BENHAM MUNICIPAL FUNDS
Series of Benham Municipal Trust
Supplement Dated December 15, 1995
to the Prospectus and Statement of
Additional Information Dated September 30, 1995
1. The following individual has been appointed to the Board of Trustees of the
Funds in addition to those listed in the current Prospectus:
ALBERT A. EISENSTAT, independent trustee (1995). Mr. Eisenstat is an
independent director of each of Commercial Metals Co. (1982), Sungard Data
Systems (1991) and Business Objects S/A (1994). Previously, he served as
vice president of corporate development and corporate secretary of Apple
Computer and served on its Board of Directors (1985 to 1993).
2. On page 17 of the Prospectus, the fourth paragraph under the heading "SHARE
PRICE" is deleted. All remaining references in the Prospectus and Statement of
Additional Information to the net asset value being calculated at "12 p.m.
Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for all
other Benham funds" are hereby changed to "the close of the Exchange, usually 12
p.m. Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for
all other Benham funds."
3. On page 21 of the Prospectus under the sub-heading "PROCESSING YOUR
PURCHASE", the second and third sentences are replaced with the following:
An investment received and accepted before the close of business of the
Exchange, normally 1:00 p.m. Pacific Time, will be included in your account
balance the same day. If the investment is received after the close of
business of the Exchange, usually 1:00 p.m. Pacific Time, it will be
credited to your account the following business day.
4. On page 21 of the Prospectus, the following sentence is to be inserted
under the sub-heading "TELEPHONE TRANSACTIONS" after the last sentence of the
first paragraph:
ONCE YOUR TELEPHONE ORDER HAS BEEN PLACED, IT MAY NOT BE MODIFIED OR
CANCELLED.
5. On page 21 of the Prospectus, the following sentence is to be inserted
under the sub-heading "CONFIRMATION AND QUARTERLY STATEMENTS" after the second
sentence:
However, beginning September of 1996, Automatic Investment Services
transactions will not be confirmed immediately but rather will be confirmed
on your next consolidated quarterly statement.
6. On page 23 of the Prospectus, the following replaces the last two sentences
of the last paragraph under the sub-heading "OPEN ORDER SERVICE":
All orders and cancellation of orders received by one hour prior to the
close of the Exchange, usually 12 p.m. Pacific Time, will be considered to
be effective the same day. All orders and cancellation of orders not
received one hour prior to the close of the Exchange, usually 12 p.m.
Pacific Time, will be considered effective the following business day.
<PAGE>
BENHAM
MUNICIPAL FUNDS
Money Market Fund
Intermediate-Term Fund
Long-Term Fund
Prospectus * September 30, 1995
[picture of the
American flag]
[company logo] The Benham Group
<PAGE>
- -------------------
[information in left margin of page]
THE BENHAM GROUP
1665 Charleston Road
Mountain View, California 94043
FUND INFORMATION
1-800-331-8331
1-415-965-4274
SHAREHOLDER RELATIONS
1-800-321-8321
1-415-965-4222
TDD SERVICE
1-800-624-6338
1-415-965-4764
BENHAM GROUP REPRESENTATIVES ARE AVAILABLE BY TELEPHONE WEEKDAYS FROM 5 A.M. TO
5 P.M. PACIFIC TIME.
- -------------------
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
Series of Benham Municipal Trust
Prospectus * September 30, 1995
BENHAM MUNICIPAL TRUST (Trust) is a no-load, open-end mutual fund consisting of
eight portfolios, three of which are described in this Prospectus. Each Fund
seeks as high a level of interest income exempt from federal income taxes as is
consistent with prudent investment management, while seeking to conserve
shareholder's capital. Each Fund invests primarily in municipal debt obligations
that pay interest exempt from federal income tax.
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND (Money Market Fund) seeks to maintain
a stable $1.00 share price. Share prices for BENHAM NATIONAL TAX-FREE
INTERMEDIATE-TERM FUND (Intermediate-Term Fund) and BENHAM NATIONAL TAX-FREE
LONG-TERM FUND (Long-Term Fund) will vary. These two Funds are referred to
collectively as the "Variable-Price Funds."
Investments in the Money Market Fund listed above are neither insured nor
guaranteed by the U.S. government. There is no assurance that the Fund will be
able to maintain a $1.00 share price.
Mutual Fund shares are not insured by the FDIC, the Federal Reserve Board, or
any other agency.
AS WITH ALL MUTUAL FUNDS, THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION,
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Please read this prospectus carefully and retain it for future reference. It is
designed to help you decide whether the Funds' goals match your own. A Statement
of Additional Information (SAI) for the Trust (also dated September 30, 1995)
has been filed with the Securities and Exchange Commission and is incorporated
herein by reference. For a free copy, call or write The Benham Group.
2
<PAGE>
SUMMARY OF FUND EXPENSES
The tables below illustrate the fees and expenses an investor in the Funds would
incur directly or indirectly. The figures shown for each Fund are based on
historical expenses, adjusted to reflect the expense limitation agreement in
effect as of June 1, 1995.
================================================================================
A. SHAREHOLDER TRANSACTION EXPENSES
For All Funds Described in This Prospectus
- --------------------------------------------------------------------------------
Sales load imposed on purchases .................................. None
Sales load imposed on reinvested dividends ....................... None
Deferred sales load .............................................. None
Redemption fee ................................................... None
Exchange fee ..................................................... None
================================================================================
B. ANNUAL FUND OPERATING EXPENSES*
As a Percentage of Average Daily Net Assets
- --------------------------------------------------------------------------------
MONEY INTERMEDIATE- LONG-
MARKET TERM TERM
FUND FUND FUND
Investment Advisory Fee .35% .39% .36%
12b-1 Fee 0 0 0
Other Expenses .29 .30 .33
TOTAL FUND OPERATING EXPENSES .64 .69 .69
*Benham Management Corporation (BMC) has agreed to limit each Funds' total
operating expenses to specified percentages of each Fund's average daily net
assets as illustrated on page 4. These expense limits are effective until May
31, 1996. The contract provides that BMC may recover amounts absorbed on behalf
of the Fund during the preceding 11 months if, and to the extent that, for any
given month, Fund expenses were less than the expense limit in effect at that
time. The expense limitation is subject to annual renewal in June. If the
expense limitations were not in effect, each Fund's advisory fee, other expenses
and total operating expenses would be as follows: Money Market Fund: .46%, .29%,
and .75%, Intermediate-Term Fund: .46%, .30%, and .76%, and Long-Term Fund:
.46%, .33%, and .79%.
Each Fund pays BMC investment advisory fees equal to an annualized percentage of
Fund average daily net assets. Other expenses include administrative and
transfer agent fees paid to Benham Financial Services, Inc. (BFS).
3
<PAGE>
================================================================================
CONTRACTUAL EXPENSE LIMITS
- --------------------------------------------------------------------------------
Each Fund's contractual expense limits for 1994 and 1995 (effective June 1,
1995) are indicated in the table below. Each limit is stated as a percentage of
the Fund's average daily net assets.
1995 1994
Money Market Fund .64% .66%
Intermediate-Term Fund .69 .66
Long-Term Fund .69 .66
================================================================================
C. EXAMPLE OF EXPENSES
- --------------------------------------------------------------------------------
The following table illustrates the expenses a shareholder would pay on a $1,000
investment in each of the Funds over periods of one, three, five, and ten years.
These figures are based on expenses shown in Table B (on page 3) and assume (i)
a 5% annual return and (ii) full redemption at the end of each time period.
MONEY INTERMEDIATE- LONG-
MARKET TERM TERM
FUND FUND FUND
One Year $ 7 $ 7 $ 7
Three Years 20 22 22
Five Years 36 38 38
Ten Years 80 86 86
We include this table to help you understand the various costs and expenses that
you, as a shareholder, will bear either directly or indirectly. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
PERFORMANCE; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, AND THE
FUND MAY NOT REALIZE THE 5% HYPOTHETICAL RATE OF RETURN REQUIRED BY THE SEC FOR
THIS EXAMPLE.
FINANCIAL HIGHLIGHTS
The information presented on the following pages has been audited by KPMG Peat
Marwick LLP, independent auditors. Their unqualified report on the financial
statements and financial highlights is included in the Funds' Annual Reports,
which are part of the Funds' respective Statements of Additional Information.
4
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
Years ended May 31
- ----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
Income From
Investment Operations
Net Investment Income .0295 .0191 .0210 .0340 .0499 .0556 .0568 .0484 .0431 .0505
Net Realized and
Unrealized Losses
on Investments 0 0 0 0 0 0 0 (.0074) 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Income From
Investment Operations .0295 .0191 .0210 .0340 .0499 .0556 .0568 .0410 .0431 .0505
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends from Net
Investment Income (.0295)(.0191)(.0210)(.0340) (.0499)(.0556)(.0568)(.0410) (.0431)(.0505)
Distributions from Net
Realized Capital Gains 0 0 0 0 0 0 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions (.0295)(.0191)(.0210)(.0340) (.0499)(.0556)(.0568)(.0410) (.0431)(.0505)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net Asset Value at
End of Period $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN+ 2.95% 1.92 2.12 3.48 5.13 5.68 5.80 4.19 4.37 5.15
- -------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period (in
millions of dollars) $92.0 109.8 109.9 111.1 111.2 93.0 93.9 71.0 80.1 42.8
Ratio of Expenses to
Average Daily
Net Assets .66% .67 .68 .57 .50 .50 .50 .31 .25 .19
Ratio of Net
Investment Income
to Average Daily
Net Assets 2.88% 1.89 2.10 3.40 4.99 5.56 5.68 4.10 4.31 5.05
</TABLE>
+ Total return figures assume reinvestment of dividends and capital gain
distributions.
5
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
Years ended May 31
- ----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.60 10.90 10.48 10.33 10.03 9.97 9.98 9.87 9.91 9.55
Income from
Investment Operations
Net Investment Income .5039 .5106 .5189 .5639 .6062 .6132 .6312 .6331 .6412 .7240
Net Realized and
Unrealized Gains
(Losses) on Investments.1467 (.1856) .5278 .2721 .3103 .0600 (.0100) .1100 (.0400) .3600
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Income From
Investment Operations .6506 .3250 1.0467 .8360 .9165 .6732 .6212 .7431 .6012 1.0840
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends from Net
Investment Income (.5039)(.5106)(.5189)(.5639) (.6062)(.6132)(.6312)(.6331) (.6412)(.7240)
Distributions from
Net Realized
Capital Gains (.0367)(.1144)(.1078)(.1221) (.0103) 0 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions (.5406)(.6250)(.6267)(.6860) (.6165)(.6132)(.6312)(.6331) (.6412)(.7240)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE
AT END OF PERIOD $10.71 10.60 10.90 10.48 10.33 10.03 9.97 9.98 9.87 9.91
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN+ 6.40% 2.93 10.26 8.28 9.43 6.95 6.44 7.75 6.03 11.82
- -------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period (in
millions of dollars)$ 64.9 70.9 67.6 44.3 34.2 24.6 21.3 20.1 19.5 12.2
Ratio of Expenses to
Average Daily
Net Assets .66% .67 .72 .65 .50 .50 .50 .50 .50 .27
Ratio of Net Investment
Income to Average
Daily Net Assets 4.82% 4.61 4.81 5.38 5.97 6.12 6.36 6.34 6.27 7.41
Portfolio
Turnover Rate 47.48% 46.11 36.31 84.96 54.98 142.06 49.07 54.31 26.31 44.29
+ TOTAL RETURN FIGURES ASSUME REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
Years ended May 31
- ----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.26 11.92 11.26 11.05 10.87 11.02 10.51 10.79 11.37 10.56
Income From
Investment Operations
Net Investment Income .6213 .6221 .6280 .6685 .7166 .7187 .7655 .7731 .8389 .9435
Net Realized and
Unrealized Gains
(Losses) on Investments.2651 (.4154) .9243 .4333 .2610 (.1000) .5100 (.2800) (.5800) .8100
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Income From
Investment Operations .8864 .2067 1.5523 1.1018 .9776 .6187 1.2755 .4931 .2589 1.7535
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Less Distributions
Dividends from Net
Investment Income (.6213)(.6221)(.6280)(.6685) (.7166)(.7187)(.7655)(.7731) (.8389)(.9435)
Distributions from
Net Realized
Capital Gains (.0551)(.2446)(.2643)(.2233) (.0810)(.0500) 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Distributions (.6764)(.8667)(.8923)(.8918) (.7976)(.7687)(.7655)(.7731) (.8389)(.9435)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
NET ASSET VALUE AT
END OF PERIOD $11.47 11.26 11.92 11.26 11.05 10.87 11.02 10.51 10.79 11.37
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN+ 8.29% 1.54 14.61 10.42 9.48 5.80 12.56 4.32 2.39 17.34
- -------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period (in
millions of dollars) $ 47.3 57.3 54.2 42.1 35.1 43.7 33.4 25.2 24.0 22.8
Ratio of Expenses to
Average Daily
Net Assets .66% .67 .72 .65 .50 .50 .50 .50 .50 .26
Ratio of Net Investment
Income to Average
Daily Net Assets 5.59% 5.16 5.40 6.00 6.57 6.58 7.14 7.27 7.11 8.61
Portfolio
Turnover Rate 34.09% 39.37 105.14 148.26 150.07 214.76 69.49 76.11 102.45 57.45
+ Total return figures assume reinvestment of dividends and capital gain distributions.
</TABLE>
7
<PAGE>
- -------------------
[information in left margin of page]
Each Fund intends to remain fully invested in municipal obligations.
- -------------------
INVESTMENT OBJECTIVE
Each Fund seeks to obtain as high a level of interest income exempt from federal
income tax as is consistent with prudent investment management, while seeking to
conserve shareholders' capital. There is no guarantee that the Funds will
achieve their investment objectives.
Each Fund's investment objective is fundamental and may not be changed without
shareholder approval. Unless otherwise noted, the other policies described in
this Prospectus are not fundamental and may be changed by the board of trustees.
INVESTMENT POLICIES
Each Fund intends to remain fully invested in municipal obligations, although
for temporary defensive purposes, each may invest a portion of its assets in
taxable U.S. government securities. In addition, each Fund may invest up to 20%
of its assets in securities issued by territories or possessions of the U.S.,
such as Puerto Rico, provided that the interest on these securities is exempt
from federal income tax, including the alternative minimum tax.
Each Fund is a "diversified company" as defined in the Investment Company Act of
1940. This means that, with respect to 75% of its total assets, each Fund will
not invest more than 5% of its total assets in the securities of a single
issuer.
This policy is fundamental.
Fund-specific investment policies are set forth in the following paragraphs.
