively flat performance. Consequently, we think
bonds could be a safe refuge in the months ahead.
THE BASICS
While past performance is no guarantee of future results, and no one can
predict what might happen to bond funds or the markets in the future, we
believe investors must understand the factors that move the markets, not just
to profit from them, but to gain the patience to ride out short-term
volatility in their investments. As always, no matter what direction you think
the economy is heading, it is important to remember the basics. Think long
term and re-evaluate your investment portfolio from time to time to make sure
it continues to match your goals, risk tolerance and time horizon. Please call
us at 800-338-2550 with your comments and suggestions. As always, we look
forward to serving your investment needs.
Sincerely,
Timothy K. Armour
President
July 25, 1996
Fund Performance
There are several ways to evaluate a fund's historical performance. You can
look at the cumulative return percentage, the average annual return
percentage, or the growth of a hypothetical $10,000 investment. Each
performance figure includes changes in a fund's share price, plus reinvestment
of any dividends (net investment income) and capital gains (the profits the
fund earns when fixed income securities grow in value).
AVERAGE ANNUAL TOTAL RETURNS
Periods ended June 30, 1996
PAST 1 PAST 3 PAST 5 PAST 10
YEAR YEARS YEARS YEARS
GOVERNMENT INCOME FUND 4.63% 4.30% 7.18% 7.33%
Lehman Government Bond Index 4.51 4.94 8.21 8.13
<FN>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
SHARES. TOTAL RETURN PERFORMANCE INCLUDES CHANGES IN SHARE PRICE AND
REINVESTMENT OF INCOME AND CAPITAL GAINS DISTRIBUTIONS. The Lehman Government
Bond Index is an unmanaged group of fixed income securities that differs from
the composition of Government Income Fund; it is not available for direct
investment.
</FN>
Investment Comparison
COMPARISON of change in value of a $10,000 investment for the years ended
June 30
GOVERNMENT INCOME FUND
GRAPH:
YEAR ENDED GOVERNMENT LEHMAN GOVERNMENT
INCOME FUND BOND INDEX
6/30/86 10,000 10,000
6/30/87 10,400 10,411
6/30/88 11,060 11,160
6/30/89 12,230 12,509
6/30/90 13,080 13,375
6/30/91 14,340 14,731
6/30/92 16,310 16,756
6/30/93 17,880 18,917
6/30/94 17,480 18,665
6/30/95 19,390 20,915
6/30/96 20,278 21,859
<FN>
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND INVESTMENT
RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL SHARES. This
graph compares the performance of Stein Roe Government Income Fund to the
Lehman Government Bond Index, an unmanaged group of fixed income securities
that differs from the composition of the Fund; it is not available for direct
investment. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions.
</FN>
MAKING THE MOST OF PERFORMANCE
The wide assortment of performance data available today can be a mixed
blessing. On one hand, a fund's performance results can be a valuable source
of information when considering an investment. On the other hand, even
seasoned investors may find the wide array of data and the different methods
of interpretation confusing.
That's why one of the most important pieces of advice we can give you is
to remember that a fund's past performance is just that -- past. While a
fund's past performance is not a guarantee of how it will perform in the
future, it can help you make rational decisions about the funds you currently
hold or about funds you might be considering. Owning bond funds helps to
provide diversification, and, as a result, can help to reduce a portfolio's
risks. And because bond funds have an income component, bond portfolio returns
tend to be less volatile than stock funds. Nonetheless, bond fund share prices
will fluctuate as interest rates change. The price and total return of a
mutual fund will change daily and if you sell your shares during a downturn in
the market, you might lose money. If you can ride out the market's ups and
downs, however, your fund might achieve a gain.
No one can make your financial decisions better than you. We hope this
annual report helps you to better understand and evaluate your fund's
performance, and serves as a helpful aid in making intelligent, appropriate
investment decisions. If you have any questions, please call a Stein Roe
account representative at 800-338-2550.
Q&A
AN INTERVIEW WITH MIKE KENNEDY, PORTFOLIO MANAGER OF
GOVERNMENT INCOME FUND
Photographic image of Mike Kennedy.
FUND DATA
INVESTMENT OBJECTIVE:
The Fund seeks high current income by investing primarily in securities
issued or guaranteed by the U.S. government or its agencies or
instrumentalities.
FUND INCEPTION:
March 5, 1986
TOTAL NET ASSETS:
$37.2 million
Q: HOW DID THE FUND PERFORM?
A: For the year ended June 30, 1996, Government Income Fund turned in a solid
4.63 percent return, which compared well with both the Lehman Government Bond
Index return of 4.51 percent and the Lipper U.S. government fund peer group
median return of 3.50 percent. As of June 30, 1996, the Fund's 30-day
standardized yield was 6.14 percent.
Q: WHAT DROVE PERFORMANCE?
A: Over the last six months, we've maintained a heavy emphasis on
mortgage-backed securities, which, on June 30, 1996, represented 53 percent of
the Fund's total net assets. This was a strategic move designed to help us
take advantage of the very attractive valuations on mortgage-backed securities
that we have been seeing over the past year.
In addition, as interest rates rose during the last six months, the risk
that borrowers would prepay their mortgages dropped dramatically.
