SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 _X__
File No. 2-91229
Pre-Effective Amendment No._____ ____
Post-Effective Amendment No._17_ _X__
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 _X__
File No. 811-4025
Amendment No._18_
BENHAM MUNICIPAL TRUST
formerly Benham National Tax-Free Trust
(Exact Name of Registrant as Specified in Charter)
1665 Charleston Road, Mountain View, CA 94043
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: 415-965-8300
Douglas A. Paul
1665 Charleston Road, Mountain View, CA 94043
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering: First Offered 8/1/84
It is proposed that this filing become effective:
_____ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) pursuant to paragraph (b) of Rule 485
__X__ 60 days after filing pursuant to paragraph (a) of Rule 485
_____ on (date) pursuant to paragraph (a) of Rule 485
_____ 75 days after filing pursuant to paragraph (a)(2) of Rule 485
- --------------------------------------------------------------------------------
Registrant has elected to register an indefinite number of shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. On July 11 1995, the Registrant filed a Rule
24f-2 Notice on Form 24f-2 with respect to its fiscal year ended May 31, 1995.
<PAGE>
FORM N-1A
CROSS-REFERENCE SHEET
BENHAM MUNICIPAL TRUST
BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND
BENHAM FLORIDA MUNICIPAL MONEY MARKET FUND
BENHAM FLORIDA MUNICIPAL INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
1933 Act Post-Effective Amendment No. 17
1940 Act Amendment No. 18
PART A: PROSPECTUS
ITEM PROSPECTUS CAPTION
1 Cover Page
2 Transaction and Operating Expenses Table
3 Financial Highlights, Performance Advertising
4 Cover Page, Information About the Investment Policies of the Funds, Further
Information About the Funds, Investment Objectives of the Funds, Other
Investment Practices, Risk Factors and Investment Techniques
5 Management, Further Information About the Funds
5A Not Applicable
6 Management, Further Information About the Funds How to Open an Account,
Distributions, Taxes
7 How to Open an Account, Distribution of Fund Shares, Share Price, Transfer
and Administrative Services
8 How to Redeem Shares
9 Not Applicable
<PAGE>
CROSS-REFERENCE SHEET
BENHAM MUNICIPAL TRUST
BENHAM FLORIDA MUNICIPAL MONEY MARKET FUND
BENHAM FLORIDA MUNICIPAL INTERMEDIATE-TERM FUND
PART B: STATEMENT OF ADDITIONAL INFORMATION
ITEM STATEMENT OF ADDITIONAL INFORMATION CAPTION
10 Cover Page
11 Table of Contents
12 About the Trust
13 (a) Investment Policies and Techniques
(b) Investment Restrictions
(c) Investment Policies and Techniques, Investment Restrictions
(d) Portfolio Transactions
14 Trustees and Officers
15 (a) Not Applicable
(b) Additional Purchase and Redemption Information
(c) Trustees and Officers
16 (a),(b) Investment Advisory Services
(c),(d) Administrative and Transfer Agent Services, Expense Limitation
Agreement
(e)-(g) Not Applicable
(h) About the Trust
(i) Administrative and Transfer Agent Services
17 Portfolio Transactions
18 (a) About the Trust
(b) Not Applicable
19 (a) Additional Purchase and Redemption Information
(b) Valuation of Portfolio Securities
(c) Additional Purchase and Redemption Information
20 Taxes
21 Additional Purchase and Redemption Information
22 Performance
23 Cover Page
<PAGE>
CROSS-REFERENCE SHEET
BENHAM MUNICIPAL TRUST
BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND
PART B: STATEMENT OF ADDITIONAL INFORMATION
ITEM STATEMENT OF ADDITIONAL INFORMATION CAPTION
10 Cover Page
11 Table of Contents
12 About the Trust
13 (a) Investment Policies and Techniques
(b) Investment Restrictions
(c) Investment Policies and Techniques, Investment Restrictions
(d) Portfolio Transactions
14 Trustees and Officers
15 (a) Not Applicable
(b) Additional Purchase and Redemption Information
(c) Trustees and Officers
16 (a),(b) Investment Advisory Services
(c),(d) Administrative and Transfer Agent Services, Expense Limitation
Agreement
(e)-(g) Not Applicable
(h) About the Trust
(i) Administrative and Transfer Agent Services
17 Portfolio Transactions
18 (a) About the Trust
(b) Not Applicable
19 (a) Additional Purchase and Redemption Information
(b) Valuation of Portfolio Securities
(c) Additional Purchase and Redemption Information
20 Taxes
21 Additional Purchase and Redemption Information
22 Performance
23 Cover Page
<PAGE>
CROSS-REFERENCE SHEET
BENHAM MUNICIPAL TRUST
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
PART B: STATEMENT OF ADDITIONAL INFORMATION
ITEM STATEMENT OF ADDITIONAL INFORMATION CAPTION
10 Cover Page
11 Table of Contents
12 Not Applicable
13 (a) Investment Policies and Techniques
(b) Investment Restrictions
(c) Investment Policies and Techniques, Investment Restrictions
(d) Portfolio Transactions
14 Trustees and Officers
15 (a) Not Applicable
(b) Additional Purchase and Redemption Information
(c) Trustees and Officers
16 (a),(b) Investment Advisory Services
(c),(d) Administrative and Transfer Agent Services, Expense Limitation
Agreement
(e)-(g) Not Applicable
(h) About the Trust
(i) Administrative and Transfer Agent Services
17 Portfolio Transactions
18 (a) About the Trust
(b) Not Applicable
19 (a) Additional Purchase and Redemption Information
(b) Valuation of Portfolio Securities
(c) Additional Purchase and Redemption Information
20 Taxes
21 Additional Purchase and Redemption Information
22 Performance
23 Cover Page
<PAGE>
BENHAM MUNICIPAL TRUST
Benham Arizona Municipal Intermediate-Term Fund
Benham Florida Municipal Money Market Fund
Benham Florida Municipal Intermediate-Term Fund
Benham National Tax-Free Money Market Fund
Benham National Tax-Free Intermediate-Term Fund
Benham National Tax-Free Long-Term Fund
PROSPECTUS
SEPTEMBER 3,
1996
- --------------------------------------------------------------------------------
The Funds listed above (the "Funds") are series of the Benham Municipal Trust, a
member of the Twentieth Century family of funds, a family that includes 68
no-load mutual funds covering a variety of investment opportunities. Six of the
funds are described in this prospectus. Their investment objectives are listed
on the inside cover of this Prospectus. The other funds are described in
separate prospectuses.
NO-LOAD MUTUAL FUNDS
Twentieth Century offers investors a full line of "no-load" funds.
Investments that have no sales charges or commissions. The Funds offered by this
prospectus have no 12b-1 plan or other deferred sales charges. The minimum
investment requirement for each of the Funds is listed on the inside cover of
this prospectus.
Investments in the Funds are not insured or guaranteed by the U.S.
government or any other agency. There is no assurance that the Money Market
Funds will be able to maintain a $1.00 share price.
This prospectus gives you information about the Funds that you should know
before investing. You should read this prospectus carefully and retain it for
future reference. Additional information is included in the Statement of
Additional Information dated September 3, 1996 and filed with the Securities and
Exchange Commission ("SEC"). It is incorporated in this prospectus by reference.
To obtain a copy without charge, call or write:
Twentieth Century Mutual Funds
4500 Main Street, P.O. Box 419200
Kansas City, MO 64141-6200
1-800-345-2021
Local and international calls:
816-531-5575
Telecommunications device for the deaf:
1-800-634-4113
In Missouri: 816-753-1865
On the Internet:
http://www.twentieth-century.com
- --------------------------------------------------------------------------------
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.
<PAGE>
INVESTMENT OBJECTIVES OF THE FUNDS
- --------------------------------------------------------------------------------
BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND
seeks to obtain as high a level of current income exempt from Arizona and
regular federal income tax as is consistent with prudent investment management
and conservation of shareholders' capital.
MINIMUM INITIAL INVESTMENT: $5,000.
BENHAM FLORIDA MUNICIPAL MONEY MARKET FUND
is a money market fund which seeks to obtain as high a level of current income
exempt from regular federal income tax as is consistent with prudent investment
management and conservation of shareholders' capital.
The Fund intends to invest so as to qualify its shares for an exemption from the
Florida intangible personal property tax (the "Florida Intangibles Tax").