MONEY MARKET FUND
In selecting investments for the Money Market Fund, BMC adheres to regulatory
guidelines concerning the quality and maturity of money market fund investments
as well as to internal guidelines designed to minimize credit risk. In
particular, the Fund
(1) Buys only U.S. dollar-denominated obligations with remaining maturities of
13 months or less (and variable- and floating-rate obligations with demand
features that effectively shorten their maturities to 13 months or less);
(2) Maintains a dollar-weighted average maturity of 60 days or less; and
8
<PAGE>
(3) Restricts its investments to high-quality obligations determined by BMC,
pursuant to procedures established by the board of trustees, to present minimal
credit risks.
To be considered high-quality, an obligation must be
(1) A U.S. government obligation; or
(2) Rated, or issued by an issuer rated with respect to a class of comparable
short-term debt obligations, in one of the two highest rating categories for
short-term obligations by at least two rating agencies (or one if only one has
rated the obligation); or
(3) An unrated obligation judged by BMC, under the direction of the board of
trustees, to be of comparable quality.
INTERMEDIATE-TERM FUND AND LONG-TERM FUND
The Variable-Price Funds have identical policies governing the quality of
securities in which they may invest, as described below. The Funds differ in
their maturity criteria as follows:
The INTERMEDIATE-TERM FUND invests primarily in municipal obligations with
maturities of four or more years. Its weighted average maturity ranges from five
to ten years.
The LONG-TERM FUND invests primarily in long-term municipal obligations. It
maintains a weighted average maturity of ten or more years.
In terms of quality, each Variable-Price Fund restricts its investments to:
(1) Municipal bonds rated, when acquired, within the three highest categories
designated by a rating agency;
(2) Municipal notes (including variable-rate demand obligations) and tax-exempt
commercial paper rated, when acquired, within the two highest categories
designated by a rating agency; and
(3) Unrated obligations judged by BMC under the direction of the board of
trustees to be of comparable quality.
- -------------------
[information in right margin of page]
The Intermediate-Term Fund invests primarily in municipal obligations with
maturities of four or more years.
The Long-Term Fund invests primarily in long-term municipal obligations.
- -------------------
9
<PAGE>
- -------------------
[information in left margin of page]
One feature the Funds have in common is their susceptibility to changing
interest rates.
- -------------------
SUITABILITY
The Money Market Fund intends to pursue a stable $1.00 share price by limiting
its average maturity to 60 days or less. To offer investors the potential for
higher yields, the Intermediate-Term Fund invests in obligations with longer
maturities. The Long-Term Fund generally offers the highest current yields but,
of the three Funds, is also the most susceptible to share price fluctuations.
Over time, the market value of the Funds' investments will change in response to
a number of factors, the more significant of which are summarized in the
following paragraphs.
Interest Rate Risk: One feature the Funds have in common is their susceptibility
to changing interest rates. For the Money Market Fund, interest rate changes
affect the level of income the Fund generates for shareholders. For the
Variable-Price Funds, changing interest rates affect not only the level of
income the Funds generate for shareholders, but their share prices as well. In
general, when interest rates rise, the Variable-Price Funds' share prices
decline; when interest rates decline, their share prices rise.
This pattern is due to the time value of money. A bond's worth in large part is
determined by the present value of its future cash flows. Since long-term bonds
are repaid further in the future, changing interest rates, in general, have a
greater effect on the present value of a long-term bond than a short-term bond.
Credit Risk: In selecting investments for each Fund, BMC carefully considers the
creditworthiness of parties and their reliability for the timely payment of
interest and repayment of principal. In many cases, these parties include not
only the issuer of the obligation, but a bank or other financial intermediary
who offers a letter of credit or other form of guarantee on the obligation.
Liquidity Risk: Securities ratings reflect the opinions of the rating agencies
that issue them and are not absolute standards of quality. Due to the cost of
obtaining credit ratings, some issuers forego them. Under the direction of the
board of trustees, BMC may buy unrated bonds for the Funds if these securities
are judged to be of a quality consistent with the Funds' investment policies.
10
<PAGE>
Similarly, on behalf of the Variable-Price Funds, BMC may purchase securities
whose ratings are not consistent with the Funds' rating criteria, but which BMC
judges, under the direction of the board of trustees, to present credit risks
consistent with the Funds' quality standards. Each Fund may invest up to 10% of
its assets in unrated securities, which may be less liquid than rated
securities.
Concentration Risk: Each Fund may invest 25% or more of its assets in
obligations that generate income from similar types of projects (in particular,
projects in health care, electric, water/sewer, education, and transportation).
Political or economic developments affecting a single issuer or industry or
similar types of projects may have a significant effect on Fund performance.
Call Risk: Many municipal obligations are issued with a call feature (features
include a date on which the issuer has reserved the right to redeem the
obligation prior to maturity). An obligation may be called for redemption before
BMC would otherwise choose to eliminate it from a Fund's holdings. A call may
also reduce an obligation's yield to maturity.
MUNICIPAL SECURITIES
Municipal securities are issued to raise money for a variety of public purposes,
including general financing for state and local governments as well as financing
for specific projects and public facilities. Municipal securities may be backed
by the full taxing power of a municipality, the revenues from a specific
project, or the credit of a private organization. The following pages provide a
brief description of some of the securities the Funds may buy. The Funds are not
limited by this discussion, however, and they may buy other types of securities
and enter into other types of transactions that meet the Funds' respective
quality, maturity, and liquidity requirements.
MUNICIPAL NOTES typically have maturities of 13 months or less and are used to
provide short-term capital or to meet cash flow needs.
GENERAL OBLIGATION BONDS are backed by the taxing power of the issuer. REVENUE
BONDS are backed by the revenues derived from a specific project, system, or
facility. Industrial development bonds are a type of revenue bond backed by the
credit of a private issuer.
- -------------------
[information in right margin of page]
Municipal securities are issued to raise money for a variety of public purposes,
including general financing for state and local governments as well as
financing for specific projects and public facilities.
- -------------------
11
<PAGE>
VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS have interest rate adjustment
formulas designed to stabilize their market values. These obligations normally
have maturities in excess of one year, but carry demand features permitting the
holders to demand repayment of principal at any time or at specified intervals.
With respect to the Money Market Fund, such intervals may not exceed 13 months.
TENDER OPTION BONDS are created by combining an intermediate- or long-term
fixed-rate tax-exempt bond with a tender agreement that gives the holder the
option to tender the bond at face value. Tender option bonds purchased by the
Fund are structured with rates that are reset weekly or at other regular
intervals.
A sponsor may terminate a tender option agreement if, for example, the issuer of
the underlying bond defaults on interest payments, or the underlying bond is
downgraded or becomes taxable. Under such circumstances, a Fund might then own a
bond that does not meet its quality or maturity criteria.
BMC monitors the credit quality of bonds underlying the Funds' tender option
bond holdings and will sell or put back a tender option bond if the rating on
the underlying bond falls below the second-highest rating designated by a rating
agency. In addition, each Fund limits its investments in tender option bonds to
15% of assets.
MUNICIPAL LEASE OBLIGATIONS are issued by state and local governments to acquire
land and a wide variety of equipment and facilities. These obligations typically
are not fully backed by the issuing municipality's ability to assess taxes to
meet its debt obligations. If the state or local government does not make
appropriations for the following year's lease payments, the lease may terminate
with a possibility of default on the lease obligation and loss to investors.
Prior to purchasing a municipal lease obligation (or a participation interest in
such obligations) and on a regular basis thereafter, pursuant to guidelines
adopted by the board of trustees, BMC evaluates the credit quality and liquidity
of the obligation. In making this evaluation, BMC considers various credit
factors, such as the necessity of the project; the issuer's credit quality,
12
<PAGE>
future borrowing plans, and sources of revenue pledged for lease repayment;
general economic conditions in the region where the security is issued;
liquidity indicators such as dealer activity; and with regard to unrated
obligations, the likelihood such lease will not be cancelled.
ZERO-COUPON MUNICIPAL SECURITIES do not make regular interest payments. Instead,
they are sold at a deep discount from their face value. In calculating daily
dividends, the Funds take into account, as income, a portion of the difference
between these securities' purchase prices and face values. Because zero-coupon
securities do not pay current income, their prices can be very volatile when
interest rates change.
The Variable-Price Funds may invest in INVERSE FLOATERS to generate higher
tax-exempt yields than are offered by other instruments. Inverse floaters bear
interest rates that move inversely to market interest rate, and vice versa.
Generally, the interest rate on these securities is computed as the difference
between an above-market fixed rate of interest and a floating rate determined by
reference to a market-based or bond-specific interest rate.
Since inverse floaters are long-term bonds, the value of these securities may be
volatile when market interest rates change. In addition, there is no guarantee
that BMC would find a ready buyer for inverse floaters. The Money Market Fund
may not invest in inverse floaters.
INVESTMENT PRACTICES
WHEN-ISSUED AND FORWARD-COMMITMENT AGREEMENTS
When-issued securities and forward-commitment agreements fix a security's price
and yield for future payment and delivery. The market value of a security may
change during this period, or a party to the agreement may fail to pay for the
security. Either of these situations could affect the market value of a Fund's
assets.
FUTURES AND OPTIONS CONTRACTS (VARIABLE-PRICE FUNDS)
The Variable-Price Funds may use futures and options transactions to maintain
cash reserves while remaining fully invested, to facilitate trading, to reduce
transaction costs, or to pursue higher investment returns when a futures
contract is priced more attractively than its underlying security or index.
13
<PAGE>
Some futures contract strategies present a substantial risk of loss, due to both
the low margin deposits required and the high degree of leverage involved in
futures pricing. A relatively small movement in a futures contract may result in
immediate, substantial gains or losses to the contract holder. Gains from
futures and options transactions are subject to federal income tax when
distributed to shareholders.
CASH MANAGEMENT (VARIABLE-PRICE FUNDS)
For cash management purposes, each of the Variable-Price Funds may invest up to
5% of its assets in any Benham money market fund, provided that the investment
is consistent with the Fund's investment policies and restrictions.
RESTRICTED AND ILLIQUID SECURITIES
A portion of each Fund's assets may be invested in obligations that are subject
to restrictions on resale (restricted securities). Certain restricted securities
may be deemed liquid pursuant to guidelines established by the board of
trustees. Each Fund may invest up to 10% of its assets in illiquid securities.
OTHER INVESTMENT MANAGEMENT TECHNIQUES
BMC may buy other types of securities or employ other portfolio management
techniques on behalf of the Funds. In particular, the Fund may also invest in
dollar rolls and inverse floaters. When SEC guidelines require it to do so, a
Fund will set aside cash or appropriate liquid assets in a segregated account to
cover its portfolio obligations. See the Statements of Additional Information
for a more detailed discussion of those investments and some of the risks
associated with them.
PERFORMANCE
Mutual Fund performance is commonly measured as yield or total return. It is
based on historical fund performance and may be quoted in advertising and sales
literature. Past performance is no guarantee of future results.
The MONEY MARKET FUND'S YIELD is calculated based on the income generated by an
investment in the Fund over a seven-day period, expressed as an annual
percentage rate. The Fund's EFFECTIVE YIELD is calculated similarly, although
this figure will be slightly higher than the
14
<PAGE>
Fund's yield because it assumes that income earned from the Fund's investments
is reinvested.
FOR EACH OF THE VARIABLE-PRICE FUNDS, yields are a way of showing the rate of
income a Fund earns on its investments as a percentage of its share price. To
calculate yield, a Fund takes the interest it earned from its portfolio of
investments for a 30-day period (net of expenses), divides it by the average
number of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on the Fund's share price at the end of the
30-day period.
EACH FUND MAY QUOTE TAX-EQUIVALENT YIELDS, which show the taxable yields an
investor would have to earn before taxes to equal the Fund's tax-free yields.
You can calculate your tax-equivalent yield (taking into account only federal
income tax and not applicable state taxes) for any federally tax-free fund using
the following equation:
Your Fund's Tax-Free Yield
---------------------------------- = Tax-Equivalent
100% - Your Federal Tax Bracket Yield
For example, if you were in the 36% federal income tax bracket, and the fund's
federally tax-free yield were 5%, your calculation would be as follows:
.05
------- = .078 = 7.8%
1 - .36
In this example, your return on a federally tax-free investment yielding 5%
would be higher than on a taxable investment with comparable quality and
maturity characteristics yielding below 7.8%. If only a portion of a Fund's
income were tax-exempt, only that portion would be adjusted in the calculation.
TOTAL RETURN represents the Fund's changes over a specified time period,
assuming reinvestment of dividends and capital gains, if any. CUMULATIVE TOTAL
RETURN illustrates the Fund's actual performance over a stated period of time.
AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that illustrates
the annually compounded return that would have produced the same cumulative
total return if the Fund's performance had been constant over an entire period.
Average annual total returns smooth out variations in the Fund's performance;
they are not the same as year-by-year results.
- -------------------
[information in right margin of page]
Each Fund may quote tax-equivalent yields, which show the taxable yields an
investor would have to earn before taxes to equal the Fund's tax-free yields.
- -------------------
15
<PAGE>
- -------------------
[information in left margin of page]
Performance data and a discussion of factors that affected performance during
the Funds' most recent reporting period are included in the Funds' semiannual
and annual reports to shareholders.
- -------------------
Performance data and a discussion of factors that affected performance during
the Funds' most recent reporting period are included in the Trust's semiannual
and annual reports to shareholders. These reports are routinely delivered to the
Funds' shareholders. For a free copy, call one of the Fund Information numbers
on page 18.
SHARE PRICE
The price of your shares is their net asset value next determined after receipt
of your instruction to purchase, convert or redeem. Net asset value is
determined by calculating the total value of a Fund's assets, deducting total
liabilities and dividing the result by the number of shares outstanding. Net
asset value is determined on each day that the New York Stock Exchange is open.
Investments and requests to redeem shares will receive the share price next
determined after receipt by Benham of the investment or redemption request. For
example, investments and requests to redeem shares received by Benham before the
close of business on the New York Stock Exchange are effective on, and will
receive the price determined, that day as of the close of the Exchange.
Redemption requests received thereafter are effective on, and receive the price
determined as of the close of the Exchange on, the next day the Exchange is
open.
Investments are considered received only when your check or wired funds are
received by Benham. Wired funds are considered received on the day they are
deposited in Benham's bank account if they are deposited before the close of
business on the Exchange, usually 1:00 p.m. Pacific Time.
16
<PAGE>
Investments by telephone pursuant to your prior authorization to Benham to draw
on your bank account are considered received at the time of your telephone call.
Investment and transaction instructions received by Benham on any business day
by mail at its office prior to the close of business on the Exchange, usually
1:00 p.m. Pacific Time, will receive that day's price. Investments and
instructions received after that time, will receive the price determined on the
next business day.
SECURITIES HELD BY THE MONEY MARKET FUNDS are valued on the basis of amortized
cost. This method involves initially valuing a security at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase, rather than determining the security's
market value from day to day.
MOST SECURITIES HELD BY THE VARIABLE-PRICE FUNDS are priced at market value
using prices obtained daily from an independent pricing service. Other
securities are priced at fair market value as determined in good faith pursuant
to guidelines established by the Funds' board of trustees.