Mortgage-backed securities rebounded accordingly.
With these two factors in our favor, we think the decision to beef up the
Fund's mortgage holdings has paid off handsomely.
Q: WHAT OTHER FACTORS AFFECTED PERFORMANCE?
A: Over the last 12 months, we kept our duration stable. We just weren't as
bullish as our competitors seemed to be and, as prices fell, that helped our
performance relative to the peer group.
Q: WHAT ARE YOUR PLANS FOR THE FUND'S MORTGAGE COMPONENT?
A: While we believe mortgage-backed securities are attractive on a long-term
basis, we think current yields on these securities do not merit an over
weighting. This, com bined with the fact that mortgage-backed securities
historically are available at attractive spreads early in the year, will
prompt us to begin shifting assets, on a strategic basis, from mortgage-backed
securities into Treasury securities to take full advantage of favorable price
movements.
Q: WHAT ARE YOUR EXPECTATIONS FOR THE FUND?
A: We expect to trim our mortgage holdings with coupons of 8 percent to 8.5
percent. These securities have performed very well to date, but are no longer
attractive in comparison with discount coupon mortgage-backed securities. As a
result, you can expect us to shift some assets into discount coupon securities
in the near term.
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. SHARE PRICE AND
INVESTMENT RETURN WILL VARY, SO YOU MAY HAVE A GAIN OR A LOSS WHEN YOU SELL
SHARES. Portfolio holdings as of June 30, 1996; portfolio data subject to
change. Total return performance includes changes in share price and
reinvestment of income and capital gains distributions. The Adviser currently
limits expenses to 1 percent of average net assets, subject to termination
upon 30 days' notice to the Fund. Absent past limits, the Fund's 30-day
standardized yield at June 30, 1996, would have been 6.09 percent and total
return would have been less. The Fund is neither insured nor guaranteed by the
U.S. government. Up to 20 percent of the Fund's assets may be invested in
other types of securities. The Lehman Government Bond Index represents an
unmanaged group of government securities that differs from the composition of
the Fund; it is not available for direct investment. According to Lipper
Analytical Services, Inc., an independent monitor of mutual fund performance,
the median returns for the Fund's U.S. government fund peer group for the
one-, five- and 10-year periods ended June 30, 1996, were 3.50 percent, 7.12
percent and 7.28 percent, respectively.
Fund Highlights
Government Income Fund
SECURITIES TYPE BREAKDOWN
PORTFOLIO PORTFOLIO
JUNE 30, 1995 JUNE 30, 1996
Federal Agency Mortgage-
Backed Securities 59.8% 46.2%
U.S. Treasury Securities 25.8 34.7
AAA Mortgage-Backed Securities 3.7 4.8
Federal Agency Securities 2.7 2.6
Cash and Equivalents 8.0 11.7
Total 100% 100%
MATURITY
PIE CHART:
As of June 30, 1995 As of June 30, 1996
OVER 25 YEARS (26.2%) OVER 25 YEARS (20.3%)
20-25 YEARS (30.2%) 20-25 YEARS (28.6%)
10-20 YEARS (22.0%) 10-20 YEARS (24.1%)
5-10 YEARS (16.3%) 5-10 YEARS (16.5%)
UNDER 5 YEARS (5.3%) UNDER 5 YEARS (10.5%)
PORTFOLIO QUALITY
PIE CHART:
As of June 30, 1995 As of June 30, 1996
AAA/AGENCY (70.1%) AAA/AGENCY (60.7%)
TREASURY (29.9%) TREASURY (39.3%)
Shareholders Approve Four Proposals
At a special meeting on June 18, 1996, shareholders of Stein Roe Government
Income Fund voted to approve proposals relating to an election of the Fund's
Board of Trustees, modifications to certain investment policies, and new
management and administrative agreements. The approved proposals include:
(A) Expansion of Board of Trustees
The Fund's Board was expanded from seven to nine members; nine members were
elected to the Board. This expansion will help Stein Roe to facilitate the
transition of responsibilities from retiring board members to new board
members over an 18-month period.
(B) Interfund Borrowing
(C) Interfund Lending
Cash management is an important part of the investment process for mutual
funds. An interfund lending program -- a program that allows mutual funds to
borrow cash from and lend cash to each other -- gives funds an additional
credit facility to meet emergency needs at terms that would be at least as
favorable as a third party transaction, such as a bank line of credit. Stein
Roe expects to engage in interfund borrowing only when we think it would be
more favorable to both funds than borrowing from a third party.
(D) Administrative and Management Agreements
The Fund's Investment Advisory Agreement is replaced by separate a)
Administrative and b) Portfolio Management Agreements. These new agreements
essentially carry forward, under two separate agreements, the investment
advisory and management services Stein Roe & Farnham already provides to the
Fund. Separate agreements will facilitate, at a future date, the pooling of
the Fund's assets with assets of another fund that has an identical investment
objective. The resulting larger pool of assets would be managed by Stein Roe &
Farnham.