AN INVESTMENT IN THIS FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE PER SHARE.
MINIMUM INITIAL INVESTMENT: $2,500.
BENHAM FLORIDA MUNICIPAL INTERMEDIATE-TERM FUND
seeks to obtain as high a level of current income exempt from regular federal
income tax as is consistent with prudent investment management and conservation
of shareholders' capital.
The Fund intends to invest so as to qualify its shares for an exemption from the
Florida Intangibles Tax.
MINIMUM INITIAL INVESTMENT: $5,000.
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
is a money market fund which seeks as high a level of interest income exempt
from federal income taxes as is consistent with prudent investment management,
while seeking to conserve shareholders' capital.
AN INVESTMENT IN THIS FUND IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN
A STABLE NET ASSET VALUE PER SHARE.
MINIMUM INITIAL INVESTMENT: $2,500.
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
seek as high a level of interest income exempt from federal income taxes as is
consistent with prudent investment management, while seeking to conserve
shareholders' capital.
MINIMUM INITIAL INVESTMENT: $5,000.
For ease of reference, the Funds sometimes will be referred to in this
prospectus by their investment category or fund type. The Benham National
Tax-Free Money Market, Benham National Tax-Free Intermediate-Term and Benham
National Tax-Free Long-Term Funds are called the "National Funds". The Benham
Florida Municipal Money Market and Benham Florida Municipal Intermediate-Term
Funds are called the "Florida Funds".
Finally, the Benham National Tax-Free Money Market and the Benham Florida
Municipal Money Market Funds are called the "Money Market Funds". The remaining
non-money market Funds are referred to as the "Variable Price Funds."
There is no assurance that the Funds will achieve their respective investment
objectives.
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED BY THE FUNDS TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN OTHER PRINTED
OR WRITTEN MATERIAL ISSUED BY OR FOR THE FUNDS, AND YOU SHOULD NOT RELY ON ANY
OTHER INFORMATION OR REPRESENTATION.
2
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
TRANSACTION AND OPERATING EXPENSE TABLE...................
FINANCIAL HIGHLIGHTS......................................
INFORMATION REGARDING THE FUNDS
INFORMATION ABOUT INVESTMENT POLICIES OF THE FUNDS........
Benham Arizona Municipal Intermediate-Term Fund......
Benham Florida Municipal Money Market Fund and
Benham Florida Municipal Intermediate-Term Fund
Benham National Tax-Free Money Market Fund, Benham
National Tax-Free Intermediate-Term Fund and
Benham National Tax-Free Long-Term Fund............
Portfolio Investment Quality and Maturity Guidelines.
RISK FACTORS AND INVESTMENT TECHNIQUES....................
Basic Fixed Income Investment Risks
Municipal Securities.................................
TAX-EXEMPT SECURITIES.....................................
OTHER INVESTMENT PRACTICES................................
Portfolio Turnover...................................
When-Issued and Forward Commitment Agreements........
Futures and Options Contracts........................
Restricted and Illiquid Securities...................
Cash Management......................................
PERFORMANCE ADVERTISING...................................
HOW TO INVEST WITH TWENTIETH CENTURY MUTUAL FUNDS
AND THE BENHAM GROUP
HOW TO OPEN AN ACCOUNT....................................
By Mail..............................................
By Wire..............................................
By Exchange..........................................
In Person............................................
SUBSEQUENT INVESTMENTS....................................
By Mail..............................................
By Telephone.........................................
By Wire..............................................
In Person............................................
AUTOMATIC INVESTMENT PLAN.................................
HOW TO EXCHANGE FROM ONE ACCOUNT TO ANOTHER...............
By Mail..............................................
By Telephone.........................................
HOW TO REDEEM SHARES......................................
By Telephone.........................................
By Mail..............................................
By Check-A-Month.....................................
Other Automatic Redemptions..........................
REDEMPTION PROCEEDS.......................................
By Check.............................................
By Wire and ACH......................................
AUTOMATIC REDEMPTION OF SHARES............................
SIGNATURE GUARANTEE.......................................
SPECIAL SHAREHOLDER SERVICES..............................
Automated Information Line...........................
CheckWriting.........................................
Open Order Service...................................
Tax-Qualified Retirement Plans.......................
IMPORTANT POLICIES REGARDING YOUR INVESTMENTS.............
REPORTS TO SHAREHOLDERS...................................
EMPLOYER-SPONSORED RETIREMENT PLANS AND
INSTITUTIONAL ACCOUNTS
ADDITIONAL INFORMATION YOU SHOULD KNOW
SHARE PRICE...............................................
When Share Price is Determined.......................
How Share Price is Determined........................
Where to Find Information About Share Price..........
DISTRIBUTIONS.............................................
TAXES.....................................................
Tax-Deferred Accounts................................
Taxable Accounts.....................................
Special Tax Information..............................
MANAGEMENT................................................
Investment Management................................
Code of Ethics.......................................
Transfer and Administrative Services.................
Distribution Services................................
FURTHER INFORMATION ABOUT THE FUNDS.......................
3
<TABLE>
<CAPTION>
TRANSACTION AND OPERATING EXPENSE TABLE
- ------------------------------------------------------------------------------------------------------------------------------------
National Tax-
AZ Muni FL Muni FL Muni Inter- National Tax- Free Inter- National Tax-
Intermediate- Money Market mediate-Term Free Money mediate-Term Free Long-
Term Fund Fund Fund Market Fund Fund Term Fund
SHAREHOLDER TRANSACTION EXPENSES
<S> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases none none none none none none
Maximum Sales Load Imposed on
Reinvested Dividends none none none none none none
Deferred Sales Load none none none none none none
Redemption Fee none none none none none none
Exchange Fee none none none none none none
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of net assets)
Management Fees .14% .23% .06% .35% .39% .36%
12b-1 Fees none none none none none none
Other Expenses .55% .42% .63% .29% .30% .33%
Total Fund Operating Expenses .69% .65% .69% .64% .69% .69%
Example
You would pay the following
expenses on a $1,000 invest- 1 year $ 7 $ 7 $ 7 $ 7 $ 7 $ 7
ment, assuming (1) a 5% annu- 3 years 22 21 22 20 22 22
al return and (2) redemption at 5 years 38 36 38 36 38 38
the end of each time period: 10 years 86 81 86 80 86 86
- ------------------------------------------------------------------------------------------------------------------------------------
* Benham Management Corporation ("BMC" or the "Manager") has agreed to limit each Fund's total operating expenses to
specified percentages of each Fund's average daily net assets. The agreement 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 current expense limits for the Funds are as
follows: Arizona Fund, .46%; Florida Money Market Fund, __%; Florida Intermediate-Term Fund, __%; National Tax-Free
Money Market Fund, __%; National Tax-Free Intermediate-Term Fund, __%; and National Tax-Free Long-Term Fund, __%. These
expense limitations are subject to annual renewal in June. If the expense limitations were not in effect, each Fund's
Management Fee, Other Expenses and Total Fund Operating Expenses would be as follows, respectively: Arizona Fund, .46%,
.29% and .75%; Florida Money Market Fund, __%, __% and __%; Florida Intermediate-Term Fund, __%, __% and __%; National
Tax-Free Money Market Fund, __%, __% and __%; National Tax-Free Intermediate-Term Fund, __%, __% and __%; and National
Tax-Free Long-Term Fund, __%, __% and __%.
</TABLE>
Each Fund pays BMC management fees equal to an annualized percentage of
Fund average daily net assets. Other expenses include administrative and
transfer agent fees paid to Twentieth Century Services, Inc.
The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the shares of the Funds. The example set forth
above assumes reinvestment of all dividends and distributions and uses a 5%
annual rate of return as required by SEC regulations.
NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
4
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
- --------------------------------------------------------------------------------
The Financial Highlights for each of the periods presented (except as noted)
have been audited by KPMG Peat Marwick LLP, independent auditors. Their report
on these Financial Highlights appears in each Fund's annual report to
shareholders which is incorporated by reference into the Statement of Additional
Information. The annual report contains additional performance information and
will be made available upon request and without charge.
BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND
Years Ended May 31 (except as noted)
<TABLE>
<CAPTION>
May 31, May 31, May 31,
1996 1995 1994+
---------- --------- ---------
PER-SHARE DATA
- --------------
<S> <C> <C> <C>
NET ASSET VALUE AT BEGINNING OF PERIOD.......................................... 10.13 10.00
Income from Investment Operations
Net Investment Income......................................................... .5149 .0684
Net Realized and Unrealized Gains
on Investments................................... .2200 .1300
--------- ---------
Total Income From Investment Operations...................................... .7349 .1984
--------- --------- --------
Less Distributions
Dividends from Net Investment Income.......................................... (.5149) (.0684)
Distributions from Net Realized Capital Gains................................. 0 0
--------- --------- --------
Total Distributions.......................................................... (.5149) (.0684)
--------- --------- --------
NET ASSET VALUE AT END OF PERIOD................................................ 10.35 10.13
======= ===== =====
TOTAL RETURN*................................................................... 7.52% 1.99%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands of dollars)........................... 19,778 7,187
Ratio of Expenses to Average Daily Net Assets................................... 0% 0%
Ratio of Expenses to Average Daily Net Assets (Before Reimbursement)++.......... 1.01% 2.33%**
Ratio of Net Investment Income to Average Daily Net Assets++.................... 5.16% 5.08%**
Ratio of Net Investment Income to Average Net Daily Assets
(Before Reimbursement)++...................................................... 4.15% 2.75%**
Portfolio Turnover Rate......................................................... 33.22% 18.14%
</TABLE>
- -------------------
+ From April 11, 1994 (commencement of operations), through May 31, 1994.
++ The ratios for the period ended __________, 1996, include expenses paid
through expense offset arrangements. * Total return figures assume
reinvestment of dividend and capital gain distributions and are not
annualized.
** Annualized.
5
<TABLE>
<CAPTION>
BENHAM FLORIDA MONEY MARKET FUND
Years ended May 31 (except as indicated)
1996 1995 1994+
------- ------- -------
PER-SHARE DATA
- --------------
<S> <C> <C> <C>
Net Asset Value at Beginning of Period.......................................... $ 1.00 1.00
Income from Investment Operations
Net Investment Income......................................................... .0371 .0040
Net Realized and Unrealized Gains on Investments.............................. 0 0
-------- -------- --------
Total Income From Investment Operations...................................... .0371 .0040
-------- -------- --------
Less Distributions
Dividends from Net Investment Income.......................................... (.0371) (.0040)
Distributions from Net Realized Capital Gains................................. 0 0
-------- -------- --------
Total Distributions.......................................................... (.0371) (.0040)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD................................................ $ 1.00 1.00
===== ===== =====
TOTAL RETURN*................................................................... % 3.71% .40%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands of dollars)........................... $ 45,147 5,565
Ratio of Expenses to Average Daily Net Assets................................... % 0% 0%
Ratio of Expenses to Average Daily Net Assets
(Before Reimbursement)++....................................................... % .88% 1.58%**
Ratio of Net Income to Average Daily Net Assets++............................... % 3.93% 2.99%**
Ratio of Net Income to Average Daily Net Assets
(Before Reimbursement)++....................................................... % 3.05% 1.41%**
- -------------------
+ From April 11, 1994 (commencement of operations), through May 31, 1994.
++ The ratios for the year ended May 31, 1996, include expenses paid through
expense offset arrangements. * Total return figures assume reinvestment of
dividend distributions and are not annualized.
** Annualized.
BENHAM FLORIDA INTERMEDIATE-TERM FUND
Years ended May 31 (except as indicated)
1996 1995 1994+
------- ------- -------
PER-SHARE DATA
- --------------
Net Asset Value at Beginning of Period.......................................... 10.11 10.00
Income from Investment Operations
Net Investment Income......................................................... .5203 .0684
Net Realized and Unrealized Gains on Investments.............................. .1900 .1100
-------- -------- --------
Total Income From Investment Operations...................................... .7103 .1784
-------- -------- --------
Less Distributions
Dividends from Net Investment Income.......................................... (.5203) (.0684)
Distributions from Net Realized Capital Gains................................. 0 0
-------- -------- --------
Total Distributions.......................................................... (.5203) (.0684)
-------- -------- --------
NET ASSET VALUE AT END OF PERIOD................................................ 10.30 10.11
======= ====== ======
TOTAL RETURN*................................................................... % 7.31% 1.79%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands of dollars)........................... 9,532 5,892
Ratio of Expenses to Average Daily Net Assets................................... 0% 0%
Ratio of Expenses to Average Daily Net Assets
(Before Reimbursement)++....................................................... 1.09% 1.92%**
Ratio of Net Income to Average Daily Net Assets++............................... 5.23% 5.02%**
Ratio of Net Income to Average Daily Net Assets
(Before Reimbursement)++....................................................... 4.14% 3.10%**
Portfolio Turnover Rate......................................................... 36.63% 5.71%
</TABLE>
- -------------------
+ From April 11, 1994 (commencement of operations), through May 31, 1994.
++ The ratios for the year ended May 31, 1996, include expenses paid through
expense offset arrangements. * Total return figures assume reinvestment of
dividend and capital gain distributions and are not annualized.
** Annualized.
6
<TABLE>
<CAPTION>
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
Years Ended May 31
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
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
Income From Investment Operations
Net Investment Income..... .0295 .0191 .0210 .0340 .0499 .0556 .0568 .0484 .0431
Net Realized and Unrealized
Losses on Investments... 0 0 0 0 0 0 0 (.0074) 0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Income From
Investment Operations. .0295 .0191 .0210 .0340 .0499 .0556 .0568 .0410 .0431
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
Dividends from Net
Investment Income...... (.0295) (.0191) (.0210) (.0340) (.0499) (.0556) (.0568) (.0410) (.0431)
Distributions from Net
Realized Capital Gains.. 0 0 0 0 0 0 0 0 0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Distributions..... (.0295) (.0191) (.0210) (.0340) (.0499) (.0556) (.0568) (.0410) (.0431)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
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
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN+............... 2.95% 1.92% 2.12% 3.48% 5.13% 5.68% 5.80% 4.19% 4.37%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars).$ 92,034 109,818 109,875 111,112 111,224 92,975 93,897 70,976 80,081
Ratio of Expenses to
Average Daily Net Assets.. .66% .67% .68% .57% .50% .50% .50% .31% .25%
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%
- -------------------
+ Total return figures assume reinvestment of dividend distributions and are not
annualized.
* These ratios are annualized and include expenses paid through expense offset
arrangements.
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
Years Ended May 31
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
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
Income from Investment Operations
Net Investment Income...... .5039 .5106 .5189 .5639 .6062 .6132 .6312 .6331 .6412
Net Realized and Unrealized Gains
(Losses) on Investments.. .1467 (.1856) .5278 .2721 .3103 .0600 (.0100) .1100 (.0400)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Income (Losses) From
Investment Operations.. .6506 .3250 1.0467 .8360 .9165 .6732 .6212 .7431 .6012
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
Dividends from Net
Investment Income........ (.5039) (.5106) (.5189) (.5639) (.6062) (.6132) (.6312) (.6331) (.6412)
Distributions from Net Realized
Capital Gains............ (.0367) (.1144) (.1078) (.1221) (.0103) 0 0 0 0
-------- --------- ------- -------- -------- -------- -------- -------- -------- --------
Total Distributions...... (.5406) (.6250) (.6267) (.6860) (.6165) (.6132) (.6312) (.6331) (.6412)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
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
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN+................ 6.40% 2.93% 10.26% 8.28% 9.43% 6.95% 6.44% 7.75% 6.03%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars).. $ 64,904 70,925 67,550 44,315 34,196 24,628 21,337 20,121 19,548
Ratio of Expenses to
Average Daily Net Assets.. .66% .67% .72% .65% .50% .50% .50% .50% .50%
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%
Portfolio Turnover Rate..... 47.48% 46.11% 36.31% 84.96% 54.98% 142.06% 49.07% 54.31% 26.31%
- -------------------
</TABLE>
+ Total return figures assume reinvestment of dividend and capital gain
distributions and are not annualized.
* These ratios are annualized and include expenses paid through expense offset
arrangements.