17
<PAGE>
- -------------------
[information in left margin of page]
Overnight and special delivery mail (e.g., Federal Express, Express Mail,
Priority Mail) should be sent to our street address: 1665 Charleston Rd.
Mountain View, California 94043. Failure to do so may result in transaction
delays.
- -------------------
HOW TO INVEST
To open an account, you must complete and sign an application. If an application
is not enclosed with this Prospectus, you may request one by calling one of the
Fund Information numbers listed below. If you prefer, we will fill out your
application over the telephone and mail it to you for your signature. Separate
forms are required to establish Benham-sponsored retirement plan accounts (see
pages 28 and 29).
Benham Group Representatives are available at the telephone numbers listed below
weekdays from 5:00 a.m. to 5:00 p.m. Pacific Time. For your protection, Benham
records all telephone conversations with its telephone representatives.
FUND INFORMATION: for information about any Benham fund or other investment
product, call 1-800-331-8331 or 1-415-965-4274.
SHAREHOLDER RELATIONS: to open an account or make transactions in an existing
account, call 1-800-321-8321 or 1-415-965-4222.
Benham shareholders may make transactions and obtain prices, yields, and total
return information for all Benham funds with TeleServ, our 24-hour automated
telephone information service. Dial 1-800-321-8321 and press 1.
18
<PAGE>
HOW TO BUY SHARES (Retirement investors, see pages 28 and 29).
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY CHECK Minimum initial investment: $1,000
Minimum additional investment: $100
MAKE YOUR INVESTMENT CHECK PAYABLE TO THE BENHAM GROUP. Mail
the check with your completed application to
The Benham Group
P.O. Box 7730
San Francisco, California 94120-9853
FOR ADDITIONAL INVESTMENTS, enclose an investment slip
preprinted with the account number to which your investment
should be credited. If the payee information provided on the
check does not agree with the information preprinted on the
investment slip, we will follow the instructions preprinted on
the slip.
If you do not have a preprinted investment slip, send your
check with separate written instructions indicating the fund
name and the account number. If the payee information provided
on the check does not agree with the written instructions, we
will follow the written instructions.
You may also invest your check in person at a Benham Investor
Center. One is located at 1665 Charleston Road in Mountain
View, California; the other is located at 2000 South Colorado
Boulevard, Suite 1000, in Denver, Colorado.
WE WILL NOT ACCEPT CASH INVESTMENTS OR THIRD-PARTY CHECKS. We
will, however, accept properly endorsed second-party checks
made payable to the investor(s) to whose account the investment
is to be credited.
We will also accept checks drawn on foreign banks or foreign
branches of domestic banks and checks that are not drawn in
U.S. dollars (U.S. $100 minimum). The cost of collecting
payment on such checks will be passed on to the investor. These
costs may be substantial, and settlement may involve
considerable delays.
Investors will be charged $5 for every investment check
returned unpaid.
19
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY BANK WIRE Minimum initial investment: $25,000
Minimum additional investment: $100
If you wish to open an account by bank wire, please call our
Shareholder Relations Department for more information and an
account number. Bank wire investments should be addressed as
follows:
State Street Bank and Trust Company
Boston, Massachusetts
ABA Routing Number 011000028
Beneficiary = Benham Municipal Trust: [Name of Fund]
AC [State Street Fund Account Number (see below)]
FBO [Your Name, Your Benham Fund Account Number]
Benham Fund Names and State Street Fund
Account Numbers:
Benham National Tax-Free
Money Market Fund ......................0505 931 6
Benham National Tax-Free
Intermediate-Term Fund..................0505 929 0
Benham National Tax-Free
Long-Term Fund..........................0505 921 7
- --------------------------------------------------------------------------------
BY EXCHANGE Minimum initial investment: $1,000
Minimum additional investment: $100
You may exchange your shares for shares of any other Benham
fund registered for sale in your state if you have received the
fund's prospectus. Exchanges may be made by telephone (for
identically registered accounts only), by written request, or
in person. Certain restrictions apply; please see page 22 for
details. You may open a new account by exchange, provided that
you meet the minimum initial investment requirement.
- --------------------------------------------------------------------------------
AUTOMATIC Minimum: $25
INVESTMENT
SERVICES These services are offered with respect to additional
investments only. See details on page 23.
20
<PAGE>
PROCESSING YOUR PURCHASE
Shares will be purchased at the next NAV calculated after your investment is
received and accepted by Benham or an authorized subtransfer agent. Investments
received and accepted before the close of business of the NYSE, normally 1:00
p.m. Pacific Time, will be included in your account balance the same day. After
1:00 p.m. Pacific Time, they will be credited the following business day. The
Funds reserve the right to refuse any investment.
TELEPHONE TRANSACTIONS
Shareholders may order certain transactions (e.g., exchanges, wires, some types
of redemptions) by telephone. This privilege is granted to Benham fund
shareholders automatically; you need not specifically request this service, and
you may not specifically decline it.
The Benham Group will not be liable for losses resulting from unauthorized or
fraudulent instructions if it follows procedures designed to verify the caller's
identity. BMC will request personal identification, record telephone calls, and
send confirmation statements for every telephone transaction to the
shareholder's record address. The Funds reserve the right to revise or terminate
telephone transaction privileges at any time.
CONFIRMATION AND QUARTERLY STATEMENTS
All transactions are summarized on quarterly account statements. In addition,
for every transaction that you request, a confirmation statement will be mailed
to your record address. Please review these statements carefully. If you believe
we have processed the transaction you requested incorrectly, please notify us as
soon as possible. If you fail to notify us of an error with reasonable
promptness, i.e., within 30 days of the date of your confirmation statement, we
will deem you to have ratified the transaction.
21
<PAGE>
- -------------------
[information in left margin of page]
The free exchange privilege is a convenient way to buy shares in other Benham
funds if your investment goals change.
- -------------------
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
You may exchange your shares for shares of equivalent value in any other Benham
fund registered for sale in your state. An exchange request will be processed
the same day if it is received before the funds' NAVs are calculated (one hour
prior to the close of the NYSE, usually 12:00 noon Pacific Time, for Benham
Target Maturities Trust; and at the close of the NYSE, usually 1:00 p.m. Pacific
Time, for all other Benham funds).
The Benham Group discourages trading in response to short-term market
fluctuations. Such activity may encumber BMC's ability to invest the funds'
assets in accordance with their respective investment objectives and policies
and may be disadvantageous to other shareholders. In addition, an exchange out
of Variable-Price Funds generally will generate taxable gains or losses to the
shareholder. More than six exchanges per calendar year out of a Variable-Price
Fund may be deemed an abuse of the exchange privilege. For purposes of
determining the number of exchanges made, accounts under common ownership or
control will be aggregated.
Currently, there are no restrictions on exchanges out of the Money Market Fund.
However, each Benham fund reserves the right to modify or revoke the exchange
privilege of any shareholder or to limit or reject any exchange. Although each
fund will attempt to give shareholders prior notice whenever it is reasonably
able to do so, it may impose these restrictions at any time.
OPEN ORDER SERVICE
The Benham Group's Open Order Service allows you to designate a price at which
to buy or sell shares of a variable-price fund by exchange from a money market
fund. To place a "buy" order, you designate a purchase price that is equal to or
lower than the current NAV. To place a "sell" order, designate a sales price
that is equal to or higher than the current NAV. If the designated price is met
within 90 calendar days, we will automatically execute your order. If you are
buying shares of a variable-price fund, we will exchange money from your money
market account to purchase them. If you are selling shares of a variable-price
fund, we will transfer
22
<PAGE>
the proceeds of that sale to your money market account. If you do not have a
money market account, we will open one for you when we execute your Open Order.
If the fund you have selected deducts a distribution from its share price, your
order price will be adjusted accordingly so that the distribution does not
inadvertently trigger an Open Order transaction on your behalf. If you close or
reregister the account from which shares are to be redeemed, your Open Order
will be canceled. Because of their time-sensitive nature, Open Order
transactions may be made by telephone or in person. These transactions are
subject to the exchange limitations described in each fund's prospectus, except
that all orders and cancellations received before 12:00 p.m. Pacific Time are
effective the same day. After 12:00 p.m. Pacific Time, they are effective the
following business day.
AUTOMATIC INVESTMENT SERVICES (AIS)
TREASURY DIRECT allows you to deposit interest and principal payments from
Treasury securities directly into a Benham fund account.
PAYROLL DIRECT allows you to deposit any amount of your paycheck directly into a
Benham fund account.
GOVERNMENT DIRECT allows you to deposit your entire U.S. government payment
directly into a Benham fund account.
BANK DIRECT allows you to deposit a fixed amount from your bank account directly
into a Benham fund account on the 1st and/or the 15th of each month (or the next
business day).
DIRECTED DIVIDENDS allow you to invest all or part of your dividend earnings
from one Benham fund account in one or more other Benham fund accounts. You may
choose to receive a portion of your dividends in cash and to invest the
remainder in another Benham fund account.
SYSTEMATIC EXCHANGES allow you to exchange from one Benham fund account to
another Benham fund account on the 1st and/or the 15th of each month (or the
next business day).
For more information about any of these services, please call our Shareholder
Relations Department at 1-800-321-8321 or 1-415-965-4222.
23
<PAGE>
BROKER-DEALER TRANSACTIONS
The Benham Group charges no sales commissions, or "loads" of any kind. However,
investors may purchase and sell shares through registered broker-dealers, who
may charge fees for their services.
The Benham Group will accept orders for the purchase of shares from authorized
broker-dealers who agree in writing to pay in full for such shares in
immediately available funds no later than 1:00 p.m. Pacific Time the following
business day.
TDD SERVICE FOR THE HEARING IMPAIRED
TDD users may contact The Benham Group at 1-800-624-6338 or 1-415-965-4764.
California residents may wish to contact us through the California Relay Service
(CRS) at 1-800-735-2929.
Your transaction requests via CRS will be handled on a recorded line. The Benham
Group cannot accept responsibility for instructions miscommunicated by CRS.
EMERGENCY SERVICES
The Benham Group has established an alternate operations site from which we can
access customer accounts and the mainframe computers used by the Benham funds in
the event of an emergency. Telephone lines and terminals are currently in place.
If our regular service is interrupted, the following numbers will automatically
connect you to this site.
From within the U.S., including Alaska and Hawaii: 1-800-321-8321.
From all foreign countries, call collect: 1-303-759-9337 or 1-510-820-1409. The
operator will request your Benham fund account number before accepting the call.
HOW TO REDEEM YOUR INVESTMENT
When you place an order to redeem shares, your shares will be redeemed at the
next NAV calculated after The Benham Group or an authorized subtransfer agent
has received your redemption request in good order. The Funds' NAVs are usually
calculated at 1:00 p.m. Pacific Time. See page 16 for details.
24
<PAGE>
Barring extraordinary circumstances prescribed by law, redemption proceeds are
mailed within seven calendar days. However, The Benham Group reserves the right
to withhold the proceeds until the investment has matured (i.e., your payment
has cleared); see maturity periods below.
- --------------------------------------------------------------------------------
DRAWN FROM A MATURITY PERIOD
TYPE OF INVESTMENT CALIFORNIA BANK? (IN BUSINESS DAYS)
- --------------------------------------------------------------------------------
Checks, cashiers' checks,
and bank money orders Yes 5 days
- --------------------------------------------------------------------------------
Same as above No 8 days
- --------------------------------------------------------------------------------
U.S. Treasury checks,
Traveler's checks,
U.S. Postal money orders,
Benham checks, bank wires,
and AIS Deposits* N/A 1 day
*Does not include bank direct deposits, which take 8 business days to mature.
- --------------------------------------------------------------------------------
If you hold shares in certificate form, redemption requests must be accompanied
by properly endorsed certificates.
If you want to keep your account open, please maintain a balance of shares worth
at least $1,000. If your account balance falls to less than $1,000 due to
redemption, your account may be closed, but not without at least 30 days' notice
and an opportunity to increase your account balance to the $1,000 minimum. Your
shares will be redeemed at the NAV calculated on the day your account is closed.
Proceeds will be mailed to the record address.
This policy applies to Benham's Individual Retirement Accounts (IRAs), excluding
SEP-IRAs, except that shareholders will receive at least 120 days' written
notice and an opportunity to increase their account balance before their
accounts are closed. Investors wishing to open a Benham-sponsored retirement
account should see pages 28 and 29 for details.
UNCASHED CHECKS
We may reinvest at the Fund's current NAV any distribution or redemption check
that remains uncashed for six months. Until we receive instructions to the
contrary, subsequent distributions will be reinvested in the original account.
Uncashed redemption checks may be reinvested in an identically registered
account.
25
<PAGE>
HOW TO REDEEM SHARES (Retirement investors, see pages 28 and 29).
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY TELEPHONE The Benham Group will accept telephone redemption requests for
any amount if the proceeds are to be sent to your
predesignated bank account. Redemptions of $25,000 or less
payable to the registered account owner(s) may also be ordered
by telephone. All other redemption requests must be made in
writing.
- --------------------------------------------------------------------------------
IN WRITING Send a letter of instruction to
The Benham Group
Shareholder Relations Department
1665 Charleston Road
Mountain View, California 94043
Your letter of instruction should specify
* Your name
* Your account number
* The name of the Fund from which you wish to redeem shares
* The dollar amount or number of shares you wish to redeem
For your protection, written redemption requests must be
accompanied by SIGNATURE GUARANTEES under the following
circumstances
* Redemption proceeds go to a party other than the registered
account owner(s)
* Redemption proceeds go to an account other than your
predesignated bank account
* Redemption proceeds go to the registered account owner(s),
but the amount exceeds $25,000
If you have instructed The Benham Group to require more than
one signature on written redemption requests, each of the
required number of signers must have his or her signature
guaranteed on the redemption requests. Signature guarantees
may be provided by banks, savings and loan associations,
savings banks, credit unions, stock brokerage firms, or a
Benham Investor Center.
26
<PAGE>
================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
IN WRITING Shareholders must appear in person with identification to
(continued) obtain a signature guarantee. Notary public certifications are
not accepted in lieu of signature guarantees.
BFS may require written consent of all account owners prior to
acting on the written instructions of any account owner.
- --------------------------------------------------------------------------------
BY CHECK Investors automatically receive a free book of checks
upon opening an account in the Money Market Fund. Checks may
be drawn to the order of any payee in any amount of $100 or
more. There is no charge for additional checks, and there are
no per-check fees.
Each check must bear the signatures of those authorized to act
on the account. Check redemptions will be charged against your
account as of the date the check is received by First
Interstate Bank of California, the collecting bank.
The check-writing option may be terminated or modified by the
board of trustees. Checks may not be used to close an account.
- --------------------------------------------------------------------------------
BY BANK WIRE If you included bank wire information on your account
application or made subsequent arrangements to accommodate
bank wire redemptions, you may wire funds to your bank by
calling 1-800-321-8321 or 1-415-965-4222. The minimum amount
for a bank wire redemption is $1,000. Allow at least two
business days for redemption proceeds to be credited to your
bank account.