RECORD TOTAL SHARE
DATE SHARE POSITION
POSITION VOTED AFFIRMATIVE WITHHOLD
GOVERNMENT INCOME FUND..... 3,484,286 1,932,378
A) Election of Board of
Trustees
Timothy K. Armour....... 1,891,508 40,870
Kenneth L. Block........ 1,890,345 42,033
William W. Boyd......... 1,891,508 40,870
Lindsay Cook............ 1,891,508 40,870
Douglas A. Hacker....... 1,875,218 57,160
Francis W. Morley....... 1,889,340 43,038
Charles R. Nelson....... 1,891,171 41,207
Thomas C. Theobald...... 1,875,218 57,160
Gordon R. Worley........ 1,888,895 43,483
FOR AGAINST ABSTENTIONS
B) Interfund Borrowing 1,527,196 74,115 331,067
C) Interfund Lending 1,527,445 79,383 325,550
D) Administrative and
Management Agreement
a) Administrative 1,551,027 21,427 359,924
b) Management 1,549,656 31,984 350,738
Government Income Fund
Investments as of June 30, 1996
(Dollar Amounts In Thousands)
Principal Market
LONG-TERM OBLIGATIONS (91.2%) Amount Value
U.S. GOVERNMENT AND AGENCY OBLIGATIONS (38.5%)
Federal National Mortgage Association
8.000% 4/13/05.................................... $ 1,000 $ 1,004
U.S. Treasury Bonds
12.750% 11/15/10.................................. 600 843
7.500% 11/15/16................................... 1,350 1,418
8.875% 8/15/17.................................... 4,200 5,042
7.125% 2/15/23.................................... 1,250 1,263
U.S. Treasury Notes
7.750% 12/31/99................................... 1,000 1,042
6.500% 5/15/05.................................... 1,500 1,480
6.500% 8/15/05.................................... 1,250 1,232
6.875% 5/15/06.................................... 1,000 1,011
-------
14,335
U.S. GOVERNMENT AGENCY MORTGAGE-BACKED SECURITIES (47.7%)
Federal Home Loan Mortgage Corporation
12.000% 7/01/13................................... 277 304
Federal Home Loan Mortgage Corporation Gold
7.500% 3/01/08.................................... 1,667 1,681
12.000% 7/01/20 .................................. 932 1,050
7.500% 11/01/23................................... 1,234 1,224
Federal Home Loan Mortgage Corporation Remic Trusts
9.500% 4/15/19 Series 11-C........................ 132 137
Federal National Mortgage Association
8.000% 6/01/02.................................... 607 624
*7.000% 11/01/08.................................. 1,750 1,726
6.000% 4/01/09.................................... 781 743
6.000% 2/01/24.................................... 854 781
8.500% 7/01/24.................................... 1,102 1,132
8.000% 9/01/24.................................... 955 963
8.500% 11/01/24................................... 30 31
8.500% 12/01/24................................... 1,385 1,422
8.500% 3/01/25.................................... 15 15
8.000% 9/01/25.................................... 431 434
Federal National Mortgage Association Remic Trusts
Effective Yield 14.400% 7/25/98 Series 1991-91-SA 10 70
9.250% 3/25/18 Series 1988-4-Z.................... 1,328 1,370
Government National Mortgage Association
8.000% 6/15/06.................................... 158 163
8.000% 3/15/08.................................... 916 940
8.000% 5/15/08.................................... 73 75
8.000% 6/15/08.................................... 424 436
8.000% 7/15/08.................................... 1,148 1,178
9.000% 6/15/16.................................... 393 415
9.000% 8/15/16.................................... 73 77
9.000% 11/15/16................................... 198 209
9.000% 2/15/17.................................... 95 100
9.000% 3/15/21.................................... 183 192
9.000% 8/15/21.................................... 272 286
--------
17,778
Government Income Fund CONTINUED
Principal Market
Amount Value
MORTGAGE-BACKED SECURITIES (5.0%)
Countrywide Mortgage Backed Securities Inc.
Series 1994-F Class A4 6.000% 4/25/09............. $ 750 $ 708
MDC Mortgage Funding Corp.
8.850% 3/20/18.................................... 527 542
Merrill Lynch Trust Series 20-D
8.000% 12/20/18................................... 595 597
--------
1,847
--------
TOTAL LONG-TERM OBLIGATIONS
(Cost basis $33,223).............................................. 33,960
SHORT-TERM OBLIGATIONS (12.1%)
U.S. GOVERNMENT AGENCY OBLIGATION (7.5%)
Federal Home Loan Mortgage Corp. 5.250% 7/03/96...... 2,800 2,799
REPURCHASE AGREEMENT (4.6%)
CIBC Wood Gundy Securities 5.450%; 6/28/96 agreement
collateralized by Federal National Mortgage
Association bond, 6.450% due 4/12/01............... 1,695 1,695
--------
TOTAL SHORT-TERM OBLIGATIONS
(Amortized cost $4,494)........................................... 4,494
TOTAL INVESTMENTS (103.3%)
(Cost basis $37,717).............................................. 38,454
OTHER ASSETS, LESS LIABILITIES (-3.3%)............................ (1,244)
--------
TOTAL NET ASSETS (100%)........................................... $37,210
========
<FN>
*Security purchased on when issued or delayed delivery basis for which the
Fund has not taken delivery as of June 30, 1996.