7
<TABLE>
<CAPTION>
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
Years Ended May 31
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------- ------- ------- ------- ------- ------- ------- ------- ------- -----
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
Income From Investment Operations
Net Investment Income...... .6213 .6221 .6280 .6685 .7166 .7187 .7655 .7731 .8389
Net Realized and Unrealized Gains
(Losses) on Investments.. .2651 (.4154) .9243 .4333 .2610 (.1000) .5100 (.2800) (.5800)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Income (Losses) From
Investment Operations.. .8864 .2067 1.5523 1.1018 .9776 .6187 1.2755 .4931 .2589
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Less Distributions
Dividends from Net
Investment Income........ (.6213) (.6221) (.6280) (.6685) (.7166) (.7187) (.7655) (.7731) (.8389)
Distributions from Net Realized
Capital Gains............ (.0551) (.2446) (.2643) (.2233) (.0810) (.0500) 0 0 0
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total Distributions...... (.6764) (.8667) (.8923) (.8918) (.7976) (.7687) (.7655) (.7731) (.8389)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
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
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
TOTAL RETURN+................ % 8.29% 1.54% 14.61% 10.42% 9.48% 5.80% 12.56% 4.32% 2.39%
- -------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars). $ 47,314 57,330 54,241 42,146 35,137 43,682 33,406 25,217 23,982
Ratio of Expenses to
Average Daily Net Assets.. % .66% .67% .72% .65% .50% .50% .50% .50% .50%
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%
Portfolio Turnover Rate..... % 34.09% 39.37% 105.14% 148.26% 150.07% 214.76% 69.49% 76.11% 102.45%
</TABLE>
- -------------------
+ Total return figures assume reinvestment of dividend and capital gain
distributions and are not annualized.
* These ratios are annualized and include expenses paid through expense offset
arrangements.
8
INFORMATION REGARDING THE FUNDS
- --------------------------------------------------------------------------------
INFORMATION ABOUT INVESTMENT POLICIES OF THE FUNDS
The Funds have adopted certain investment restrictions that are set forth
in the Statement of Additional Information. Those restrictions, as well as the
investment objectives of the Funds identified on the inside front cover page of
this prospectus and any other investment policies which are designated as
"fundamental" in this prospectus or in the Statement of Additional Information,
cannot be changed without shareholder approval. The Funds have implemented
additional investment policies and practices to guide their activities in the
pursuit of their respective investment objectives. These policies and practices,
which are described throughout this prospectus, are not designated as
fundamental policies and may be changed without shareholder approval.
The descriptions that follow are designed to help you choose the Fund that
best fits your investment objectives. You may want to pursue more than one
objective by investing in more than one of these Funds.
For an explanation of the securities ratings referred to in the following
discussion, see "Other Information" in the Statement of Additional Information.
BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND
The Benham Arizona Municipal Intermediate-Term Fund (the "Arizona Fund")
seeks to obtain as high a level of current income exempt from Arizona and
regular federal income tax as is consistent with prudent investment management
and conservation of shareholders' capital. The Arizona Fund requires a minimum
investment of $5,000.
The Arizona Fund is designed for individuals in upper tax brackets seeking
income free from Arizona state and regular federal income taxes, although the
Arizona Fund may generate some taxable income. Because of this emphasis on
tax-exempt income, the Arizona Fund does not constitute a balanced investment.
The Arizona Fund is a "non-diversified company" as defined in the
Investment Company Act of 1940 (the "1940 Act"). However, the Arizona Fund
intends to meet federal tax requirements for qualification as a regulated
investment company, as described in the Fund's Statement of Additional
Information.
The Arizona Fund intends to remain fully invested in municipal obligations
(obligations issued by or on behalf of a state, its political subdivisions,
agencies, and instrumentalities). As a fundamental policy, the Arizona Fund will
invest at least 80% of its net assets in obligations with interest exempt from
the regular federal income tax, including the federal alternative minimum tax
(the "AMT").
In addition, the Arizona Fund will invest at least 65% of its net assets in
Arizona municipal obligations (obligations issued by or on behalf of the state
of Arizona, its political subdivisions, agencies, and instrumentalities).
The remaining 35% of net assets may be invested in (1) obligations issued
by other states and their political subdivisions, (2) obligations issued by U.S.
territories or possessions such as Puerto Rico, and (3) U.S. government
securities. Under exceptional market or economic conditions, the Fund may invest
more than 35% of its net assets in these securities.
The Arizona Fund is authorized, under normal conditions to invest as much
as 100% of its net assets in municipal obligations for which the interest is a
tax preference item for purposes of the AMT. If you are or become subject to the
AMT, a portion of your income distributions that are exempt from the regular
federal income tax may not be exempt from the AMT. Interest from AMT bonds is
considered to be exempt from federal income tax for purposes of the 80% policy
noted above.
Because the Arizona Fund invests primarily in Arizona municipal securities,
its yield and share price are affected by political
9
and economic conditions and developments within Arizona. The following summary
is derived from official statements of the state of Arizona as well as from
other publicly-available documents. This summary has not been independently
verified by the Arizona Fund and does not purport to be a complete description
of the conditions and developments in Arizona that may affect the Arizona Fund.
For further information about the risks associated with investing in Arizona
obligations, please see the Arizona Fund's Statement of Additional Information.
Arizona has been, and is projected to continue to be, one of the
faster-growing areas in the United States. During the last several decades, the
state has outpaced most other regions of the county in population and personal
income growth, gross state product, and job creation, although growth has slowed
somewhat in recent years. During the last 25 years, the state's emphasis on the
mining and agricultural employment sectors has diminished, and significant job
growth has occurred in the areas of aerospace, information technology,
construction, finance, insurance, and real estate.
Under its constitution, the state of Arizona is not permitted to issue
general obligation bonds secured by the full faith and credit of the state.
However, certain agencies and instrumentalities of the state are authorized to
issue bonds secured by revenues from specific projects and activities, and state
and local government units may enter into lease transactions. The particular
source of payments and security for an Arizona municipal obligation is detailed
in the instruments themselves and in related offering materials.
Limitations imposed under Arizona law on taxation and bond indebtedness may
affect the ability of the issuers to generate revenues to satisfy their debt
obligations. Arizona is required by law to maintain a balanced budget. In the
past, the state has issued a combination of spending reductions and tax
increases to avoid potential budgetary shortfalls and may require to do so
again.
For further information about the risks associated with investing in
Arizona obligations, please see the Statement of Additional Information.
BENHAM FLORIDA MUNICIPAL MONEY MARKET FUND
BENHAM FLORIDA MUNICIPAL INTERMEDIATE-TERM FUND
The Florida Funds seek to obtain as high a level of current income exempt
from regular federal income tax as is consistent with prudent investment
management and conservation of shareholders' capital. In addition, Fund shares
are intended to be exempt from the Florida intangibles tax. The minimum
investment for the Benham Florida Municipal Money Market Fund and the Benham
Florida Municipal Intermediate-Term Fund are $2,500 and $5,000, respectively.
The Florida Funds are designed for individuals in upper tax brackets
seeking income free from regular federal income tax, although the Florida Funds
may generate some taxable income. The Florida Funds also provide an investment
that is intended to be exempt from the Florida intangibles tax. Because of this
emphasis on tax-exempt income, the Florida Funds by themselves do not constitute
a balanced investment plan.
Each Florida Fund is a "non-diversified company" as defined in the 1940
Act. However, each Fund intends to meet federal tax requirements for
qualification as a regulated investment company.
Each Florida Fund intends to remain fully invested in municipal obligations
(obligations issued by or on behalf of a state, its political subdivisions,
agencies, and instrumentalities). As a fundamental policy, each Florida Fund
will invest at least 80% of its total assets in obligations with interest exempt
from regular federal income tax, including the AMT.
10
In addition, each Florida Fund will invest at least 65% of its net assets
in Florida municipal obligations (obligations issued by or on behalf of Florida,
its political subdivisions, agencies, and instrumentalities, or U.S. possessions
or territories such as Puerto Rico). The remaining 35% of net assets may be
invested in (1) obligations issued by other states and their political
subdivisions and (2) U.S. government securities. Under exceptional market or
economic conditions, each Florida Fund may invest more than 35% of its net
assets in these securities.
Each Florida Fund is authorized under normal conditions to invest as much
as 100% of its net assets in municipal obligations for which the interest is a
tax prefrence item for purposes of the AMT. If you are or become subject to the
AMT, a portion of your income distributions that are exempt from the regular
federal income tax may not be exempt from the AMT. Interest from AMT bonds is
considered to be exempt from federal income tax purposes of the 80% policy noted
above.