- --------------------------------------------------------------------------------
BY EXCHANGE See details on pages 20 and 22.
- --------------------------------------------------------------------------------
AUTOMATIC DIRECTED PAYMENTS. You may arrange for periodic redemp-
REDEMPTION tions from your Benham fund account to your bank
SERVICES account or to another designated payee.
SYSTEMATIC EXCHANGES. You may arrange for periodic exchange
redemptions from one Benham fund account to another Benham
fund account.
27
<PAGE>
ABOUT BENHAM-SPONSORED RETIREMENT PLANS
Retirement plans offer investors a number of benefits, including the chance to
reduce current taxable income and to take advantage of tax-deferred compounding.
Retirement plan accounts require a special application; please let our
Shareholder Relations Department know if you want to establish this type of
account. We suggest that you consult your tax advisor before establishing a
retirement plan account. The minimum account balance for all Benham Individual
Retirement Accounts (IRAs), excluding SEP-IRAs, is $1,000. If your balance falls
below the $1,000 per fund account (continued on the next page)
================================================================================
PLAN TYPE AVAILABLE TO MAXIMUM ANNUAL CONTRIBUTION
PER PARTICIPANT
- --------------------------------------------------------------------------------
Contributory An employed indi- $2,000 or 100% of compensation
IRA vidual under age 70 1/2. (whichever is less).
- --------------------------------------------------------------------------------
Spousal IRA A nonworking spouse $2,250 (can be split between
(under age 70 1/2) of a Spousal and Contributory IRAs,
wage earner. provided that no IRA receives
more than a total of $2,000).
- --------------------------------------------------------------------------------
Rollover IRA An individual with a None, as long as total amount is
distribution from an eligible.
employer's retirement
plan or a rollover IRA.
- --------------------------------------------------------------------------------
SEP-IRA A self-employed indi- $22,500 or 15% of compensation
vidual or a business. (whichever is less).*
- --------------------------------------------------------------------------------
Money Same as for SEP-IRA. $30,000 or 25% of compensation
Purchase Plan (whichever is less). Annual
(Keogh) contribution is mandatory.*
- --------------------------------------------------------------------------------
Profit Same as for SEP-IRA. $22,500 or 15% of compensation
Sharing Plan (whichever is less). Annual
(Keogh) contribution is optional.*
- --------------------------------------------------------------------------------
* Self-employed individuals should consult IRS Publication 560 for their annual
contribution limits.
28
<PAGE>
(continued from the previous page)
minimum, your account may be closed (see page 25 for details). This distribution
may result in a taxable event and a possible penalty for early withdrawal. The
minimum fund account balance for all other Benham-sponsored retirement plan
accounts is $100. Benham charges no fees for its IRAs but does charge low
maintenance fees for its Keoghs.
YOU MUST COMPLETE SPECIFIC FORMS TO TAKE DISTRIBUTIONS (I.E., REDEEM SHARES)
FROM A BENHAM-SPONSORED RETIREMENT PLAN ACCOUNT. PLEASE CALL OUR SHAREHOLDER
RELATIONS DEPARTMENT AT 1-800-321-8321 FOR ASSISTANCE.
================================================================================
DEADLINE FOR
OPENING ACCOUNT CONTRIBUTION DEADLINES
- --------------------------------------------------------------------------------
You may open an account anytime, Annual contributions can be made
but the deadline for establishing from January 1 through April 15 of
and funding an IRA for the prior the following tax year up to the
tax year is April 15. year you turn age 70 1/2.
- --------------------------------------------------------------------------------
Same as for Contributory IRA. Same as for Contributory IRA.
- --------------------------------------------------------------------------------
You may open a Rollover IRA Eligible rollover contributions must
account anytime. be made within 60 days of receiv-
ing your distribution. There is no
age limit on rollover contributions.
- --------------------------------------------------------------------------------
You may open an account anytime, Must be made by employer's tax
but the deadline for establishing and filing deadline (including
funding an account for the prior tax extensions).
year is the employer's tax deadline
(including extensions).
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
- --------------------------------------------------------------------------------
The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.
- --------------------------------------------------------------------------------
For all Benham-sponsored retirement plans, you may begin taking distributions at
age 59 1/2. You must begin to take required distributions by April 1 of the year
after you turn age 70 1/2. You may take distributions from your IRA or SEP-IRA
before you reach age 59 1/2; however, a penalty may apply.
29
<PAGE>
- -------------------
[information in left margin of page]
Each January you will be informed of the tax status of dividends and capital
gain distributions for the previous year.
- -------------------
DISTRIBUTIONS AND TAXES
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
MONEY MARKET FUND. Dividends are declared and credited (i.e., available for
redemption) daily and distributed on the last business day of the month.
VARIABLE-PRICE FUNDS. Dividends are declared daily, accrued throughout the
month, and distributed on the last business day of the month.
ALL FUNDS. Net capital gains, if any, are declared and paid once a year in
December.
DISTRIBUTION OPTIONS. You may choose to receive dividends and capital gain
distributions in cash or to reinvest them in additional shares (see "Directed
Dividends" on page 23 for further information). Please indicate your choice on
your account application or contact our Shareholder Relations Department. See
page 25 for a description of our policy regarding uncashed distribution checks.
TAXES
Each Fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (Code), as amended, by
distributing all or substantially all of its net investment income and net
realized capital gains to shareholders each year.
Interest earned by a Fund from municipal and other tax-exempt obligations
generally is exempt from the regular federal income tax. Each Fund intends to
invest a sufficient portion of its assets in state and municipal obligations so
that it will qualify to pay "exempt-interest dividends" to shareholders. Such
exempt-interest dividends are generally excludable from a shareholder's gross
income for federal tax purposes. If a Fund earned federally taxable income from
any of its investments, the income would be distributed to shareholders as a
taxable dividend.
Exempt-interest dividends of a Fund, although exempt from regular federal income
tax, are includable in the tax base for determining the extent to which social
security or railroad retirement benefits will be subject to federal income tax.
30
<PAGE>
Distributions from net short-term capital gains and all or a portion of gains
realized upon the disposition of market discount bonds are federally taxable as
ordinary income. Long-term capital gain distributions designated as capital gain
dividends are federally taxable as long-term capital gains, regardless of how
long you have held your shares. Distributions generally are subject to the same
tax treatment, whether they are received in cash or in additional shares.
Distributions declared to record shareholders in October, November, or December
and paid in January of the following year are treated as if paid on December 31.
You may realize a taxable gain or loss when you redeem (sell) or exchange shares
of a Variable-Price Fund. For most types of accounts, proceeds from your
redemption transactions will be reported to the IRS annually. However, because
the tax treatment depends on your purchase price and your personal tax
situation, you should keep your regular account statements to use in determining
your taxes.
If you hold Fund shares for six months or less, the deduction of any loss
realized upon redemption is disallowed to the extent that you received
"exempt-interest dividends" on those shares. All shareholders are required to
report the receipt of dividends and distributions, including exempt-interest
dividends, on their federal income tax returns.
Shareholders should be aware that redeeming shares of a Fund after tax-exempt
interest income has been accrued by a Fund but before that income has been
distributed as a dividend may be disadvantageous. Any gain on such redemption
will be taxable, even though the gain may be attributable in part to the accrued
tax-exempt interest that might have qualified as an exempt-interest dividend if
distributed as a dividend rather than as redemption proceeds.
BUYING A DIVIDEND. The timing of your investment could have undesirable tax
consequences. If you open a new account or buy more shares for your current
account just before the day a dividend or distribution is reflected in your
Fund's share price, you will receive a portion of your investment back as a
taxable dividend or distribution.
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Deductions for interest expense incurred (or deemed to be incurred) to acquire
or carry shares of a Fund may be subject to limitations that reduce or eliminate
the deductions.
Opinions relating to the validity of municipal securities and the exemptions of
interest thereon from federal income tax are rendered by bond counsel to the
issuers. The Funds, BMC, and the Funds' counsel rely on the opinion of bond
counsel, and do not undertake any independent investigation of proceedings
relating to the issuance of state or municipal securities. The Funds may invest
in various instruments that are not traditional state and local obligations and
that are believed to generate interest excludable from taxable income under Code
Section 103, including, but not limited to, municipal lease obligations and
inverse floaters. Although the Funds may invest in these instruments, they
cannot guarantee the tax-exempt status of the income earned thereon or from any
other investment.
BACKUP WITHHOLDING. The Funds are required by federal law to withhold 31% of
reportable dividends and capital gain distributions (as well as redemptions from
Variable-Price Funds) payable to shareholders who have not complied with IRS
regulations. These regulations require you to certify on your account
application or on IRS Form W-9 that your social security or taxpayer
identification number (TIN) is correct and that you are not subject to backup
withholding from previous underreporting to the IRS, or that you are exempt from
backup withholding.
The Benham Group may refuse to sell shares to investors who have not complied
with this requirement, either before or at the time of purchase. Until we
receive your certified tax certification, we may redeem your shares in the Funds
at any time.
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MANAGEMENT INFORMATION
ABOUT THE TRUST
Benham Municipal Trust is a registered open-end management investment company
that was organized as a Massachusetts business trust on May 1, 1984 (the Trust
was formally known as "Benham National Tax-Free Trust"). Three of the Trust's
eight series are described in this Prospectus. Additional series may be created
from time to time.
A board of trustees oversees the Funds' activities and is responsible for
protecting shareholders' interests in the Funds. The Trust is not required to
hold annual meetings, although special meetings may be called for purposes such
as electing trustees or amending a Fund's advisory agreement or investment
policies. The number of votes you are entitled to is based upon the dollar value
of your investment. Each Series votes separately on matters that pertain to it
exclusively. Voting rights are not cumulative.
THE BENHAM GROUP
Benham Management Corporation (BMC) is investment advisor to the funds in The
Benham Group, which currently constitute more than $11 billion in assets. BMC,
incorporated in California in 1971, became a wholly owned subsidiary of
Twentieth Century Companies, Inc. (TCC), a Delaware corporation, on June 1,
1995, upon the merger of Benham Management International, Inc., BMC's former
parent, into TCC. TCC is a holding company that owns the operating companies
that provide the investment management, transfer agency, shareholder service,
and other services for the Twentieth Century family of funds, which now includes
the Benham Group. The combined company offers 62 mutual funds and has combined
assets of more than $41 billion.
Benham Management Corporation (BMC) supervises and manages the investment
portfolios of The Benham Group and directs the purchase and sale of its
investment securities. BMC utilizes teams of portfolio managers, assistant
portfolio managers and analysts acting together to manage the assets of the
funds. The teams meet regularly to review portfolio holdings and to
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[information in right margin of page]
The Benham Group serves more than 350,000 investors.
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[information in left margin of page]
Benham Management Corporation provides investment advice and portfolio
management services to the Funds.
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discuss purchase and sale activity. The teams adjust holdings in the funds'
portfolios as they deem appropriate in pursuit of the Funds' investment
objectives. Individual portfolio manager members of the team may also adjust
portfolio holdings of the funds as necessary between team meetings.
Mr. G. David MacEwen, Portfolio Manager, has primary responsibility for the
day-to-day operations of all series of the Trust. He also manages the following
Benham California Tax-Free and Municipal Funds: Tax-Free Short-Term Fund,
Tax-Free Intermediate-Term Fund, Tax-Free Long-Term Fund, and Tax-Free Insured
Fund. Before joining BMC in 1991, Mr. MacEwen was Vice President-Municipal
Portfolio Manager at Provident Institutional Management Corporation in
Wilmington, Delaware (1986 to 1991).
ADVISORY AND SERVICE FEES
For investment advice and portfolio management services, each Fund pays BMC a
monthly investment advisory fee equal to its pro rata share of the dollar amount
derived from applying the Trust's average daily net assets to an investment
advisory fee schedule.
The investment advisory fee cannot exceed .50% of average daily net assets, and
it drops to a marginal rate of .19% of average daily net assets as Trust assets
increase.
The following table illustrates investment advisory fees paid by the Funds for
the fiscal year ended May 31, 1995. For each Fund, the figures shown represent
investment advisory fees as a percentage of the Fund's average daily net assets
and as a dollar amount per $1,000 of the Fund's average daily net assets.
INVESTMENT ADVISORY FEES*
Money Market Fund .37% $3.70
Intermediate-Term Fund .35 3.50
Long-Term Fund .33 3.30
*Net of expense limitation, as described on page 3.
To avoid duplicative investment advisory fees, the variable-price funds do not
pay BMC investment advisory fees with respect to assets invested in shares of
Benham money market funds.
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BFS, a wholly owned subsidiary of TCC, is the Funds' agent for transfer and
administrative services. For administrative services, each Fund pays BFS a
monthly fee equal to its pro rata share of the dollar amount derived from
applying the average daily net assets of all of the funds in The Benham Group.
The administrative fee rate ranges from .11% to .08% of average daily net
assets, dropping as Benham Group assets increase. For transfer agent services,
each Fund pays BFS a monthly fee for each shareholder account maintained and for
each shareholder transaction executed during that month.
Each Fund pays certain operating expenses directly, including but not limited
to: custodian, audit, and legal fees; fees of the independent trustees; costs of
printing and mailing prospectuses, statements of additional information, proxy
statements, notices, and reports to shareholders; insurance expenses; and costs
of registering the Funds' shares for sale under federal and state securities
laws. See the Statement of Additional Information for a more detailed discussion
of independent trustee compensation.
EXPENSE LIMITATION AGREEMENT
An expense limitation agreement between BMC and the Funds is described on pages
3 and 35.
TOTAL OPERATING EXPENSES*
Money Market Fund .66% $6.60
Intermediate-Term Fund .66 6.60
Long-Term Fund .66 6.60
*Net of expense limitation, as described above and on page 3.
DISTRIBUTION OF SHARES
Benham Distributors, Inc. (BDI), and BMC distribute and market Benham products
and services. BMC pays all expenses for promoting sales of and distributing the
Funds' shares. The Funds do not pay commissions to, or receive compensation
from, broker-dealers.
BDI is a wholly owned subsidiary of TCC.
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[information in right margin of page]
Benham Financial Services, Inc. provides administrative and transfer agent
services to the funds.
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INVESTMENT ADVISOR
BENHAM MANAGEMENT CORPORATION
1665 Charleston Road
Mountain View, California 94043
DISTRIBUTOR
BENHAM DISTRIBUTORS, INC.
1665 Charleston Road
Mountain View, California 94043
CUSTODIAN
STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02101
TRANSFER AGENT
BENHAM FINANCIAL SERVICES, INC.