See accompanying notes to financial statements.
</FN>
Balance Sheet
June 30, 1996
(Amounts In Thousands, except Per-Share Amount)
GOVERNMENT
INCOME
FUND
-------
ASSETS
Investments, at market value..................................... $38,454
Receivable for fund shares sold.................................. 48
Accrued interest receivable...................................... 440
Cash and other assets............................................ 100
-------
Total Assets................................................. $39,042
=======
LIABILITIES
Payable for investments purchased................................ $ 1,718
Dividends payable................................................ 73
Payable to investment adviser and transfer agent................. 8
Other liabilities................................................ 33
--------
Total Liabilities............................................. 1,832
--------
CAPITAL
Paid-in capital ................................................. 38,533
Net unrealized appreciation of investments....................... 737
Accumulated undistributed net investment income.................. 14
Accumulated net realized losses on investments................... (2,074)
--------
Total Capital (Net Assets).................................... 37,210
--------
Total Liabilities and Capital................................. $39,042
=======
Shares Outstanding (Unlimited Number Authorized)................. 3,836
=======
Net Asset Value (Capital) Per Share.............................. $ 9.70
=======
See accompanying notes to financial statements.
Statement of Operations
FOR THE YEAR ENDED
JUNE 30, 1996
(AMOUNTS IN THOUSANDS)
GOVERNMENT
INCOME
FUND
INVESTMENT INCOME
Interest income.................................................. $2,610
-------
EXPENSES
Management fees.................................................. 219
Transfer agent fees.............................................. 51
Printing and postage............................................. 26
SEC and state registration fees.................................. 22
Legal and audit fees............................................. 32
Accounting fees.................................................. 25
Trustees' fees................................................... 18
Custodian fees................................................... 10
Other............................................................ 23
-------
426
Reimbursement of expenses by investment adviser.................. (61)
-------
Total Expenses................................................ 365
-------
Net Investment Income......................................... 2,245
REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Net realized gains on investments................................ 186
Net change in unrealized appreciation on investments............. (656)
-------
Net Losses on Investments..................................... (470)
-------
Net Increase in Net Assets Resulting from Operations............. $1,775
======
See accompanying notes to financial statements.
Statements of Changes in Net Assets
FOR THE YEARS ENDED JUNE 30, 1995 AND 1996
(AMOUNTS IN THOUSANDS)
GOVERNMENT
INCOME FUND
1995 1996
OPERATIONS
Net investment income .......................................... $ 2,770 $ 2,245
Net realized gains (losses) on investments ..................... (1,162) 186
Net change in unrealized appreciation or
depreciation of investments ................................. 2,629 (656)
-------- --------
Net Increase in Net Assets Resulting from
Operations ................................................ 4,237 1,775
-------- --------
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income ........................... (2,770) (2,231)
-------- --------
SHARE TRANSACTIONS
Subscriptions to fund shares ................................... 15,151 11,176
Investment income dividends reinvested ......................... 2,106 1,663
Redemptions of fund shares ..................................... (27,280) (12,453)
-------- --------
Net Increase (Decrease) from Share
Transactions .............................................. (10,023) 386
-------- --------
Net Decrease in Net Assets .................................. (8,556) (70)
TOTAL NET ASSETS
Beginning of Year .............................................. 45,836 37,280
-------- --------
End of Year .................................................... 37,280 37,210
======== ========
Accumulated Undistributed Net Investment Income at
End of Year ................................................. $ -- $ 14
======== ========
ANALYSES OF CHANGES IN SHARES OF BENEFICIAL INTEREST
Subscriptions to fund shares ................................... 1,606 1,138
Investment income dividends reinvested ......................... 223 168
-------- --------
1,829 1,306
Redemptions of fund shares ..................................... (2,877) (1,256)
-------- --------
Net increase (decrease) in fund shares ......................... (1,048) 50
Shares outstanding at beginning of year ........................ 4,834 3,786
-------- --------
Shares outstanding at end of year .............................. 3,786 3,836
======== ========
See accompanying notes to financial statements.
Notes to Financial Statements
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The following are the significant accounting policies of the Stein Roe
Government Income Fund (the "Fund"), a series of the Stein Roe Income Trust (a
Massachusetts business trust). The policies are in conformity with generally
accepted accounting principles. The preparation of financial statements in
conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
SECURITY VALUATIONS
All securities are valued as of June 28, 1996, the last business day in
the period. Long-term debt securities are valued using market quotations if
readily available at the time of valuation. If market quotations are not
readily available, they are valued at a fair value using a procedure
determined in good faith by the Board of Trustees, which has authorized the
use of market valuations provided by a pricing service. Short-term debt
securities with remaining maturities of 60 days or less are valued at their
amortized cost. Those with remaining maturities of more than 60 days for which
market quotations are not readily available are valued by use of a matrix,
prepared by the Adviser, based on quotations for comparable securities. Other
assets and securities of the Fund are valued by a method that the Board of
Trustees believes represents a fair value.