As discussed more fully on page __, the Florida Funds may need to sell
certain investments near the end of each calendar year so that on January 1 of
each year, its portfolio consists only of investments that are exempt from the
Florida intangibles tax. As a result, a Fund could incur additional costs or
taxable income or gains.
Because the Florida Funds invest primarily in Florida municipal securities,
Fund yields and share prices are affected by political and economic conditions
and developments within the state of Florida. The following summary is derived
from independent municipal credit reports but has not been independently
verified by the Funds and does not purport to be a complete description of the
conditions and developments in Florida that may affect the Funds.
Historically, the Florida economy has been dependent upon agriculture and
seasonal tourism. These industries are vulnerable to widespread crop failures,
severe weather conditions and other agriculture-related problems, and trends and
difficulties in the tourism industry. In recent years, the economy has broadened
into a service and trade economy with substantial insurance, banking, and export
participation as well as a tourism industry that operates less seasonally.
Population growth was significant in the 1980s but is expected to continue
at reduced rates. The retiree component of the population is expected to
continue to be a major factor. The population growth and expanding economy have
brought pressures for more infrastructure, educational facilities, and other
needs. Therefore, construction is very important to the Florida economy but is
vulnerable to declines in economic and population growth and has been weak in
recent years.
In August 1992, Hurricane Andrew struck southern Florida, with consequent
hurricane damage estimated to be $20-30 billion, about $10.2 billion of which
was insured. Although the state and federal governments have pledged funds to
help rebuild the area, the impact of this event on the fiscal resources of the
state and on local government is difficult to assess.
Florida is heavily dependent upon sales tax revenues, making the state's
general fund vulnerable to recession and presenting difficulties in expanding
the tax base in an economy increasingly geared to services. This dependence on
sales tax has resulted in budgetary shortfalls in the past; Florida has reacted
to preserve an adequate financial position primarily through expenditure
reductions and by doubling the intangibles tax.
For further information about the risks associated with investing in
Florida obligations, please see the Statement of Additional Information.
11
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
The National Funds seek as high a level of current income exempt from
federal income taxes as is consistent with prudent investment management and
conservation of shareholders' capital. The minimum investment for the National
Money Market Fund is $2,500. The minimum investment for the rest of the National
Funds is $5,000.
Each National Fund is a "diversified company" as defined in the 1940 Act.
This means that, with respect to 75% of its total assets, each National Fund
will not invest more that 5% of its total assets in the securities of a single
issurer. This policy is fundamental.
Each National Fund intends to remain fully invested in municipal
obligations, although for temporary defensive purposes, each may invest a
portion if its assets in U.S. government securities, the interest income on
which is subject to federal income tax. Each National Fund may invest up to 20%
of its total assets in securities issued by U.S. territories or possessions,
such as Puerto Rico, provided that the interest on these securities is exempt
from the regular federal income tax.
PORTFOLIO INVESTMENT QUALITY AND MATURITY GUIDELINES
The Money Market Funds may be appropriate for investors seeking share price
stability who can accept the lower yields that short-term obligations typically
provide. To offer investors the potential for higher yields, the Variable Price
Funds invest in obligations with longer maturities. The National Long-Term Fund
generally offers the highest current yields but, of all the Funds, is also the
most susceptible to share price fluctuations.
MONEY MARKET FUNDS
In selecting investments for the Money Market Funds, the Manager 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, each 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 (90
days or less for the Florida Money
Market Fund); and
(3) Restricts its investments to high-quality obligations determined by
the Manager, 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 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 the Manager, pursuant to guidelines
established by the board of trustees, to be of quality comparable to
the securities listed above.
VARIABLE PRICE FUNDS
The Variable-Price Funds differ in their maturity criteria as follows:
The Arizona Fund invests primarily in intermediate-term Arizona municipal
obligations with maturities of four or more years. The
12
weighted average portfolio maturity is five to ten years.
The Florida Intermediate-Term Fund invests primarily in intermediate-term
Florida municipal obligations with maturities of four or more years. The
weighted average portfolio maturity is five to ten years.
The National 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 National Long-Term Fund invests primarily in long-term municipal
obligations. It maintains a weighed average maturity of ten or more years.
In terms of credit quality, each Variable-Price Fund restricts its
investments to
(1) Municipal bonds rated, when acquired, within the three highest (four
highest for the Arizona and Florida Intermediate-Term Funds) categories
designated by a nationally-recognized statistical rating agency (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 the Manager, under the direction of the
board of trustees, to be of comparable quality.
RISK FACTORS AND INVESTMENT TECHNIQUES
Each Fund described in this Prospectus offers a range of potential for
income and total return based on its maturity criteria. The market value of the
investments of each Fund will change over time in response to a number of
factors, which are summarized in the following paragraphs.
BASIC FIXED INCOME INVESTMENT RISKS
INTEREST RATE RISK
One feature the Funds have in common is their susceptibility to changing
interest rates. For both Money Market Funds, interest rate changes affect the
level of income the Funds generate 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 is
determined by the present value of its future cash flows. Consequently, changing
interest rates 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, the Manager 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 from 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. Because of the cost of obtaining
credit ratings, some issuers forego them. Under the direction of the board of
trustees, the Manager may buy unrated bonds for the Funds if these securities
are judged to be of a quality consistent with the Funds' investment policies.
Similarly, on behalf of the
13
Variable-Price Funds, the Manager may purchase securities whose ratings are not
consistent with the Funds' rating criteria but which the Manager judges, under
the direction of the board of trustees, to present credit risks consistent with
the Funds' quality standards.
The Arizona and Florida Intermediate-Term Funds may invest up to 15% of its
net assets in unrated securities. Each of the other Funds described in this
Prospectus may invest up to 10% of its assets in unrated securities. Unrated
securities may be less liquid than rated securities.
The Arizona and Florida Intermediate-Term Funds may invest in securities
rated Baa or BBB - (the lowest investment grade category). Such securities are
medium-grade investment obligations that may have speculative characteristics.
Changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity for such obligations to make principal and interest
payments.
CONCENTRATION RISK
Each of the Funds described in this Prospectus may invest 25% or more of
its total 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 the Manager
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
discussion provides a brief description of some securities the Funds may buy.
The Funds are not limited by this discussion, and they may buy other types of
securities and enter into other types of transactions that meet their 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 demands.
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.
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 Funds, such intervals may not exceed 13 months.
TENDER OPTION BONDS are created by combing 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
Funds are structured with rates that are reset weekly or at other regular
intervals.
14
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.
The Manager 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 net 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 the 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, the Manager evaluates the credit
quality and liquidity of the obligation. In making this evaluation, the Manager
considers various credit factors, such as the necessity of the project; the
issuer's credit quality, future borrowing plans, and sources of revenue pledged
for lease repayment; general economic conditions in the region where the
security is issued; liquidity indictors such as dealer activity; and with regard
to unrated obligations the likelihood such lease will not be canceled.
ZERO-COUPON MUNICIPAL SECURITIES do not make regular interest payments.
Instead, they are sold at a deep discount to 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 rates. Generally, the
interest rate on the inverse floater 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 the Manager will be able to find a ready buyer for inverse
floaters. The Money Market Funds may not invest in inverse floaters.
AMT BONDS (ARIZONA AND FLORIDA FUNDS ONLY) typically are tax-exempt
"private activity" bonds issued after August 7, 1986, whose proceeds are
directed at least in part to a private, for-profit organization. Although the
interest income from AMT bonds is exempt from regular federal income tax, that
income is a tax preference item for purposes of the AMT.
In addition, corporate investors should note that all income from a Fund
may be part of an adjustment to AMT under Section 55 of the Internal Revenue
Code (the "Code") and the environmental tax under Code Section 59A. The AMT is a
special separate tax that applies to certain taxpayers who have certain
adjustments to income or tax preference items. The Arizona and Florida Funds are
authorized to invest as much as 100% of their assets in AMT bonds.
TAX-EXEMPT SECURITIES
Historically, interest paid on securities issued by states, cities,
counties, school districts and other political subdivisions of the United
15
States has been exempt from federal income taxes. Legislation since 1985,
however, affects the tax treatment of certain types of municipal bonds issued
after certain dates and, in some cases, subjects the income from certain bonds
to differing tax treatment depending on the tax status of its recipient.