1665 Charleston Road
Mountain View, California 94043
INDEPENDENT AUDITORS
KPMG PEAT MARWICK LLP
3 Embarcadero Center
San Francisco, California 94111
TRUSTEES
James M. Benham
Ronald J. Gilson
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
James E. Stowers III
Jeanne D. Wohlers
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<PAGE>
THE BENHAM GROUP OF INVESTMENT COMPANIES
Capital Preservation Fund
Capital Preservation Fund II
Benham Government Agency Fund
Benham Prime Money Market Fund
Benham Short-Term Treasury and Agency Fund
Benham Treasury Note Fund
Benham Long-Term Treasury and Agency Fund
Benham Adjustable Rate Government Securities Fund
Benham GNMA Income Fund
Benham Target Maturities Trust
Benham California Tax-Free and Municipal Funds*
Benham National Tax-Free Money Market Fund
Benham National Tax-Free Intermediate-Term Fund
Benham National Tax-Free Long-Term Fund
Benham Florida Municipal Money Market Fund**
Benham Florida Municipal Intermediate-Term Fund**
Benham Arizona Municipal Intermediate-Term Fund***
Benham Gold Equities Index Fund
Benham Income & Growth Fund
Benham Equity Growth Fund
Benham Utilities Income Fund
Benham Global Natural Resources Index Fund
Benham European Government Bond Fund
Benham Capital Manager Fund
* Available only to residents of California, Arizona, Colorado, Hawaii, Nevada,
New Mexico, Oregon, Texas, Utah, and Washington.
** Available only to residents of Florida, California, Georgia, Illinois,
Michigan, New Jersey, New York, and Pennsylvania.
***Available only to residents of Arizona, California, Colorado, Nevada, Oregon,
Washington, and Texas.
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NOTES:
38
<PAGE>
39
<PAGE>
CONTENTS
Summary of Fund Expenses .................. 3
Financial Highlights ...................... 4
Investment Objective ...................... 8
Investment Policies ....................... 8
Suitability ............................... 10
Municipal Securities ...................... 11
Investment Practices ...................... 13
Performance ............................... 14
Share Price ............................... 16
How to Invest ............................. 18
Shareholder Services ...................... 22
Exchange Privilege ..................... 22
Open Order Service ..................... 22
Automatic Investment Services .......... 23
Broker-Dealer Transactions ............. 24
TDD Service ............................ 24
Emergency Services ..................... 24
How to Redeem Your Investment ............. 24
About Benham-Sponsored Retirement Plans ... 28
Distributions and Taxes ................... 30
Dividends and Capital Gain Distributions 30
Taxes .................................. 30
Management Information .................... 33
About the Trust ........................ 33
The Benham Group ....................... 33
Advisory and Service Fees .............. 34
Expense Limitation Agreement ........... 35
Distribution of Shares ................. 35
<PAGE>
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
Series of Benham Municipal Trust
The Benham Group(R)
1665 Charleston Road
Mountain View, California 94043
Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274
STATEMENT OF ADDITIONAL INFORMATION
September 30, 1995
This Statement is not a prospectus but should be read in conjunction with the
Trust's current Prospectus dated September 30, 1995. The Funds' Annual Report
for the fiscal year ended May 31, 1995, is included in this Statement of
Additional Information. To obtain a copy of the Prospectus, call or write The
Benham Group.
TABLE OF CONTENTS
Page
----
Investment Policies and Techniques 2
Investment Restrictions 9
Portfolio Transactions 13
Valuation of Portfolio Securities 14
Performance 15
Taxes 17
About the Trust 19
Trustees and Officers 20
Investment Advisory Services 22
Administrative and Transfer Agent Services 23
Direct Fund Expenses 24
Expense Limitation Agreements 24
Additional Purchase and Redemption Information 25
Other Information 26
Financial Statements 30
NOTE: Throughout this Statement of Additional Information, Benham National
Tax-Free Money Market Fund will be referred to as the Money Market Fund. Benham
National Tax-Free Intermediate-Term Fund (Intermediate-Term Fund) and Benham
National Tax-Free Long-Term Fund (Long-Term Fund) are referred to collectively
as the Variable-Price Funds.
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INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of securities and
investment practices identified in the Prospectus. Unless otherwise noted, the
policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of trustees.
MUNICIPAL NOTES
Municipal notes are issued by state and local governments or government entities
to provide short-term capital or to meet cash flow needs.
TAX ANTICIPATION NOTES (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use, and business taxes,
and are payable from these future taxes. Tax anticipation notes usually are
general obligations of the issuer. General obligations are secured by the
issuer's pledge of its full faith and credit (i.e., taxing power) for the
payment of principal and interest.
REVENUE ANTICIPATION NOTES (RANs) are issued with the expectation that receipt
of future revenues, such as federal revenue sharing or state aid payments, will
be used to repay the notes. Typically, these notes also constitute general
obligations of the issuer.
BOND ANTICIPATION NOTES (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
TAX-EXEMPT COMMERCIAL PAPER is an obligation with a stated maturity of 365 days
or less issued to finance seasonal cash flow needs or to provide short-term
financing in anticipation of longer-term financing.
MUNICIPAL BONDS
Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.
GENERAL OBLIGATION (GO) BONDS are issued by states, counties, cities, towns, and
regional districts to fund a variety of public projects, including construction
of and improvements to schools, highways, and water and sewer systems. General
obligation bonds are backed by the issuer's full faith and credit based on its
ability to levy taxes for the timely payment of interest and repayment of
principal, although such levies may be constitutionally or statutorily limited
as to rate or amount.
REVENUE BONDS are not backed by an issuer's taxing authority; rather, interest
and principal are secured by the net revenues from a project or facility.
Revenue bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and sea port facilities, schools, and hospitals. Many
revenue bond issuers provide additional security in the form of a debt service
reserve fund that may be used to make payments of interest and repayments of
principal on the issuer's obligations. Some revenue bond financings are further
protected by a state's assurance (without obligation) that it will make up
deficiencies in the debt service reserve fund.
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<PAGE>
INDUSTRIAL DEVELOPMENT BONDS (IDBs), types of revenue bonds, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business, manufacturing, housing, athletic, and
pollution control projects as well as public facilities, such as mass transit
systems, air and sea port facilities, and parking garages. Payment of interest
and repayment of principal on IDBs depend solely on the ability of the
facility's user to meet its financial obligations and on the pledge, if any, of
the real or personal property financed. The interest earned on IDBs may be
subject to the federal alternative minimum tax. Currently the Funds do not buy
obligations whose interests are subject to the alternative minimum tax.
VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS
The Funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal, plus accrued interest, from the issuers or financial
intermediaries. Floating-rate instruments have interest rates that change
whenever there is a change in a designated base rate; variable-rate instruments
provide for a specified, periodic adjustment in the interest rate, which is
typically based on an index. These formulas are designed to result in a market
value for the VRDO or FRDO that approximates its par value.
The board of trustees has approved investments in VRDOs and FRDOs on the
following conditions:
(1) The Fund must have an unconditional right to demand a return of principal
plus accrued interest from the issuer on thirty days' notice or less;
(2) Under the direction of the board of trustees, Benham Management Corporation
(BMC) must determine that the issuer will be able to make payment upon such
demand, either from its own resources or through an unqualified commitment
(such as a letter of credit) from a third party; and
(3) The rate of interest payable on the VRDO or FRDO must be calculated to
ensure that its market value will approximate par value on interest rate
adjustment dates.
OBLIGATIONS WITH TERM PUTS ATTACHED
Each Fund may invest in fixed-rate bonds subject to third party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the Funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
BMC expects that the Funds will pay more for securities with puts attached than
for securities without these liquidity features. BMC may buy securities with
puts attached to keep a Fund fully invested in municipal securities while
maintaining sufficient liquidity to meet redemption requests or to facilitate
management of the Funds' investments. To ensure that the interest on municipal
securities subject to puts is tax-exempt to the Funds, BMC limits the Funds' use
of puts in accordance with applicable interpretations and rulings of the
Internal Revenue Service.
Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, it is expected that puts will be determined to have a value of
zero, regardless of whether any direct or indirect consideration was paid.
Accordingly, puts as separate securities are not expected to affect
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<PAGE>
the Funds' weighted average maturities. Where a Fund has paid for a put, the
cost will be reflected as unrealized depreciation on the underlying security for
the period the put is held. Any gain on the sale of the underlying security will
be reduced by the cost of the put.
There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a Fund attempts to exercise the put. To
minimize such risks, the Funds will purchase obligations with puts attached only
from sellers deemed creditworthy by BMC under the direction of the board of
trustees.
TENDER OPTION BONDS
Tender option bonds (TOBs) are created by municipal bond dealers who purchase
long-term tax-exempt bonds in the secondary market, place the certificates in
trusts, and sell interests in the trusts with puts or other liquidity guarantees
attached. The credit quality of the resulting synthetic short-term instrument is
based on the guarantor's short-term rating and the underlying bond's long-term
rating.
Although there is some risk that a remarketing agent will renege on a tender
option agreement if the underlying bond defaults, BMC monitors the credit
quality of bonds underlying the Funds' TOB holdings and intends to sell or put
back any TOB if the rating on its underlying bond falls below the second highest
rating category designated by a rating agency.
BMC also takes steps to minimize the risk that the Fund may realize taxable
income as a result of holding TOBs. These steps may include consideration of (i)
legal opinions relating to the tax-exempt status of the underlying municipal
bonds, (ii) legal opinions relating to the tax ownership of the underlying
bonds, and (iii) other elements of the structure that could result in taxable
income or other adverse tax consequences.
After purchase, BMC monitors factors related to the tax-exempt status of the
Fund's TOB holdings in order to minimize the risk of generating taxable income.
TOBs were created to increase the supply of high-quality, short-term tax-exempt
obligations, and, thus, they are of particular interest to the Money Market
Fund. However, any of the Funds may purchase these instruments.
WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS
The Funds may engage in securities transactions on a when-issued or
forward-commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date (typically 15 to 45 days later).
When purchasing securities on a when-issued or forward-commitment basis, each
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While a Fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
nevertheless sell the securities before the settlement date if deemed advisable
as a matter of investment strategy.
In purchasing securities on a when-issued or forward-commitment basis, a Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, U.S. government
4
<PAGE>
securities, or other high-quality liquid debt securities in an amount sufficient
to meet the purchase price. When the time comes to pay for when-issued
securities, the Fund will meet its obligations with available cash, through
sales of securities, or, although it would not normally expect to do so, through
sales of the when-issued securities themselves (which may have a market value
greater or less than the Fund's payment obligation). Selling securities to meet
when-issued or forward-commitment obligations may generate taxable capital gains
or losses.
The Funds may sell a security and at the same time make a commitment to purchase
the same security at a future date and specified price. Conversely, the Funds
may purchase a security and at the same time make a commitment to sell the same
security at a future date and specified price. These types of transactions are
executed simultaneously in what are known as "dollar-roll" or "cash-and-carry"
transactions. For example, a broker-dealer may seek to purchase a particular
security that the Funds own. The Funds will sell that security to the
broker-dealer and simultaneously enter into a forward-commitment agreement to
buy it back at a future date. This type of transaction generates income for the
Funds if the dealer is willing to execute the transaction at a favorable price
in order to acquire a specific security.
As an operating policy, each Fund will not commit greater than 50% of its assets
to when-issued or forward-commitment agreements. If fluctuations in the value of
securities held cause more than 50% of a Fund's assets to be committed under
when-issued or forward-commitment agreements, BMC need not sell such agreements,
but it will be restricted from entering into further agreements on behalf of the
Fund until the percentage of assets committed to such agreements is reduced to
50%. In addition, as an operating policy, each Fund will not enter into
when-issued or forward-commitment transactions that settle in more than 120
days.
MUNICIPAL LEASE OBLIGATIONS
Each Fund may invest a portion of its assets in municipal lease obligations.
These obligations, which may take the form of a lease, an installment purchase,
or a conditional sale contract, are issued by state and local governments and
authorities to acquire land and a wide variety of equipment and facilities.
Generally, the Funds will not hold such obligations directly as a lessor of the
property but will purchase a participation interest in a municipal lease
obligation from a bank or other third party.
Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.
Many leases and contracts include nonappropriation clauses, which provide that
the government issuer has no obligation to make future payments under the lease
or contract unless money is appropriated for such purposes by the appropriate
legislative body on a yearly or other periodic basis. Municipal lease
obligations also may be subject to abatement risk. For example, construction
delays or destruction of a facility as a result of an uninsurable disaster that
prevents occupancy could result in all or a portion of a lease payment not being
made.
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<PAGE>
INVERSE FLOATERS (VARIABLE-PRICE FUNDS)
An inverse floater bears an interest rate that moves inversely to market
interest rates. As market interest rates rise, the interest rate on an inverse
floater goes down, and vice versa. Generally this is accomplished by expressing
the interest rate on the inverse floater as an above-market fixed rate of
interest, reduced by an amount determined by reference to a market-based or
bond-specific floating interest rate (as well as by any fees associated with
administering the inverse floater program).
Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. Floaters and inverse floaters may be
brought to market by a broker-dealer who purchases fixed-rate bonds and places
them in a trust or by an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.
In the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following manner:
(i) Floater holders receive interest based on rates set at a Dutch Auction,
which is typically held every 28 to 35 days. Current and prospective
floater holders bid the minimum interest rate that they are willing to
accept on the floaters, and the interest rate is set just high enough to
ensure that all of the floaters are sold.
(ii) Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.
Procedures for determining the interest payment on floaters and inverse floaters
brought to market directly by the issuer are comparable, although the interest
paid on such inverse floaters is based on a presumed coupon rate that would have
been required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.
Where inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be held or sold. However, typically there are time
constraints and other limitations associated with any right to combine interests
and claim the underlying security.
Floater holders subject to a Dutch Auction procedure generally do not have the
right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures; during this time, interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds. The interest rates on inverse floaters may be significantly
reduced, even to zero, if interest rates rise.
6
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RESTRICTED SECURITIES
The Funds may buy securities that are subject to restrictions on resale. These
securities will be deemed illiquid unless (i) the board of trustees establishes
guidelines for determining the liquidity of restricted securities and (ii) the
securities (on a case by case basis) are determined to be liquid in accordance
with board-approved guidelines.
SHORT-TERM INVESTMENTS (VARIABLE-PRICE FUNDS)
Under certain circumstances, the Variable-Price Funds may invest in short-term
municipal or U.S. government securities, including money market instruments
(short-term securities). Except as otherwise required for temporary defensive
purposes, BMC does not expect these Funds' investments in short-term securities
to exceed 35% of total assets. If a Fund invests in U.S. government securities,
a portion of dividends paid to shareholders will be taxable at the federal
level, and may be taxable at the state level, as ordinary income. BMC intends to
minimize such investments, however, and may allow the Funds to hold cash to
avoid generating taxable dividends when suitable short-term municipal securities
are unavailable.
Pursuant to an exemptive order that BMC received from the Securities and
Exchange Commission, for liquidity purposes each Variable-Price Fund may invest
up to 5% of its assets in shares of a money market fund advised by BMC, provided
that the investment is consistent with the Fund's investment policies and
restrictions.