FUTURES CONTRACTS
The Fund may enter into U.S. Treasury Bond futures contracts to either
hedge against expected declines of their portfolio securities or as a
temporary substitute for the purchase of individual bonds. Risks of entering
into futures contracts include the possibility that there may be an illiquid
market at the time the Fund seeks to close out a contract, and changes in the
value of the futures contract may not correlate with changes in the value of
the portfolio securities being hedged. Upon entering into a futures contract,
the Fund deposits with its custodian, cash or securities in an amount
sufficient to meet the initial margin requirements. Subsequent payments are
made or received by the Fund equal to the daily change in the contract value
and are recorded as unrealized gains or losses. The Fund recognizes a realized
gain or loss when the contract is closed or expires. The Fund did not enter
into futures contracts during the year ended June 30, 1996.
FEDERAL INCOME TAXES
No provision is made for federal income taxes since the Fund elects to be
taxed as a "regulated investment company" and make such distributions to its
shareholders as to be relieved of all federal income taxes under provisions of
current federal tax law. The Fund intends to utilize provisions of the federal
income tax laws, which allow it to carry a realized capital loss forward up to
eight years following the year of the loss, and offset such losses against any
future realized gains. At June 30, 1996, the Fund had capital loss
carryforwards of $1,871, expiring in 2003.
DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income are declared daily and paid monthly.
Capital gain distributions, if any, are distributed annually. Distributions in
excess of tax basis earnings are reported in the financial statements as a
return of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings that result in temporary
overdistri butions are classified as distributions in excess of net investment
income or net realized gains, and any permanent differences are reclassified
to paid-in capital. The Fund did not have distributions in excess of net
investment income or net realized gains for the year ended June 30, 1996.
OTHER INFORMATION
Realized gains or losses from sales of securities are determined on the
specific identified cost basis. Securities purchased on a when-issued or
delayed delivery basis may be settled a month or more after the transaction
date. These securities are subject to market fluctuation during this period.
When-issued and delayed delivery purchase commitments of the Fund amounted to
$1,718 as of June 30, 1996. All amounts, except per-share amounts, are shown
in thousands.
NOTE 2. PORTFOLIO COMPOSITION
The Fund invests primarily in securities issued or guaranteed as to principal
and interest by the U.S. government or by its agencies and instrumentalities.
See the Fund's schedule of invest ments for information on individual
securities as well as industry diversification, and see Fund Highlights for
the Fund's portfolio quality.
NOTE 3. TRUSTEES' FEES AND TRANSACTIONS WITH AFFILIATES
The Fund pays a monthly management fee to Stein Roe & Farnham Incorporated
(the "Adviser"), an indirect majority-owned subsidiary of Liberty Mutual
Insurance Company, for its services as investment adviser and manager. The
management fee for the Fund is computed at an annual rate of .60 of 1 percent
of the first $100 million of average net assets and .55 of 1 percent
thereafter.
Effective July 1, 1996, as a result of shareholder vote, the Fund's
investment advisory agreement was replaced by separate administrative and
management agreements. The administrative fee for the Fund will be .15 of 1
percent of the first $100 million of average daily net assets, and .125 of 1
percent thereafter. The management fee for the Fund will be .45 of 1 percent
of the first $100 million of average daily net assets, .425 of 1 percent
thereafter. There is no increase in the aggregate fee paid to the Adviser due
to these changes.
The investment advisory agreement of the Fund provides that the Adviser
will reimburse the Fund to the extent that its annual expenses, excluding
certain expenses, exceed the applicable limits prescribed by any state in
which the Fund's shares are offered for sale. In addition, the Adviser has
agreed to reimburse the Fund to the extent that expenses exceed 1 percent of
average net assets. The expense limitation for the Fund expires October 31,
1997, subject to earlier termination by the Adviser on 30 days' notice.
The transfer agent fees of the Fund are paid to SteinRoe Services, Inc.
(SSI), an indirect, majority-owned subsidiary of Liberty Mutual Insurance
Company. Effective July 3, 1996, SSI entered into an agreement with Colonial
Investors Service Center, Inc., an indirect, majority-owned subsidiary of
Liberty Mutual Insurance Company, to act as a sub-transfer agent for the Fund.
The Adviser also provides certain accounting services. For the year ended
June 30, 1996, the Fund incurred charges of $25 for these services.
Certain officers and trustees of the Trust are also officers of the
Adviser. The compensation of trustees not affiliated with the Adviser for the
Fund for the year ended June 30, 1996, was $18. No remuneration was paid to
any other trustee or officer of the Trust.
NOTE 4. SHORT-TERM DEBT
To facilitate portfolio liquidity, the Fund maintains borrowing
arrangements under which it can borrow against portfolio securities. The Fund
had no borrowings during the year ended June 30, 1996.
NOTE 5. INVESTMENT TRANSACTIONS
The aggregate cost of purchases and proceeds from sales other than short-term
obligations for the year June 30, 1996, were $28,134 and $25,208 respectively.
At June 30, 1996, unrealized appreciation and depreciation on a tax basis were
$1,009 and $336, respectively. Cost of investments for federal income tax
purposes and for financial reporting purposes were $37,781 and $37,717,
respectively.
Financial Highlights
Government Income Fund
Selected per-share data (for a share outstanding throughout each year),
ratios and supplemental data.