The Arizona and Florida Funds should be expected to invest some portion of
their assets in bonds which, in the hands of some holders, would be subject to
the AMT, as long as management determines it is in the best interest of
shareholders generally to invest in such securities. (See "Taxes," 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. As
a prospective investor in the Funds, you should determine whether your
tax-equivalent yield is likely to be higher with a taxable or with a tax-exempt
Fund. To determine this, you may use the formulas depicted below.
For the Florida Funds, the tax-equivalent yield is based on each Fund's
current tax-free yield, your federal income tax bracket , and the Florida
intangibles tax applicable to a taxable investment. The formula is:
Fund's Tax-Free Yield Florida Intangibles Your Tax-
- ----------------------------- + Tax Rate = Equivalent
100% - Your Federal Tax Rate Yield
For the Arizona Fund, the tax-equivalent yield is based on the current
double tax-exempt yield and your combined federal and state marginal tax rate.
Assuming that all of the Arizona Fund's dividends are tax-exempt in Arizona
(which may not always be the case) and that your Arizona taxes are fully
deductible for federal income tax purposes, you can calculate your
tax-equivalent yield for the Arizona Fund using the following equation:
Fund's Double Tax-Free Yield Your Tax-
- -------------------------------------------------- = Equivalent
(100% - Federal Tax Rate)(100% - Arizona Tax Rate) Yield
You can calculate your tax-equivalent yield for a National Tax-Free
Fund (taking into account only federal income taxes and not any applicable state
taxes) using the following equation:
Fund's Tax-Free Yield Your Tax-
- ----------------------------- = Equivalent
100% - Your Federal Tax Rate Yield
OTHER INVESTMENT PRACTICES
For additional information regarding the investment practices of any of the
Funds, see the Statement of Additional Information.
PORTFOLIO TURNOVER
The total portfolio turnover rates of the Variable Price Funds are shown in
the Financial Highlights table on pages __, __, __ and __ of this prospectus.
With respect to each series of shares, investment decisions to purchase and
sell securities are based on the anticipated contribution of the security in
question to the particular Fund's objectives. The rate of portfolio turnover is
irrelevant when management believes a change is in order to achieve those
objectives and accordingly, the annual portfolio turnover rate cannot be
anticipated.
The portfolio turnover of each Fund may be higher than other mutual funds
with similar investment objectives. A high turnover rate involves
correspondingly higher transaction costs that are borne directly by a Fund. It
may also affect the character of capital gains, if any, realized and distributed
by a Fund since short-term capital gains are taxable as ordinary income.
WHEN-ISSUED AND FORWARD-COMMITMENT AGREEMENTS
Each of the Funds may sometimes purchase new issues of securities on a
when-issued or forward commitment basis without the limit when, in the opinion
of the manager, such
16
purchases will further the investment objectives of the Fund. The price of
when-issued securities is established at the time commitment to purchase is
made. Delivery of and payment for these securities typically occurs 15 to 45
days after the commitment to purchase. Market rates of interest on debt
securities at the time of delivery may be higher or lower than those contracted
for on the security. Accordingly, the value of each security may decline prior
to delivery, which could result in a loss to the Fund.
INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON
The Variable Price Funds may buy and sell interest rate futures contracts
relating to debt securities ("debt futures," i.e., futures relating to debt
securities, and "bond index futures," i.e., futures relating to indexes on types
or groups of bonds) and write and buy put and call options relating to interest
rate futures contracts.
For options sold, a Fund will segregate cash or high-quality debt
securities equal to the value of securities underlying the option unless the
option is otherwise covered.
A Fund will deposit in a segregated account with its custodian bank
high-quality debt obligations maturing in one year or less, or cash, in an
amount equal to the fluctuating market value of long futures contracts is has
purchased, less any margin deposited on its long position. It may hold cash or
acquire such debt obligations for the purpose of making these deposits.
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.
Since futures contracts and options thereon can replicate movements in the
cash markets for the securities in which a Fund invests without the large cash
investments required for dealing in such markets, they may subject a Fund to
greater and more volatile risks than might otherwise be the case. The principal
risks related to the use of such instruments are (1) the offsetting correlation
between movements in the market price of the portfolio investments (held or
intended) being hedged and in the price of the futures contract or option may be
imperfect; (2) possible lack of a liquid secondary market for closing out
futures or option positions; (3) the need of additional portfolio management
skills and techniques; and (4) losses due to unanticipated market price
movements. For a hedge to be completely effective, the price change of the
hedging instrument should equal the price change of the securities being hedged.
Such equal price changes are not always possible because the investment
underlying the hedging instrument may not be the same investment that is being
hedged.
Management will attempt to create a closely correlated hedge but hedging
activities may not be completely successful in eliminating market value
fluctuation. The ordinary spreads between prices in the cash and futures
markets, due to the differences in the natures of those markets, are subject to
distortion. Due to the possibility of distortion, a correct forecast of general
interest rate trends by management may still not result in a successful
transaction. Management may be incorrect in its expectations as to the extent of
various interest rate movements or the time span within which the movements take
place.
See the Statement of Additional Information for further information about
these instruments and their risks.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may, from time to time, purchase Rule 144A securities when
they present attractive investment opportunities that otherwise meet the Funds'
criteria for selection. Rule 144A securities are securities that are privately
placed with and traded among qualified
17
institutional buyers rather than the general public. Although Rule 144A
securities are considered "restricted securities," they are not necessarily
illiquid.
With respect to securities eligible for resale under Rule 144A, the staff
of the SEC has taken the position that the liquidity of such securities in the
portfolio of a Fund offering redeemable securities is a question of fact for the
board of trustees to determine, such determination to be based upon a
consideration of the readily available trading markets and the review of any
contractual restrictions. Accordingly, the board of trustees is responsible for
developing and establishing the guidelines and procedures for determining the
liquidity of Rule 144A securities. As allowed by Rule 144A, the board of
trustees of the Funds has delegated the day-to-day function of determining the
liquidity of Rule 144A securities to the manager. The board retains the
responsibility to monitor the implementation of the guidelines and procedures is
had adopted.
Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and a Fund may, from time to time, hold a Rule 144A security
that is illiquid. In such an event, the Manager will consider appropriate
remedies to minimize the effect on such Fund's liquidity. No Fund may invest
more than 10% of its total assets (15% of total assets, with regard to the
Arizona and Florida Intermediate-Term Funds) in illiquid securities (securities
that may not be sold within seven days at approximately the price used in
determining the net asset value of Fund shares).
CASH MANAGEMENT
For cash management purposes, each of the Variable-Price Funds may invest
up to an aggregate total of 5% of its total assets in any Benham money market
fund advised by BMC, provided that the investment is consistent with the Fund's
investment policies and restrictions.
OTHER TECHNIQUES
The Manager may buy other types of securities or employ other portfolio
management techniques on behalf of the Funds. 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 obligations. The Funds are subject to a number of
fundamental investment restrictions, which are set forth in each Fund's
Statement of Additional Information.
PERFORMANCE ADVERTISING
From time to time, the Funds may advertise performance data. Fund
performance may be shown by presenting one or more performance measurements,
including cumulative total return or average annual total return, yield,
effective yield and tax-equivalent yield (for tax-exempt funds such as the
Funds).
Cumulative total return data is computed by considering all elements of
return, including reinvestment of dividends and capital gains distributions,
over a stated period of time. Average annual total return is determined by
computing the annual compound return over a stated period of time that would
have produced a Fund's cumulative total return over the same period if the
Fund's performance had remained constant throughout.
A quotation of yield reflects a Fund's income over a stated period
expressed as a percentage of the Fund's share price. In the case of the Money
Market Funds, yield is calculated by measuring the income generated by an
investment in the Fund over a seven-day period (net of expenses). This income is
then annualized. That is, the amount of income generated by the investment over
the seven day period is assumed to be generated over each similar period each
week throughout a full year and is shown as a percentage of the investment.
18
The "effective yield" is calculated in a similar manner but, when annualized,
the income earned by the investment is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the compounding effect
on the assumed reinvestment.
With respect to the Variable Price Funds, yield is calculated by adding
over a 30-day (or one-month) period all interest and dividend income (net of
fund expenses) calculated on each day's market values, dividing this sum by the
average number of Fund shares outstanding during the period, and expressing the
result as a percentage of the Fund's share price on the last day of the 30-day
(or one month) period. The percentage is then annualized. Capital gains and
losses are not included in the calculation.