CONCENTRATION OF ASSETS IN OBLIGATIONS ISSUED TO FINANCE SIMILAR PROJECTS OR
FACILITIES
From time to time, a significant portion of a Fund's assets may be invested in
municipal obligations related to the extent that economic, business, or
political developments affecting one of these obligations could affect the other
obligations in a similar manner. For example, if a Fund invested a significant
portion of its assets in utility bonds and a state or federal government agency
or legislative body promulgated or enacted new environmental protection
requirements for utility providers, projects financed by utility bonds the Fund
holds could suffer as a class. Additional financing might be required to comply
with the new environmental requirements, and outstanding debt might be
downgraded in the interim. Among other factors that could negatively affect
bonds issued to finance similar types of projects are state and federal
legislation regarding financing for municipal projects, pending court decisions
relating to the validity of or the means of financing municipal projects,
material or manpower shortages, and declining demand for the project or facility
financed by the municipal bonds.
FUTURES AND OPTIONS (VARIABLE-PRICE FUNDS)
Each Variable-Price Fund may enter into futures contracts, options, or options
on futures contracts. Some futures and options strategies, such as selling
futures, buying puts, and writing calls, hedge a Fund's investments against
price fluctuations. Other strategies, such as buying futures, writing puts, and
buying calls, tend to increase market exposure.
The Funds do not use futures and options transactions for speculative purposes.
FUTURES CONTRACTS provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the
7
<PAGE>
Commodity Futures Trading Commission (CFTC), a U.S. government agency. The Funds
may engage in futures and options transactions based on securities or indexes
that are consistent with the Funds' investment objectives. Some currently
available futures contracts consistent with the Funds' investment policies and
techniques are based on securities indexes, such as the Bond Buyer Index of
Municipal Bonds. Others are based on specific securities, such as U.S. Treasury
bonds or notes.
Although futures contracts, by their terms, call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date. A futures position may be closed out by taking
an opposite position in an identical contract (i.e., buying a contract that has
previously been sold, or selling a contract that has previously been bought).
To initiate and maintain an open position in a futures contract, a Fund would be
required to make a good-faith margin deposit in cash or government securities
with a broker or custodian. A margin deposit is intended to assure completion of
the contract (delivery or acceptance of the underlying security) if it is not
terminated prior to the specified delivery date. Minimum initial margin
requirements are established by the futures exchanges and may be revised. In
addition, brokers may establish margin requirements that are higher than the
exchange minimums.
Once a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, the contract holder is
required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker for as long as the contract remains open and do not
constitute margin transactions for purposes of the Funds' investment
restrictions.
Although other techniques may be used to control a Fund's exposure to market
fluctuations, the use of futures contracts can be a more effective means of
hedging this exposure. While a Fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than
transaction costs incurred in the purchase and sale of the underlying
securities.
RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS. Futures and options prices
can be volatile, and trading in these markets involves certain risks. If BMC
applies a hedge at an inappropriate time or judges interest rate trends
incorrectly, futures and options strategies may lower a Fund's return. A Fund
could also suffer losses if the prices of its futures and options positions were
poorly correlated with its other investments, or if it were unable to close out
its position because of an illiquid secondary market.
Futures contracts may be closed out only on an exchange that provides a
secondary market for these contracts, and there is no assurance that a liquid
secondary market will exist for any particular futures contract at any
particular time. Consequently, it might not be possible to close a futures
position when BMC considers it appropriate or desirable to do so. In the event
of adverse price movements, a Fund would be required to continue making daily
cash payments to maintain its required margin. If the Fund had insufficient
cash, it might have to sell portfolio securities to meet daily margin
requirements at a time when BMC would not otherwise elect to do so. In addition,
a Fund may be required to deliver or take delivery of instruments underlying the
futures contracts it holds. BMC will seek to minimize these risks by limiting
the contracts it enters into on behalf of the Funds to those traded on national
futures exchanges and for which there appears to be a liquid secondary market.
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Securities underlying futures contracts purchased by the Funds may have
different maturities from those of the portfolio securities being hedged. Such
imperfect correlation may give rise to circumstances in which a Fund loses money
on a futures contract at the same time that it experiences a decline in the
value of its "hedged" portfolio securities. The Fund may also lose margin
payments it has deposited with a margin broker if, for example, the broker
becomes bankrupt.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. The daily limit governs only
price movements during a particular trading day and, therefore, does not limit
potential losses. In addition, the limit may prevent liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a fixed "strike" price. A Fund
can terminate its position in a put option by allowing it to expire or by
exercising the option. If the option is exercised, the Fund completes the sale
of the underlying security at the strike price. Purchasing an option on a
futures contract does not require a Fund to make margin payments unless the
option is exercised.
Although they do not currently intend to do so, the Funds may write (or sell)
call options that obligate them to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the Funds would give up some
ability to participate in a price increase on the underlying security. If a Fund
were to engage in options transactions, it would own the futures contract at the
time a call was written and would keep the contract open until the obligation to
deliver it pursuant to the call expired.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. Each Variable-Price
Fund may enter into futures contracts, options, or options on futures contracts,
provided that such obligations represent no more than 20% of the Fund's net
assets. Under the Commodity Exchange Act, a Fund may enter into futures and
options transactions for hedging purposes without regard to the percentage of
assets committed to initial margin and option premiums and for other than
hedging purposes provided that assets committed to initial margin and option
premiums do not exceed 5% of the Fund's net assets. To the extent required by
law, each Fund will set aside cash and appropriate liquid assets in a segregated
account to cover its obligations related to futures contracts and options.
The Funds intend to comply with tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Funds' investments in
such instruments.
INVESTMENT RESTRICTIONS
The Funds' investment restrictions are set forth below. Except for those
designated as operating policies, these restrictions are fundamental and may not
be changed without approval of "a majority of the outstanding voting securities"
of the Fund as defined in the Investment Company Act of 1940.
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THE MONEY MARKET FUND MAY NOT
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities) if, as a result, (a) more than
5% of the Fund's total assets would be invested in the securities of that
issuer, or (b) the Fund would own more than 10% of the outstanding voting
securities of that issuer.
(2) Borrow money in excess of 331/3% of the market value of its total assets,
and then only from a bank and as a temporary measure to satisfy redemption
requests for extraordinary or emergency purposes, and provided that
immediately after any such borrowing there is an asset coverage of at least
300 per centum for all such borrowings. To secure any such borrowing, the
Fund may not mortgage, pledge, or hypothecate in excess of 331/3% of the
value of its total assets. The Fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding.
(3) Act as an underwriter of securities issued by others, except to the extent
that the purchase of municipal securities, or other permitted investments,
directly from the issuer thereof or from an underwriter for an issuer and
the later disposition of such securities in accordance with the Fund's
investment policies and techniques may be deemed to be an underwriting.
(4) Purchase, sell, or invest in real estate, commodities, commodity contracts,
foreign exchange, or interests in oil, gas, or other mineral exploration or
development programs, provided that this limitation shall not prohibit the
purchase of municipal securities and other debt securities secured by real
estate or interests therein.
(5) Engage in any short-selling operations.
(6) Make loans to others, except in accordance with the Fund's investment
objective and policies.
(7) Purchase any equity securities in any companies, including warrants, or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.
(8) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads, except that it may purchase and hold securities with
rights to put securities to the seller or "standby commitments" in
accordance with its investment techniques.
(9) Invest in securities that are not readily marketable or the disposition of
which is restricted under federal securities laws (collectively, illiquid
securities) if, as a result, more than 10% of the Fund's net assets would
be invested in illiquid securities.
(10) Issue or sell any class of senior security as defined in the Investment
Company Act of 1940 except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or
delayed-delivery basis might be deemed such.
(11) Acquire or retain the securities of any other investment company, except in
connection with a merger, consolidation, acquisition, or reorganization.
(12) Purchase or retain securities of any issuer if, to the knowledge of the
Fund's management, those officers and trustees of the Trust and of its
investment advisor, who each own beneficially more
10
<PAGE>
than 0.5% of the outstanding securities of such issuer, together own
beneficially more than 5% of such securities. However, such restrictions
shall not apply to holdings of the issuers of industrial development bonds.
(13) Acquire securities for the purpose of exercising control over management of
the issuer.
(14) As a matter of operating policy, purchase any security if, as a result,
more than 5% of the value of the Fund's total assets would be invested in
the securities of issuers that at the time of purchase had been in
operation for less than three years, except obligations issued or
guaranteed by the U.S. government or its agencies, and municipal securities
(for this purpose, the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional guarantor of such
issuer); provided, however, that for the purpose of this limitation,
industrial development bonds issued by nongovernmental users shall not be
deemed municipal securities.
(15) Purchase any security if, as a result, 25% or more of the value of the
Fund's total assets would be invested in the securities of issuers having
their principal business activity in the same industry. However, this
limitation does not apply to securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities, or to municipal
securities of any type.
THE INTERMEDIATE-TERM FUND AND THE LONG-TERM FUND EACH MAY NOT
(1) With respect to 75% of its total assets, purchase the securities of any
issuer (other than securities issued or guaranteed by the U.S. government
or any of its agencies or instrumentalities) if, as a result, (a) more than
5% of the Fund's total assets would be invested in the securities of that
issuer, or (b) the Fund would own more than 10% of the outstanding voting
securities of that issuer.
(2) Borrow money in excess of 331/3% of the market value of its total assets,
and then only from a bank and as a temporary measure to satisfy redemption
requests for extraordinary or emergency purposes, and provided that
immediately after any such borrowing there is an asset coverage of at least
300 per centum for all such borrowings. To secure any such borrowing, the
Fund may not mortgage, pledge, or hypothecate in excess of 331/3% of the
value of its total assets. The Fund will not purchase any security while
borrowings representing more than 5% of its total assets are outstanding
(the deposit of assets in escrow in connection with the writing of covered
put and call options and collateral arrangements with respect to initial or
variation margin deposits for futures contracts will not be deemed a pledge
of the Fund's assets).
(3) Act as an underwriter of securities issued by others, except to the extent
that the purchase of municipal securities, or other permitted investments,
directly from the issuer thereof or from an underwriter for an issuer and
the later disposition of such securities in accordance with the Fund's
investment policies and techniques may be deemed to be an underwriting.
(4) Purchase, sell, or invest in real estate, commodities, commodity contracts,
foreign exchange, or interests in oil, gas, or other mineral exploration or
development programs, provided that this limitation shall not prohibit the
purchase of municipal securities and other debt securities secured by real
estate or interests therein, and shall not prohibit the Fund from
purchasing, selling, or entering into options on securities or indexes of
securities, futures contracts, options on futures contracts, or any other
interest rate hedging instrument, subject to the Fund's compliance with
applicable provisions of the federal securities or commodities laws.
11
<PAGE>
(5) Engage in any short-selling operations, except that the Fund may purchase,
sell, or enter into short positions in options on securities or indexes of
securities, futures contracts, options on futures contracts, and any other
interest rate hedging instrument as may be permitted under the federal
securities or commodities laws.
(6) Make loans to others, except in accordance with the Fund's investment
objective and policies;
(7) Purchase any equity securities in any companies, including warrants, or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.
(8) Engage in margin transactions, except that it may purchase, sell, or enter
into positions in options on securities or indexes of securities, futures
contracts, options on futures contracts, and other interest rate hedging
instruments, and may make margin deposits in connection therewith, and may
purchase and hold securities with rights to put securities to the seller
(standby commitments) in accordance with its investment techniques.
(9) Invest in securities that are not readily marketable or the disposition of
which is restricted under federal securities laws (collectively, illiquid
securities) if, as a result, more than 10% of the Fund's net assets would
be invested in illiquid securities.
(10) Issue or sell any class of senior security as defined in the Investment
Company Act of 1940 except to the extent that transactions in options,
futures, options on futures, other interest rate hedging instruments, notes
evidencing temporary borrowings, or the purchase of securities on a
when-issued or delayed-delivery basis might be deemed such.
(11) Acquire or retain the securities of any other investment company, except
that the Fund may, for temporary purposes, purchase shares of the Money
Market Fund, subject to such restrictions as may be imposed by (i) the
Investment Company Act of 1940 and rules thereunder or (ii) any state in
which shares of the Fund are registered, and may acquire shares of any
investment company in connection with a merger, consolidation, acquisition,
or reorganization.
(12) Purchase or retain securities of any issuer if, to the knowledge of the
Fund's management, those officers and trustees of the Trust and of its
investment advisor, who each own beneficially more than 0.5% of the
outstanding securities of such issuer, together own beneficially more than
5% of such securities. However, such restrictions shall not apply to
holdings of the issuers of industrial development bonds.
(13) Acquire securities for the purpose of exercising control over management of
the issuer.
(14) As a matter of operating policy, purchase any security if, as a result,
more than 5% of the value of the Fund's total assets would be invested in
the securities of issuers that at the time of purchase had been in
operation for less than three years, except obligations issued or
guaranteed by the U.S. government or its agencies, and municipal securities
(for this purpose, the period of operation of any issuer shall include the
period of operation of any predecessor or unconditional guarantor of such
issuer); provided, however, that for the purpose of this limitation,
industrial development bonds issued by nongovernmental users shall not be
deemed municipal securities.
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<PAGE>
(15) Purchase any security if, as a result, 25% or more of the value of the
Fund's total assets would be invested in the securities of issuers having
their principal business activity in the same industry. However, this
limitation does not apply to securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities, or to municipal
securities of any type.
Unless otherwise indicated, with the exception of the percentage limitation on
borrowing, percentage limitations included in the restrictions apply at the time
transactions are entered into. Accordingly, any later increase or decrease
beyond the specified limitation resulting from a change in the Fund's net assets
will not be considered in determining whether it has complied with its
investment restrictions.
For purposes of the Funds' investment restrictions, the party identified as the
"issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an IDB, if the bond is backed
only by the assets and revenues of a nongovernmental user, the nongovernmental
user would be deemed the sole issuer. If the creating government or some other
entity guarantees the security, the guarantee would be considered a separate
security and would be treated as an issue of the guaranteeing entity.
PORTFOLIO TRANSACTIONS
Each Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies, and restrictions, and with any instructions the
board of trustees may issue from time to time. Within this framework, BMC is
responsible for making all determinations as to the purchase and sale of
portfolio securities and for taking all steps necessary to implement securities
transactions on behalf of the Funds.
In placing orders for the purchase and sale of portfolio securities, BMC will
use its best possible price and execution and will otherwise place orders with
broker-dealers subject to and in accordance with any instructions from the board
of trustees that may be issued from time to time. BMC will select broker-dealers
to execute portfolio transactions on behalf of the Funds solely on the basis of
best price and execution.
Under normal conditions, the Intermediate-Term Fund's annual portfolio turnover
rate is not expected to exceed 100%, and the Long-Term Fund's annual portfolio
turnover rate is not expected to exceed 200%. Because a higher turnover rate
increases transaction costs and may increase taxable capital gains, BMC
carefully weighs the potential benefits of short-term investing against these
considerations.