Years Ended June 30,
1987 1988 1989 1990
Net Asset Value, Beginning of Year .................................. $ 10.10 $ 9.79 $ 9.59 $ 9.77
---------- ---------- ---------- ----------
Income From Investment Operations
Net investment income ...................................... .72 .74 .78 .76
Net realized and unrealized gains (losses) on investments .. (.31) (.15) .18 (.11)
---------- ---------- ---------- ----------
Total from investment operations .................. .41 .59 .96 .65
---------- ---------- ---------- ----------
Distributions
Net investment income ...................................... (.72) (.74) (.78) (.76)
Net realized capital gains ................................. -- (.05) -- --
In excess of realized gains ................................ -- -- -- --
---------- ---------- ---------- ----------
Total distributions ............................... (.72) (.79) (.78) (.76)
---------- ---------- ---------- ----------
Net Asset Value, End of Year ........................................ $ 9.79 $ 9.59 $ 9.77 $ 9.66
========== ========== ========== ==========
Ratio of net expenses to average net assets (a) ..................... 1.00% 1.00% 1.00% 1.00%
Ratio of net investment income to average net assets (b) ............ 7.13% 7.68% 8.19% 7.90%
Portfolio turnover rate ............................................. 205% 237% 239% 181%
Total return (b) .................................................... 4.01% 6.35% 10.61% 6.92%
Net assets, end of year (000s) ...................................... $ 22,656 $ 26,859 $ 32,011 $ 46,853
Years Ended June 30,
1991 1992 1993
Net Asset Value, Beginning of Year .................................. $ 9.66 $ 9.81 $ 10.40
---------- ---------- ----------
Income From Investment Operations
Net investment income ...................................... .75 .72 .64
Net realized and unrealized gains (losses) on investments .. .15 .59 .31
---------- ---------- ----------
Total from investment operations .................. .90 1.31 .95
---------- ---------- ----------
Distributions
Net investment income ...................................... (.75) (.72) (.64)
Net realized capital gains ................................. -- -- (.25)
In excess of realized gains ................................ -- -- --
---------- ---------- ----------
Total distributions ............................... (.75) (.72) (.89)
---------- ---------- ----------
Net Asset Value, End of Year ........................................ $ 9.81 $ 10.40 $ 10.46
========== ========== ==========
Ratio of net expenses to average net assets (a) ..................... 1.00% 0.99% 0.95%
Ratio of net investment income to average net assets (b) ............ 7.65% 7.05% 6.25%
Portfolio turnover rate ............................................. 136% 139% 170%
Total return (b) .................................................... 9.61% 13.75% 9.60%
Net assets, end of year (000s) ...................................... $ 49,952 $ 58,978 $ 61,591
Years Ended June 30,
1994 1995 1996
Net Asset Value, Beginning of Year .................................. $ 10.46 $ 9.48 $ 9.85
---------- ---------- ----------
Income From Investment Operations
Net investment income ...................................... .56 .62 .61
Net realized and unrealized gains (losses) on investments .. (.77) .37 (.15)
---------- ---------- ----------
Total from investment operations .................. (.21) .99 .46
---------- ---------- ----------
Distributions
Net investment income ...................................... (.56) (.62) (.61)
Net realized capital gains ................................. (.01) -- --
In excess of realized gains ................................ (.20) -- --
---------- ---------- ----------
Total distributions ............................... (.77) (.62) (.61)
---------- ---------- ----------
Net Asset Value, End of Year ........................................ $ 9.48 $ 9.85 $ 9.70
========== ========== ==========
Ratio of net expenses to average net assets (a) ..................... 0.98% 1.00% 1.00%
Ratio of net investment income to average net assets (b) ............ 5.49% 6.56% 6.13%
Portfolio turnover rate ............................................. 167% 225% 73%
Total return (b) .................................................... (2.26%) 10.94% 4.63%
Net assets, end of year (000s) ...................................... $ 45,836 $ 37,280 $ 37,210
<FN>
(a) If the Fund had paid all of its expenses and there had been no
reimbursement by the investment adviser, this ratio would have been 1.44,
1.37, 1.21, and 1.07 percent for the years ended June 30, 1987 through 1990,
respectively, and 1.09 and 1.17 percent for the years ended June 30, 1995 and
1996, respectively.
(b) Computed giving effect to investment adviser's expense limitation
undertaking.
</FN>
Report of Independent Auditors
To the Shareholders and Board of Trustees of Stein Roe Income Trust
Stein Roe Government Income Fund
We have audited the accompanying balance sheet, including the schedule of
investments, of Stein Roe Government Income Fund as of June 30, 1996, and the
related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for the periods indicated thereon. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of June 30, 1996, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
Stein Roe Government Income Fund at June 30, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for the
periods indicated thereon, in conformity with generally accepted accounting
principles.
Ernst & Young LLP
Chicago, Illinois
August 2, 1996
Funds for Every Investment Objective
The Stein Roe family of 100 percent no-load mutual funds offers a variety of
funds so you can select the right fund, or combination of funds, to meet your
investment objec tives. Call us at 800-338-2550 for a prospectus and more
complete information on any of the funds, including management fees and
expenses. Please read the pro spectus carefully before you invest or send
money.