Yields are calculated according to accounting methods that are standardized
in accordance with SEC rules for all stock and bond funds. Because yield
accounting methods differ from the methods used for accounting purposes, a
Fund's yield may not equal the income paid on its shares or the income reported
in a Fund's financial statements.
A tax-equivalent yield demonstrates the taxable yield necessary to produce
after-tax yield equivalent to that of a mutual fund which invests in exempt
obligations. (See "Tax-Exempt Securities," page __, for a description of the
formulas used in comparing yields to tax-equivalent yields.)
The Funds may also include in advertisements data comparing performance
with the performance of non-related investment media, published editorial
comments and performance rankings compiled by independent organizations (such as
Lipper Analytical Services or Donoghue's Money Fund Report) and publications
that monitor the performance of mutual funds. Performance information may be
quoted numerically or may be presented in a table, graph or other illustration.
In addition, fund performance may be compared to well-known indices of market
performance including the Donoghue's Money Fund Average and Bank Rate Monitor
National Index of 2 1/2-year CD rates. Fund performance may also be combined
with other funds in our fund family. It may also be combined or blended with
other funds in our fund family, and that performance may be compared to other
funds indices to which individual funds may be compared.
All performance information advertised by the Funds is historical in nature
and is not intended to represent or guarantee future results. The value of Fund
shares when redeemed may be more or less than their original cost.
The Funds may also be compared, on a relative basis, to the other funds in
our fund family. This relative comparison, which may be based upon historical or
expected performance, volatility or other fund characteristics, may be presented
numerically, graphically or in text.
19
HOW TO INVEST WITH TWENTIETH CENTURY MUTUAL FUNDS
AND THE BENHAM GROUP
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The following section explains how to invest with Twentieth Century Mutual
Funds and The Benham Group, including purchases, redemptions, exchanges and
special services. You will find more detail about doing business with us by
referring to the Shareholder Services Guide that you will receive when you open
an account.
If you own or are considering purchasing fund shares through an
employer-sponsored retirement plan or through a bank, broker-dealer or other
financial intermediary, the following sections may not apply to you. Please read
"Employer-Sponsored Retirement Plans and Institutional Accounts," page __.
HOW TO OPEN AN ACCOUNT
To open an account, you must complete and sign an application, furnishing
your taxpayer identification number. (You must also certify whether you are
subject to withholding for failing to report income to the IRS.) Investments
received without a certified taxpayer identification number will be returned.
The minimum investment is $2,500 [$1,000 for IRA and Uniform
Gifts/Transfers to Minors Acts ("UGMA/UTMA") accounts]. These minimums will be
waived if you establish an automatic investment plan to your account that is the
equivalent of at least $50 per month. See "Automatic Investment Plan," page 18.
The minimum investment requirements may be different for some types of
retirement accounts. Call one of our Investor Services representatives for
information on out retirement plans, which are available for individual
investors or for those investing through their employers.
Please note: If you register your account as belonging to multiple owners
(e.g., as joint tenants), you must provide us with specific authorization on
your application in order for us to accept written or telephone instructions
from a single owner. Otherwise, all owners will have to agree to any
transactions that involve the account (whether the transaction request is in
writing or over the telephone).
You may invest in the following ways:
BY MAIL
Send a completed application and check or money order payable in U.S.
dollars to Twentieth Century Services.
BY WIRE
You may make your initial investment by wiring funds. To do so:
(1)Call us or mail a completed application.
(2)Instruct your bank to wire funds to Commerce Bank of Kansas City, Missouri.
ABA routing number 101000019.
(3) Be sure to specify on the wire:
(a)Twentieth Century Mutual Funds
(b)The fund you are buying (and account number, if you have one)
(c)The amount
(d)Your name
(e)Your city and state
(f)Your taxpayer identification number
BY EXCHANGE
Call 800-345-2021 from 7 a.m. to 7 p.m. Central time to get information on
opening an account by exchanging from another Twentieth Century or Benham
account. See page 18 for more information on exchanges.
IN PERSON
If you prefer to work with a representative in person, please visit one of
our Investors Centers, located at:
4500 Main Street
Kansas City, MO 64111
816-340-7050
1665 Charleston Road
Mountain View, CA 94043
415-965-8300
20
2000 S. Colorado Blvd.
Denver, CO 80222
303-759-8382
SUBSEQUENT INVESTMENTS
Subsequent Investments may be made by an automatic bank, payroll or
government direct deposit (see Automatic Investment Plan, this page) or by any
of the methods below. The minimum investment requirement for subsequent
investments: $250 for checks submitted without the remittance portion of a
previous statement or confirmation, $50 for all other types of subsequent
investments.
BY MAIL
When making subsequent investments, enclose your check with the remittance
portion of the confirmation of a previous investment. If the remittance slip is
not available, indicate your name, address and account number on your check or a
separate piece of paper. (Please be aware that the investment minimum for
subsequent purchases is higher without a remit slip.)
BY TELEPHONE
Once your account is open, you may make investments by telephone if your
have authorized us (by choosing "Full Services" on your application) to draw on
your bank account. You may call an Investor Services Representative or use our
Automated Information Line.
BY WIRE
You may make subsequent investments in person at one of our Investors
Centers. The locations of our three Investors Centers are listed on page __.
AUTOMATIC INVESTMENT PLAN
You may elect on your application to make investments automatically by
authorizing us to draw on your bank account regularly. Such investments must be
at least the equivalent of $50 per month. You also may choose an automatic
payroll or government direct deposit. If you are establishing a new account,
check the appropriate box under "Automatic Investments" on your application to
receive more information. If you would like to add a direct deposit to an
existing account, please call one of our Investor Services Representatives.
HOW TO EXCHANGE FROM ONE ACCOUNT TO ANOTHER
As long as you meet any minimum initial investment requirements, you may
exchange your fund shares to our other funds up to six times per year per
account. For any single exchange, the share of each fund being acquired must
have a value of at least $100. However, we will allow investors to set up an
Automatic Exchange Plan between any two funds in the amount of at least $50 per
month. See our Shareholder Services Guide for further information about
exchanges.
BY MAIL
You may direct us in writing to exchange your shares from one Twentieth
Century or Benham account to another. For additional information, please see our
Shareholder Services Guide.
BY TELEPHONE
You can make exchanges over the phone (either with an Investor Services
Representative or using our Automated Information Line--see page 20) if you have
authorized us to accept telephone instructions. You can authorize this by
selecting "Full Services" on you application or by calling us at 800-345-2021 to
get the appropriate form.
21
HOW TO REDEEM SHARES
We will redeem or "buy back" your shares at any time. Redemptions will be
made at the next net asset value determined after a complete redemption request
is received.
Please note that a request to redeem shares in an IRA or 403(b) plan must
be accompanied by an executed IRS Form W4-P and a reason for withdrawal as
specified by the IRS.
BY TELEPHONE
If you have authorized us to accept telephone instructions, you may redeem
your shares by calling an Investor Services Representative.
BY MAIL
Your written instructions to redeem shares may be made either by a
redemption form, which we will send to you upon request, or by a letter to us.
Certain redemptions may require a signature guarantee. Please see "Signature
Guarantee," page 20.
BY CHECK-A-MONTH
If you have at least a $10,000 balance in your account, you may redeem
shares by Check-A-Month. A Check-A-Month plan automatically redeems enough
shares each month to provide you with a check for an amount you choose (minimum
$50). To set up a Check-A-Month plan, please contact an Investor Services
Representative or refer to the Shareholder Services Guide.
OTHER AUTOMATIC REDEMPTIONS
You may elect to make redemptions automatically by authorizing us to send
funds directly to your account at a bank or other financial institution. To set
up automatic redemptions, call one of our Investor Services Representatives.
REDEMPTION PROCEEDS
Please not that shortly after a purchase of shares is made by check or
electronic draft (also known as an ACH draft) from your bank, we may wait up to
15 days or longer to send redemption proceeds (to allow your purchase funds to
clear). No interest is paid on the redemption proceeds after the redemption is
processed but before your redemption proceeds are sent.
Redemption proceeds may be sent to you in one of the following ways:
BY CHECK
Ordinarily, all redemption checks will be made payable to the registered
owner of the shares and will by mailed only to the address of record. For more
information, please refer to our Shareholder Services Guide.
BY WIRE AND ACH
You may authorize us to transmit redemption proceeds by wire or ACH. These
services will be effective 15 days after we receive the authorization.