The Variable-Price Funds' portfolio turnover rates for the fiscal years ended
May 31, 1995, 1994, and 1993, are indicated in the following table.
PORTFOLIO TURNOVER RATES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Intermediate-Term Fund 47.48% 46.11% 36.31%
Long-Term Fund 34.09 39.37 105.14
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VALUATION OF PORTFOLIO SECURITIES
Each Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1996: New Year's Day (observed), Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
Although BFS expects the same holiday schedule to be observed in the future, the
NYSE may modify its holiday schedule at any time. BMC typically completes its
trading on behalf of each Fund in various markets before the NYSE closes for the
day.
Each Fund's share price is calculated by adding the value of all portfolio
securities and other assets, deducting liabilities, and dividing the result by
the number of shares outstanding. Expenses and interest earned on portfolio
securities are accrued daily.
MONEY MARKET FUND. Securities held by the Money Market Fund are valued at
amortized cost. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase. While this method provides certainty in
valuation, it disregards the effect of fluctuating interest rates on an
instrument's market value. Consequently, the instrument's amortized cost value
may be higher or lower than its market value, and this discrepancy may be
reflected in the Fund's yield. During periods of declining interest rates, for
example, the daily yield on Fund shares computed as described above may be
higher than that of a fund with identical investments priced at market value.
The converse would apply in a period of rising interest rates.
The amortized cost valuation method is permitted in accordance with Rule 2a-7
under the Investment Company Act of 1940. Under the Rule, a fund holding itself
out as a money market fund must adhere to certain quality and maturity criteria.
In particular, such a fund must limit its investments to U.S. dollar-denominated
instruments that are determined by its directors or trustees to present minimal
credit risks and that are (a) high-grade obligations rated in accordance with
applicable rules in one of the two highest rating categories for short-term
obligations by at least two rating agencies (or by one if only one has rated an
obligation) or (b) unrated obligations judged by the advisor, under the
direction of the fund's directors or trustees, to be of comparable quality.
Further, pursuant to Rule 2a-7, a money market fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less and purchase
instruments with remaining maturities of 397 days or less. As an operating
policy, the Money Market Fund maintains a dollar-weighted average maturity of 60
days or less.
The trustees have established procedures designed to stabilize, to the extent
reasonably possible, the Money Market Fund's NAV at $1.00 per share. These
procedures require the Trust's chief financial officer to notify the trustees
immediately if, at any time, the Fund's weighted average maturity exceeds 60
days, or its NAV, as determined by using available market quotations, deviates
from its amortized cost per share by .25% or more. If such deviation exceeds
.40%, a meeting of the board of trustees' audit committee will be called to
consider what actions, if any, should be taken. If such deviation exceeds .50%,
the Trust's chief financial officer is instructed to adjust daily dividend
distributions immediately to the extent necessary to reduce the deviation to
.50% or lower and to call a meeting of the board of trustees to consider what
further action to take.
The board of trustees monitors the levels of illiquid securities, however if the
levels are exceeded, they will take action to rectify these levels.
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Actions the board may consider under these circumstances include: (i) selling
portfolio securities prior to maturity, (ii) withholding dividends or
distributions from capital, (iii) authorizing a one-time dividend adjustment,
(iv) discounting share purchases and initiating redemptions in kind, or (v)
valuing portfolio securities at market for purposes of calculating NAV.
VARIABLE-PRICE FUNDS. Securities held by the Variable-Price Funds normally are
priced by an independent pricing service, provided that such prices are believed
by BMC to reflect the fair market value of portfolio securities. There are
hundreds of thousands of municipal issues outstanding, and the majority of them
do not trade daily. Consequently, prices provided by pricing services are
generally determined without regard to bid or last sale prices. In valuing
securities, the pricing services take into account institutional trading
activity, trading in similar groups of securities, and any developments related
to specific securities. The methods used by the pricing service and the
valuations so established are reviewed by BMC under the general supervision of
the board of trustees. There are a number of pricing services available, and
BMC, on the basis of ongoing evaluation of these services, may use other pricing
services or discontinue the use of any pricing service in whole or in part.
Securities not priced by a pricing service are valued at the mean between the
most recently quoted bid and asked prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference between bid and asked prices, for certain municipal bonds
may differ substantially among broker-dealers.
Securities maturing within 60 days of the valuation date may be valued at cost,
plus or minus any amortized discount or premium, unless the trustees determine
that this would not result in fair valuation of a given security. Other assets
and securities for which quotations are not readily available are valued in good
faith at their fair value using methods approved by the board of trustees.
PERFORMANCE
The Funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature and is not
indicative of future results. The Funds share price, yield, and return will vary
with changing market conditions.
For the MONEY MARKET FUND, yield quotations are based on the change in the value
of a hypothetical investment (excluding realized gains and losses from the sale
of securities and unrealized appreciation and depreciation of securities) over a
seven-day period (base period) and stated as a percentage of the investment at
the start of the base period (base-period return). The base-period return is
then annualized by multiplying it by 365/7, with the resulting yield figure
carried to at least the nearest hundredth of one percent.
Calculations of effective yield begin with the same base-period return used to
calculate yield, but the return is then annualized to reflect weekly compounding
according to the following formula:
365/7
Effective Yield = [(Base-Period Return + 1) ] - 1
For the seven-day period ended May 31, 1995, the Money Market Fund's yield was
3.69%, and its effective yield was 3.75%.
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For the VARIABLE-PRICE FUNDS, yield quotations are based on the investment
income per share earned during a given 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing the
Fund's net investment income by its share price on the last day of the period,
according to the following formula:
6
YIELD = 2 [(a - b + 1) - 1]
-----
cd
where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of reimbursements), c = the average daily number of shares
outstanding during the period that were entitled to receive dividends, and d =
the maximum offering price per share on the last day of the period.
For the 30-day period ended May 31, 1995, the Intermediate-Term Fund's yield was
4.34%, and the Long-Term Fund's yield was 5.06%.
Total returns quoted in advertising reflect all aspects of a Fund's return,
including the effect of reinvesting dividends and capital gain distributions and
any change in the Fund's NAV during the period.
Average annual returns are calculated by determining the growth or decline in
value of a hypothetical historical investment in a Fund over a stated period and
then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative return of 100% over
ten years would produce an average annual total return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Funds' performance is
not constant over time but changes from year to year and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance. The Funds' average annual total returns for the one-year,
five-year, and life-of-fund periods ended May 31, 1995, are indicated in the
following table.
FUND ONE YEAR FIVE YEAR TEN YEAR
Money Market Fund 2.95% 3.11% 4.07%
Intermediate-Term Fund 6.40 7.43 7.60
Long-Term Fund 8.29 8.78 8.56
In addition to average annual total returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as a percentage or as a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return.
The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include
16
<PAGE>
comparisons with funds that, unlike Benham funds, are sold with a sales charge
or deferred sales charge. Economic data that may be considered in making such
comparisons may include, but are not limited to, U.S. Treasury bill, note, and
bond yields, money market fund yields, U.S. government debt and percentage held
by foreigners, the U.S. money supply, net free reserves, and yields on
current-coupon GNMAs (source: Board of Governors of the Federal Reserve System);
the federal funds and discount rates (source: Federal Reserve Bank of New York);
yield curves for U.S. Treasury securities and AA/AAA-rated corporate securities
(source: Bloomberg Financial Markets); yield curves for AAA-rated tax-free
municipal securities (source: Telerate); yield curves for foreign government
securities (sources: Bloomberg Financial Markets and Data Resources, Inc.);
total returns on foreign bonds (source: J.P. Morgan Securities Inc.); various
U.S. and foreign government reports; the junk bond market (source: Data
Resources, Inc.); the CRB Futures Index (source: Commodity Index Report); the
price of gold (sources: London a.m./p.m. fixing and New York Comex Spot Price);
rankings of any mutual fund or mutual fund category tracked by Lipper Analytical
Services, Inc. or Morningstar, Inc.; mutual fund rankings published in major
nationally distributed periodicals; data provided by the Investment Company
Institute; Ibbotson Associates, Stocks, Bonds, Bills, and Inflation; major
indexes of stock market performance; and indexes and historical data supplied by
major securities brokerage or investment advisory firms. The Fund may also
utilize reprints from newspapers and magazines furnished by third parties to
illustrate historical performance.
The Fund's shares are sold without a sales charge (load). No-load funds offer an
advantage to investors when compared to load funds with comparable investment
objectives and strategies. If an investor pays $10,000 to buy shares of a load
fund with an 8.5% sales charge, $850 of that $10,000 is paid as a commission to
a salesperson, leaving only $9,150 to put to work for the investor. Over time,
the difference between paying a sales load and not paying one can have a
significant effect on an investor's total return. The Mutual Fund Education
Alliance provides a comparison of $10,000 invested in each of two mutual funds,
one with an 8.5% sales load and one without a sales load. Assuming a compounded
annual growth rate of 10% for both investments, the no-load fund investment is
worth $25,937 after ten years, and the load fund investment is worth only
$23,732.
The Benham Group has distinguished itself as an innovative provider of low-cost,
true no-load mutual funds. Among other innovations, The Benham Group established
the first no-load fund investing primarily in zero-coupon U.S. Treasury
securities, the first no-load double tax-free California short-term bond fund,
the first no-load adjustable rate government securities fund, and the first
no-load utilities fund designed to pay monthly dividends.
TAXES
The Fund intends to qualify annually as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986 (the Code) as amended. By so
qualifying, the Fund will not incur federal income taxes on its net investment
income and on net realized capital gains to the extent distributed to
shareholders.
It is intended that each Fund's assets will be sufficiently invested in
municipal securities to pay "exempt-interest dividends" (as defined in the Code)
to shareholders. A Fund's dividends payable from net tax-exempt interest earned
from municipal securities will qualify as exempt-interest dividends if, at the
close of each quarter of its taxable year, at least 50% of the value of its
total assets consists of municipal securities. Exempt-interest dividends
distributed to shareholders are not included in shareholders' gross income for
purposes of the regular federal income tax. The
17
<PAGE>
percentage of income that is tax-exempt is applied uniformly to all
distributions made during each calendar year. This percentage may differ from
the actual percentage of tax-exempt income received during any particular month.
The Funds will determine periodically which distributions will be designated as
exempt-interest dividends. If a Fund earns income which is not eligible to be
designated as exempt-interest dividends, the Fund, nonetheless, intends to
distribute such income. Such distributions will be subject to federal, state,
and local taxes, as applicable, in the hands of shareholders.
Distributions of net investment income received by a Fund from investment in
debt securities other than municipal securities and any net realized short-term
capital gains distributed by the Fund will be taxable to shareholders as
ordinary income. Because the Funds' investment income is derived from interest
rather than dividends, no portion of such distributions is eligible for the
dividends-received deduction available to corporations.
The timing of your investment could have undesirable tax consequences. If you
open an account or buy shares for your account before the day a dividend or
distribution is declared, you may receive a portion of your investment back as
taxable income if that dividend or distribution is not an exempt-interest
dividend.
Under the Code, any distribution from a Fund's net realized long-term capital
gains is taxable to shareholders as a long-term capital gain, regardless of the
length of time shares have been held.
As of May 31, 1995, the Money Market Fund, Intermediate-Term Fund and Long-Term
Fund had a capital loss carryover of $242,901, $382,614, $330,926, respectively.
When a Fund has a capital loss carryover, it does not make capital gain
distributions to shareholders until the loss carryover has been offset or
expired. The Money Market Fund capital loss carryover and variable-price funds
carryover expire May 31, 1996, and May 31, 2003 respectively.
The Funds intend to comply with tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the investments in such
instruments.
Upon the sale or exchange of a Fund's shares, a shareholder generally will
realize a taxable gain or loss depending upon his/her basis in the shares. Such
gain or loss will be treated as a capital gain or loss if the shares are capital
assets in the shareholder's hands and will be long-term if the shareholder's
holding period for the shares is more than one year and, generally, will
otherwise be short-term.
Any loss realized from a disposition of Fund shares held for six months or less
will be disallowed to the extent that dividends from the Fund have been (i)
designated as exempt-interest dividends. Any loss realized on a sale or exchange
of Fund shares also will be disallowed to the extent that the shares disposed of
are replaced (including replacement through reinvesting of dividends and capital
gain distributions in the Fund) within a period of 61 days beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.
18
<PAGE>
Interest on certain types of industrial development bonds is subject to federal
income tax when received by "substantial users" or persons related to
substantial users as defined in the Code. The term "substantial user" includes
any "nonexempt person" who regularly uses in trade or business part of a
facility financed from the proceeds of industrial development bonds. The Funds
may invest periodically in industrial development bonds and, therefore, may not
be appropriate investments for entities that are substantial users of facilities
financed by industrial development bonds or "related persons" of substantial
users. Generally, an individual will not be a related person of a substantial
user under the Code unless he/she or his/her immediate family (spouse, brothers,
sisters, and lineal descendants) owns directly or indirectly in aggregate more
than 50% of the equity value of the substantial user.
Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. The Funds, the
investment manager, and the Funds' counsel do not review the proceedings
relating to the issuance of state or municipal securities on the basis of bond
counsel opinions.
From time to time, proposals have been introduced in Congress for the purpose of
restricting or eliminating the federal income tax exemption for interest on
municipal securities, and similar proposals may be introduced in the future. If
such a proposal were enacted, the availability of municipal securities for
investment by the Funds and the Funds' NAVs would be adversely affected. Under
these circumstances, the trustees would re-evaluate the Funds' investment
objectives and policies and would consider either changes in the structure of
the Trust or its dissolution.
The information above is only a summary of some of the tax considerations
affecting the Fund and its shareholders. No attempt has been made to discuss
individual tax consequences. To determine whether the Fund is a suitable
investment based on his or her situation, a prospective investor may wish to
consult a tax advisor.
ABOUT THE TRUST
Benham Municipal Trust is a registered open-end management investment company
that was organized as a Massachusetts business trust on May 1, 1984 (the Trust
was formerly known as "Benham National Tax-Free Trust"). Three of the Trust's
eight series are described in this Statement of Additional Information. The
board of trustees may create additional series from time to time.
The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest without par value, which may
be issued in series (funds). Shares issued are fully paid and nonassessable and
have no preemptive, conversion, or similar rights.
Each series votes separately on matters affecting that series exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all series') outstanding shares may elect a board of trustees.
The Trust has instituted dollar-based voting, meaning that the number of votes
you are entitled to is based upon the dollar value of your investment. The
election of trustees is determined by the votes received from all Trust
shareholders, without regard to whether a majority of shareholders of any one
series voted in favor of a particular nominee or all nominees as a group.
Shareholders have equal rights as to dividends and distributions declared by
their series and in the net assets of such series upon its liquidation or
dissolution.
19
<PAGE>
Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding, and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees, and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss as a result of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its obligations.
CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, is custodian of the Trust's assets. Services
provided by the custodian include (i) settling portfolio purchases and sales,
(ii) reporting failed trades, (iii) identifying and collecting portfolio income,
and (iv) providing safekeeping of securities. The custodian takes no part in
determining the Fund's investment policies or in determining which securities
are sold or purchased by the Fund.
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 3 Embarcadero Center, San
Francisco, California 94111, serve as the Fund's independent auditors. KPMG
audits the annual report and provides tax and other services.
TRUSTEES AND OFFICERS
The Trust's activities are overseen by a board of trustees, including five
independent trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act of 1940) by virtue of, among other considerations, their affiliation
with either the Trust; the Trust's investment advisor, Benham Management
Corporation (BMC); the Trust's agent for transfer and administrative services,
Benham Financial Services, Inc. (BFS); the Trust's distribution agent, Benham
Distributors, Inc. (BDI); the parent corporation, Twentieth Century Companies,
Inc. (TCC) or TCC's subsidiaries; or other funds advised by BMC. Each trustee
listed below serves as a trustee or director of other funds in The Benham Group.
Unless otherwise noted, dates in parentheses indicate the dates the trustee or
officer began his or her service in a particular capacity. The trustees' and
officers' address is 1665 Charleston Road, Mountain View, California 94043 and
4500 Main Street, Kansas City, Missouri 64111.
*JAMES M. BENHAM, chairman of the board of trustees (1985). Mr. Benham is also
chairman of the boards of BFS (1985), BMC (1971), and BDI (1988); president of
BMC (1971), and BDI (1988); and a member of the board of governors of the
Investment Company Institute (1988). Mr. Benham has been in the securities
business since 1963, and he frequently comments through the media on economic
conditions, investment strategies, and the securities markets.
RONALD J. GILSON, independent trustee (1995); Charles J. Meyers Professor of Law
and Business at Stanford Law School (1979) and the Mark and Eva Stern Professor
of Law and Business at Columbia University School of Law (1992); counsel to
Marron, Reid & Sheehy (a San Francisco law firm, 1984).
20
<PAGE>
MYRON S. SCHOLES, independent trustee (1985). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).
KENNETH E. SCOTT, independent trustee (1985). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Funds, Inc. (June 1994).
EZRA SOLOMON, independent trustee (1985). Mr. Solomon is Dean Witter Professor
of Finance Emeritus at the Stanford Graduate School of Business, where he served
as Dean Witter Professor of Finance from 1965 to 1990, and a director of
Encyclopedia Britannica.
ISAAC STEIN, independent trustee (1992). Mr. Stein is former chairman of the
board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the board of Raychem
Corporation (electrical equipment, 1993), president of Waverley Associates, Inc.
(private investment firm, 1983), and a director of ALZA Corporation
(pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and
chairman of Stanford Health Services (hospital, 1994).
*JAMES E. STOWERS III, trustee (1995); president and director, Twentieth Century
Investors, Inc.; president and director, TCI Portfolios, Inc., Twentieth Century
World Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth
Century Capital Portfolios, Inc., Twentieth Century Companies, Inc., Investors
Research Corporation and Twentieth Century Services, Inc.
JEANNE D. WOHLERS, independent trustee (1985). Ms. Wohlers is a private investor
and an independent director and partner of Windy Hill Productions, LP.
Previously, she served as vice president and chief financial officer of Sybase,
Inc. (software company, 1988 to 1992).
*BRUCE R. FITZPATRICK, vice president (1985).
*JOHN T. KATAOKA, president, and chief executive officer (1984).
*DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel
(1990).
*ANN N. McCOID, controller (1987).
*MARYANNE ROEPKE, chief financial officer (1995).
The table on the next page summarizes the compensation that the trustees of the
Funds received for the Fund's fiscal year ended May 31, 1995, as well as the
compensation received for serving as a director or trustee of all other Benham
funds.
21
<PAGE>
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED
May 31, 1995
- -------------------------------------------------------------------------------------------------------------------
Name of Aggregate Pension or Estimated Total
Trustee Compensation Retirement Benefits Annual Benefits Compensation
From Accrued As Part of Upon Retirement From Fund and
The Fund Fund Expenses Fund Complex*
Paid to Trustees
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Ronald J. Gilson+ $0 Not Applicable Not Applicable $0
- -------------------------------------------------------------------------------------------------------------------
Myron S. Scholes $478 (Money Market) Not Applicable Not Applicable $67,999
429 (Intermediate-Term)
406 (Long-Term)
- -------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $490 (Money Market) Not Applicable Not Applicable $76,500
444 (Intermediate-Term)
416 (Long-Term)
- -------------------------------------------------------------------------------------------------------------------
Ezra Solomon $547 (Money Market) Not Applicable Not Applicable $79,251
475 (Intermediate-Term)
440 (Long-Term)
- -------------------------------------------------------------------------------------------------------------------
Isaac Stein $510 (Money Market) Not Applicable Not Applicable $72,001
457 (Intermediate-Term)
425 (Long-Term)
- -------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $517 (Money Market) Not Applicable Not Applicable $75,500
462 (Intermediate-Term)
431 (Long-Term)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Elected on May 31, 1995, and received no compensation for fiscal year.
* The Benham Group fund complex currently consists of 41 investment companies.
As of August 31, 1995, the Trust's officers and trustees, as a group, owned less
than 1% of each Fund's total shares outstanding.
INVESTMENT ADVISORY SERVICES
Each Fund has an investment advisory agreement with Benham Management
Corporation (BMC) dated June 1, 1995, that was approved by shareholders on May
31, 1995.
BMC is a California corporation and a wholly owned subsidiary of Twentieth
Century Companies (TCC), a Delaware corporation. BMC, as well as BFS and BDI,
became wholly owned subsidiaries of TCC on June 1, 1995, upon the merger of
Benham Management International (BMI), the former parent of BMC, BFS and BDI,
into TCC. BMC has served as investment advisor to the Fund since the Fund's
inception. TCC is a holding company that owns all of the stock of the operating
companies that provide the investment management, transfer agency, shareholder
service, and other services for the Twentieth Century funds. James E. Stowers,
Jr., controls TCC by virtue of his ownership of a majority of its common stock.
BMC has been a registered investment advisor since 1971 and is investment
advisor to other funds in The Benham Group.
Each Fund's agreement with BMC continues for an initial period of two years and
thereafter from year to year provided that, after the initial two year period,
it is approved at least annually by vote of a majority of the Fund's
shareholders or by vote of a majority of the Trust's trustees, including a
22
<PAGE>
majority of those trustees who are neither parties to the agreement nor
interested persons of any such party, cast in person at a meeting called for the
purpose of voting on such approval.
Each Fund's agreement is terminable on sixty days' written notice, either by the
Fund or by BMC, to the other party, and terminates automatically in the event of
its assignment.
Pursuant to the investment advisory agreement, BMC provides the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objectives, policies, and restrictions. BMC determines what
securities will be purchased and sold by the Fund and assist the Trust's
officers in carrying out decisions made by the board of trustees.
For these services, each Fund pays BMC a monthly investment advisory fee based
on a percentage of the Trust's average daily net assets to the following
investment advisory fee schedule:
.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next $1 billion
.24% of the next $1 billion
.23% of the next $1 billion
.22% of the next $1 billion
.21% of the next $1 billion
.20% of the next $1 billion
.19% of net assets over $6.5 billion
Investment advisory fees paid by each Fund to BMC for the fiscal periods ended
May 31, 1995, 1994, and 1993, are indicated in the following table. Fee amounts
are net of reimbursements as described below.
INVESTMENT ADVISORY FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Money Market Fund $367,683 $397,311 $421,480
Intermediate-Term Fund 234,926 275,656 211,351
Long-Term Fund 165,409 218,160 87,939
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
BFS, a wholly owned subsidiary of TCC, is the Trust's agent for transfer and
administrative services. For administrative services, each Fund pays BFS a
monthly fee based on its pro rata share of the dollar amount derived from
applying the average daily net assets of all of the funds in The Benham Group to
the following administrative fee rate schedule:
23
<PAGE>
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08
For transfer agent services, each Fund pays BFS a monthly fee of $1.3958 for
each shareholder account maintained and $1.35 for each shareholder transaction
executed during the month.
Administrative service and transfer agent fees paid by each Fund to BFS for the
fiscal years ended May 31, 1995, 1994, and 1993, are indicated in the following
tables. Fee amounts are net of reimbursements as described below.
ADMINISTRATIVE FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Money Market Fund $103,791 $104,485 $97,474
Intermediate-Term Fund 65,398 73,292 48,987
Long-Term Fund 49,352 59,711 42,804
TRANSFER AGENT FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Money Market Fund $65,409 $79,424 $77,044
Intermediate-Term Fund 51,377 54,899 41,952
Long-Term Fund 43,687 46,314 33,746
DIRECT FUND EXPENSES
Each Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent trustees; custodian, audit,
and pricing fees; fees of outside counsel and counsel employed directly by the
Trust; costs of printing and mailing prospectuses, statements of additional
information, proxy statements, notices, confirmations, and reports to
shareholders; fees for registering the Fund's shares under federal and state
securities laws; brokerage fees and commissions; trade association dues; costs
of fidelity and liability insurance policies covering the Fund; costs for
incoming WATS lines maintained to receive and handle shareholder inquiries; and
organizational costs.
EXPENSE LIMITATION AGREEMENTS
BMC may recover amounts absorbed on behalf of the Fund during the preceding 11
months if, and to the extent that, for any given month, the Fund's expenses were
less than the expense limit in effect at that time. BMC has agreed to limit each
Fund's expenses to a specified percentage of average daily net assets for a
limited amount of time as listed on the next page.
24
<PAGE>
FUND EXPENSE LIMIT
Money Market Fund .64%
Intermediate-Term Fund .69%
Long-Term Fund .69%
The Funds' contractual expense limit is subject to annual renewal. The expense
limit for each Fund for the year ended May 31, 1995 was .66% of average daily
net assets.
Net expense limitations/recoupments for the fiscal years ended May 31, 1995,
1994, and 1993, are indicated in the table below.
NET EXPENSE LIMITATIONS/RECOUPMENTS BY BMC AND BFS
FISCAL FISCAL FISCAL
FUND 1995 1994 1993
Money Market Fund $88,328 $93,387 $94,249
Intermediate-Term Fund 69,263 68,582 47,258
Long-Term Fund 64,101 62,290 38,268
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.
The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a series' tax status; or whenever, in management's
opinion, such rejection is in the Trust's or a series' best interest.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
FUND SHAREHOLDER # OF SHARES HELD % OF TOTAL
NAME AND ADDRESS SHARES OUTSTANDING
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Charles Schwab & Co. 494,824.489 8.430
Fund 101 Montgomery Street
San Francisco, CA 94104
- -------------------------------------------------------------------------------------------------
Long-Term Fund Charles Schwab & Co. 254,328.149 6.231
101 Montgomery Street
San Francisco, CA 94104
- -------------------------------------------------------------------------------------------------
</TABLE>
As of August 31, 1995, to the knowledge of the Trust, no shareholder was the
record holder or beneficial owner of 5% or more of the Money Market Fund's total
shares outstanding. In addition, as of August 31, 1995, no other shareholder was
the record holder or beneficial owner of 5% or more of a Fund's total
outstanding shares.
25
<PAGE>
The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income.
Pursuant to Rule 18f-1 under the Investment Company Act of 1940, the Trust has
elected to pay in cash all requests for redemption by any shareholder of record,
limited in amount with respect to each shareholder during any 90-day period to
the lesser of $250,000 or 1% of the net assets of the Fund in which shares are
held at the beginning of such period. This election is irrevocable without the
prior approval of the Securities and Exchange Commission. With respect to
redemption requests in excess of the above limit, it is the intention of the
Trust to make payments in cash, although the trustees reserve the right to make
payments in whole or in part in securities under emergency circumstances or when
payment in cash would impair the liquidity of a Fund to the detriment of
shareholders. In this event, the securities would be valued in the same manner
applied in valuing the Funds' assets for purposes of calculating NAV. An
investor may incur brokerage costs upon the sale of such securities.
Share purchases and redemptions are governed by California law.
OTHER INFORMATION
The Funds' investment advisor, Benham Management Corporation (BMC), has been
continuously registered with the Securities and Exchange Commission (SEC) under
the Investment Advisers Act of 1940 since December 14, 1971. The Trust has filed
a registration statement under the Securities Act of 1933 and the Investment
Company Act of 1940 with respect to the shares offered. Such registrations do
not imply approval or supervision of the Trust or the advisor by the Securities
Exchange Commission.
For further information, refer to registration statements and exhibits on file
with the SEC in Washington, D.C. These documents are available upon payment of a
reproduction fee. Statements in the Prospectus and in this Statement of
Additional Information concerning the contents of contracts or other documents,
copies of which are filed as exhibits to the registration statement, are
qualified by reference to such contracts or documents.
MUNICIPAL SECURITIES RATINGS
Securities rating descriptions provided under this heading are excerpted from
publications of Moody's Investors Service, Inc. and Standard & Poor's
Corporation available as of July 31, 1993.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
26
<PAGE>
Aa: Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group, they comprise what are generally known as
high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or there may be other elements
present that make long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and are
considered to be upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered medium-grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times in the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be limited.
Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default, or there may be elements of danger present with respect to principal or
interest.
Ca: Bonds that are rated Ca represent obligations that are speculative to a high
degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
NOTE: Moody's may apply the numerical modifier "1" for municipally backed bonds
and modifiers "1," "2," and "3" for corporate-backed municipal bonds. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND
VARIABLE-RATE DEMAND OBLIGATIONS:
Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or MIG. Such ratings recognize the differences between
short-term credit and long-term risk. Short-term ratings on issues with demand
features (variable-rate demand obligations) are differentiated by the use of the
VMIG symbol to reflect such characteristics as payment upon periodic demand
rather than on fixed maturity dates and payments relying on external liquidity.
27
<PAGE>
MIG 1/VMIG 1: This designation denotes best quality. There is strong protection
present through established cash flows, superior liquidity support, or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample,
although not as large as in the preceding group.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TAX-EXEMPT COMMERCIAL PAPER
RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers to
punctually repay those promissory obligations that have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Funds may invest:
PRIME - 1: Issuers rated Prime - 1 (or supporting institutions) have a superior
ability for repayment of senior short-term promissory obligations.
PRIME - 2: Issuers rated Prime - 2 (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR MUNICIPAL BONDS:
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in a small degree.
A: Debt rated "A" has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
SPECULATIVE
BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
28
<PAGE>
C: The "C" rating is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The "CI" rating is reserved for income bonds on which no interest is being
paid.
D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR INVESTMENT GRADE
MUNICIPAL NOTES AND SHORT-TERM DEMAND OBLIGATIONS:
SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR DEMAND OBLIGATIONS
AND TAX-EXEMPT COMMERCIAL PAPER:
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two rating categories for securities in which the Funds may invest
are as follows:
A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics will be denoted with a plus (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