MONEY MARKET FUNDS
Money market funds seek to provide income while preserving principal and
maintaining liquidity. These funds offer free check writing.
o Government Reserves Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies and
instrumentalities.*
o Cash Reserves Fund -- Invests in high-quality, short-term money market
securities such as certificates of deposit, banker's acceptances and
commercial paper.*
BOND FUNDS
Bond funds seek high current income by investing pri marily in fixed income
securities.
o Limited Maturity Income Fund -- Invests primarily in U.S. government and
other high-quality debt securities. The dollar -weighted average
effective maturity will not exceed three years.
o Government Income Fund -- Invests primarily in securities issued or
guaranteed by the U.S. government and its agencies.*
o Intermediate Bond Fund-- Invests primarily in marketable debt securities
with an average life of three to 10 years.
o Income Fund -- Pursues a higher level of current income by investing
primarily in medium- and lower-quality bonds.
TAX-EXEMPT FUNDS
These funds help investors keep more of their earnings by investing in
instruments that earn income free from federal income tax. Income may be
subject to federal alternative minimum tax and state and local taxes; capital
gains are subject to state, local and federal taxes.
o Municipal Money Market Fund -- Seeks to provide the liquidity and
stability of a money market fund plus current tax-free income.
Free check writing available.*
*Money market mutual funds strive to maintain a $1 per share net asset value,
but there is no assurance that the fund will be able to maintain a stable net
asset value. The net asset value of a fund that invests in securities issued
or guaranteed by the U.S. government is not guaranteed.
o Intermediate Municipals Fund -- Seeks high current yield through
investments primarily in the three highest grades of intermediate-term
municipal securities.
o Managed Municipals Fund -- Pursues high tax-free income by investing in a
quality-conscious portfolio of long-term municipal bonds.
o High-Yield Municipals Fund -- Seeks a higher level of tax-free income
from long-term municipal securities, primarily of medium or lower
quality.
GROWTH AND INCOME FUNDS
These funds seek to provide a conservative investment that is well positioned
for long-term growth and current income. Each fund's approach is designed to
limit the effects of market volatility.
o Balanced Fund +-- Seeks long-term growth of capital and current income
consistent with reasonable investment risk by investing in equities, debt
securities and cash equivalents.
o Growth & Income Fund -- Pursues income and long-term capital growth by
investing primarily in large, well-established companies.
GROWTH FUNDS
Growth funds offer long-term capital appreciation potential by investing
primarily in various types of stocks.
o Growth Stock Fund -- Pursues long-term capital appreciation from stocks
with strong growth potential.
o Special Fund -- Invests in securities believed to have limited downside
risk relative to their potential for above-average growth, including
securities of undervalued, under followed or out-of-favor companies.
o Special Venture Fund -- Seeks capital appreciation through equity
securities of entre preneurially managed companies.
o Young Investor Fund -- Invests in securities of companies that affect the
lives of children or teenagers.
o Capital Opportunities Fund -- Takes a long-term approach to emerging
growth by selecting quality companies with the potential to generate high
levels of earnings growth over a three- to five-year period.
o International Fund -- Invests in a diversified portfolio of foreign
securities.
+Formerly Total Return Fund; name and investment objective changed effective
April 17, 1996.
To Contact Us. . .
BY PHONE 800-338-2550
You can discuss your investment questions with a Stein Roe account
representative by calling us toll free. We'll be happy to answer questions
about your current account, or to provide you with information about opening a
Stein Roe account, including Stein Roe IRAs. We're available seven days a
week, from 7 a.m. to 8 p.m. weekdays and from 8 a.m. to 5 p.m. Saturday and
Sunday (central time).
STEIN ROE'S FUNDS-ON-CALL(R)
24-HOUR SERVICE LINE
Using a touch-tone phone, call our toll-free number, day or night, for your
current account balance, the latest Stein Roe prices and yields, and other
information. In addition, if you have a Personal Identification Number (PIN),
you may place orders for the following transactions 24 hours a day:
o Exchange shares between your Stein Roe accounts;
o Purchase shares by electronic transfer;
o Order additional account statements and money market fund checks;
o Redeem shares by check, wire or electronic transfer.
RETIREMENT PLAN ACCOUNTS
Call us for information about how we can assist you with your defined
contribution plan, including 401(k) plans. You can reach us toll free at
800-322-1130.
For information on IRA plans, call us toll free at 800-338-2550.
BY MAIL
If you prefer to contact us by mail, please address all correspondence
to: P.O. Box 8900, Boston,
MA 02205-8900. You also may
visit our Internet web site -- www.steinroe.com -- to contact
us by e-mail.
IN PERSON
If you are in the Chicago area, please visit our Investor Center located in
downtown Chicago at One South Wacker Drive, 32nd Floor. Our account
representatives can answer questions about your current Fund investments or
provide you infor mation about any of the Stein Roe Funds and retirement
plans. Stop by weekdays between 8 a.m. and 5:15 p.m.
This report must be preceded or accompanied by a prospectus.
A GUIDE TO STEIN ROE SERVICES
We encourage you to take advantage of our free shareholder services. If you
would like additional information about how to establish or use a Stein Roe
service, just call us at 800 338-2550.
PURCHASES
In addition to sending us a check or wire to purchase additional fund shares,
you can take advantage of these convenient automatic services:
o Automatic Investment Plan -- Make regular investments ($50 minimum) in
your Stein Roe account directly from your bank checking account. You
select monthly, quarterly, semiannual or annual purchases.
o Special Investments -- Purchase shares by telephone and pay for them by
electronic transfer from your bank checking account.
EXCHANGES
o Telephone Exchange -- Call us to exchange $50 or more from your existing
account in one Stein Roe fund to an identically registered existing
account in another Stein Roe fund. You receive this service when you open
a Stein Roe fund account, unless you elect not to.*
o Automatic Exchange -- Stein Roe will regularly exchange shares
from your account in one Stein Roe fund to your account in another. You
select twice-monthly, monthly, quarterly, semiannual or annual exchanges.
REDEMPTIONS
o Telephone Redemption by Check -- Call to redeem $1,000 or more from your
account. A check will be sent to your registered address. You
automatically receive this service when you open a Stein Roe account,
unless you elect not to.
o Telephone Redemption by Wire -- Redeem shares by phone from your account
($1,000 minimum) and wire the proceeds to your bank checking account. A
small fee for wiring proceeds will be deducted from the amount wired.
o Special Redemption Option -- If you do not want to preschedule your
redemptions, you can redeem shares by telephone ($50 minimum/ $100,000
maximum) and have the proceeds sent directly to your bank checking
account.
o Automatic Redemption Plan -- Redeem either a fixed dollar or
share amount, or a fixed percentage of your account automatically on a
schedule you establish. You select monthly, quarterly, semiannual or
annual withdrawals ($50 minimum/ $100,000 max imum), and the proceeds are
sent either to your bank checking account or to an address you specify.
o Money Market Fund Check Writing -- Write checks for $50 or more on your
money market fund account.
*Stein Roe reserves the right to discontinue or modify the exchange
privilege, and certain restrictions apply. Please refer to your prospectus for
details.
A GUIDE TO STEIN ROE SERVICES
DISTRIBUTIONS
Most investors like to reinvest their dividends and capital gains
distributions and put them back to work. If, however, you do not want them
reinvested, consider these alternatives:
o Dividend Purchase Option -- Use the distributions from one Stein Roe fund
account ($25 minimum) to automatically purchase shares in your account
with another Stein Roe fund.
o Automatic Dividend Deposit -- Instead of receiving your dividends by
check, your distributions are deposited automatically into your bank
checking account.
RECORDKEEPING
o Summary of Investments -- Consolidates quarterly transaction and
investment infor mation for any or all of your household's Stein Roe
accounts on one easy-to-read statement. At year end, Stein Roe provides a
complete summary of all account activity for the year.
Income Trust
TRUSTEES
Timothy K. Armour
President, Mutual Fund Division and
Director, Stein Roe & Farnham Incorporated
Kenneth L. Block
Chairman Emeritus, A.T. Kearney, Inc.
William W. Boyd
Chairman and Director, Sterling Plumbing
Group Inc.
Lindsay Cook
Senior Vice President, Liberty Financial
Companies, Inc.
Douglas A. Hacker
Senior Vice President and Chief Financial Officer, United Airlines
Francis W. Morley
Chairman, Employer Plan Administrators
and Consultants Co.
Charles R. Nelson
Van Voorhis Professor of Political Economy, University of Washington
Thomas C. Theobald
Managing Partner, William Blair Capital Partners
Gordon R. Worley
Private investor
OFFICERS
Timothy K. Armour, President
Jilaine H. Bauer, Executive Vice President,
Secretary
N. Bruce Callow, Executive Vice President
Hans P. Ziegler, Executive Vice President
Gary A. Anetsberger, Senior Vice President,
Chief Financial Officer
Ann H. Benjamin, Vice President
Thomas W. Butch, Vice President
Philip J. Crosley, Vice President
Philip D. Hausken, Vice President
Michael T. Kennedy, Vice President
Steven P. Luetger, Vice President
Lynn C. Maddox, Vice President
Anne E. Marcel, Vice President
Jane M. Naeseth, Vice President
Nicolette D. Parrish, Vice President,
Assistant Secretary
Cynthia A. Prah, Vice President
Thomas P. Sorbo, Vice President
Sharon R. Robertson, Controller
Margaret O. Zwick, Treasurer
Janet B. Rysz, Assistant Secretary
AGENTS AND ADVISERS
Stein Roe & Farnham Incorporated
Investment Adviser
State Street Bank and Trust Company
Custodian
SteinRoe Services Inc.
Transfer Agent
Bell, Boyd & Lloyd
Legal Counsel to the Trust
Ernst & Young LLP
Independent Auditors
Logo: Stein Roe
Stein Roe Mutual Funds
Building Wealth for Generations (sm)
THE STEIN ROE FUNDS
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Limited Maturity Income Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe 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 International Fund
P.O. Box 8900
Boston, Massachusetts 02205-8900
800-338-2550
In Chicago, visit our Fund Center at One South Wacker Drive
Liberty Securities Corporation, Distributor
Member SIPC. 7/96
GI11A