Your bank will usually receive wired funds within 48 hours of transmission.
Electronically transferred funds may be received up to seven days after
transmission. Wired funds are subject to a $10 fee to cover bank wire charges,
which is deducted from redemption proceeds. Once the funds are transmitted, the
time or receipt and the funds' availability are not under our control.
AUTOMATIC REDEMPTION OF SHARES
Whenever the shares held in an account have a value of less than the
required minimum, a letter will be sent advising you to either bring the value
of the shares held in the account up to the minimum or to establish an automatic
investment that is the equivalent of a least $50 per month. If action is not
taken within 90 days of the letter's date, the shares held in the account
22
will be redeemed and proceeds from the redemption will be sent by check to your
address of record. We reserve the right to increase the investment minimums.
SIGNATURE GUARANTEE
To protect your accounts from fraud, some transactions will require a
signature guarantee. Which transactions will require a signature guarantee will
depend on which service options you elect when you open your account. For
example, if you choose "In Writing Only," a signature guarantee would be
required when:
* Redeeming more than $25,000
* Establishing or increasing a Check-A-Month or automatic transfer on an
existing account.
You can obtain a signature guarantee from a bank or trust company, credit
union, broker, dealer, securities exchange or association, clearing agency or
savings association, as defined by federal law.
For a more in-depth explanation of our signature guarantee policy, or if
you live outside the United States and would like to know how to obtain a
signature guarantee, please consult our Shareholder Services Guide.
We reserve the right to require a signature guarantee on any transaction,
or to change this policy at any time.
SPECIAL SHAREHOLDER SERVICES
We offer several options to make your account easier to manage. These are
listed on the account application. Please make note of these options and elect
the ones that are appropriate for you. Be aware that the Full Services option
offers you the most flexibility. You will find more information about each of
these service options in our Shareholder Services Guide.
Our special shareholder services include:
AUTOMATED INFORMATION LINE
We offer an Automated Information Line, 24 hours a day, seven days a week,
at 1-800-345-8765. By calling the Automated Information Line, you may listen to
fund prices, yields and total return figures. You may also use the Automated
Information Line to make investments into your accounts (if we have your bank
information on file) and obtain your share balance, value and most recent
transactions. If you have authorized us to accept telephone instructions, you
also may exchange shares from one fund to another via the Automated Information
Line. Redemption instructions cannot be given via the Automated Information
Line.
CHECKWRITING
We offer CheckWriting as a service option for your account in either of the
Money Market Funds. CheckWriting allows you to redeem shares in your account by
writing a draft ("check") against your account balance. (Shares held in
certificate form may not be redeemed by check.) There is no limit on the number
of checks you can write, but each one must be for at least $100.
When you write a check, you will continue to receive dividends on all
shares until your check is presented for payment to our clearing bank. If you
redeem all shares in your account by check, any accrued distributions on the
redeemed shares will be paid to you in cash on the next monthly distribution
date.
If you want to add CheckWriting to an existing account that offers
CheckWriting, contact us by phone or mail for an appropriate form. For a new
account, you may elect CheckWriting on your purchase application by choosing the
Full Services option. CheckWriting is not available for any account held in an
IRA or 403(b) plan.
CheckWriting redemptions may only be made on checks provided by us.
Currently, there is no charge for checks or for the CheckWriting service.
We will return checks drawn on insufficient funds or on funds from
investments
23
made by means other than by wire within the previous 15 days. Neither the
company nor our clearing bank will be liable for any loss or expenses associated
with returned checks. Your account may be assessed a $15 service charge for
checks drawn on insufficient funds.
A stop payment may be ordered on a check written against your account. We
will use reasonable efforts to stop a payment, but we cannot guarantee that we
will be able to do so. If we are successful in fulfilling a stop-payment order,
your account may be assessed a $15 fee.
OPEN ORDER SERVICE
Through our open order service, you may designate a price at which to buy
shares of a variable-priced fund by exchange from one of our money market funds,
or a price at which to sell shares of a variable-priced fund by exchange to one
of our money market funds. The designated purchase price must be equal to or
lower, or the designated sale price equal to or higher, than the variable-priced
fund's net asset value at the time the order is placed, If the designated price
is met within 90 calendar days, we will execute your exchange order
automatically at that price (or better). Open orders not executed within 90 days
will be canceled.
If the fund you have selected deducts a distribution from its share price,
your order price will be adjusted accordingly so the distribution does not
inadvertently trigger an open order transaction on your behalf. If you close or
re-register the account from which the shares are to be redeemed, your open
order will be canceled.
Because of their time-sensitive nature, open order transactions are
accepted only by telephone or in person. These transactions are subject to
exchange limitations described in each fund's prospectus, except that orders and
cancellations received before 2 p.m. Central time are effective the same day,
and orders or cancellations received after 2 p.m. Central time are effective the
next business day.
TAX-QUALIFIED RETIREMENT PLANS
Each fund is available for your tax-deferred retirement plan. Call or write
us and request the appropriate forms for:
* Individual Retirement Accounts (IRAs)
* 403(b) plans for employees of public school systems and non-profit
organizations
* Profit sharing plans and pension plans for corporations and other employers
If your IRA and 403(b) accounts do not total $10,000, each account is
subject to an annual $10 fee, up to a total of $30 per year.
You can also transfer your tax-deferred plan to us from another company or
custodian. Call or write us for a Request to Transfer form.
IMPORTANT POLICIES REGARDING YOUR INVESTMENTS
Every account is subject to policies that could affect your investment.
Please refer to the Shareholder Services Guide for further information about the
policies discussed below, as well as further detail about the services we offer.
(1) We reserve the right for any reason to suspend the offering of shares for
a period of time, or to reject any specific purchase order (including
purchases by exchange). Additionally, purchases may be refused if, in the
opinion of the manager, they are of a size that would disrupt the
management of the fund.
(2) We reserve the right to make changes to any stated investment
requirements, including those that relate to purchases, transfers and
redemptions. In addition, we may also alter, add to or terminate any
investor services and privileges. Any changes may affect all shareholders
or only certain series or classes of shareholders.
(3) Shares being acquired must be qualified for sale in your state of
residence.
24
(4) Transactions requesting a specific price and date, other than open orders,
will be refused.
(5) If a transaction request is made by a corporation, partnership, trust,
fiduciary, agent or unincorporated association, we will require evidence
satisfactory to us of the authority of the individual making the request.
(6) We have established procedures designed to assure the authenticity of
instructions received by telephone. These procedures include requesting
personal identification from callers, recording telephone calls, and
providing written confirmations of telephone transactions. These
procedures are designed to protect shareholders from unauthorized or
fraudulent instructions. If we do not employ reasonable procedures to
confirm the genuineness of instructions, then we may be liable for losses
due to unauthorized or fraudulent instructions. The company, its transfer
agent and investment adviser will not be responsible for any loss due to
instructions they reasonably believe are genuine.
(7) All signatures should be exactly as the name appears in the registration.
The owner's name appears in the registration as May Elizabeth Jones, she
should sign that way and not as Mary E. Jones.
(8) Unusual stock market conditions have in the past resulted in an increase
in the number of shareholder telephone calls. If you experience
difficulty in reaching us during such periods, you may send your
transaction instructions by mail, express mail or courier service, or you
may visit one of our Investors Centers. You may also use our Automated
Information Line if you have requested and received an access code and
are not attempting to redeem shares.
(9) If you fail to provide us with the correct certified taxpayer
identification number, we may reduce any redemption proceeds by $50 to
cover the penalty the IRS will impose on us for failure to report your
correct taxpayer identification number of information reports.
(10) We will perform special inquiries on shareholder accounts. A research fee
of $15 may be applied.
REPORTS TO SHAREHOLDERS
At the end of each calendar quarter, we will send you a consolidated
statement that summarizes all of your Twentieth Century and Benham holdings, as
well as an individual statement for each fund you own that reflects all
year-to-date activity in your account. You may request a statement of your
account activity at any time.
With the exception of most automatic transactions, each time you invest,
redeem, transfer or exchange shares, we will send you a confirmation of the
transactions. See the Shareholder Services Guide for more detail.
Carefully review all the information relating to transactions on your
statements and confirmations to ensure that your instructions were acted on
properly. Please notify us immediately in writing if there is an error. If you
fail to provide notification of an error with reasonable promptness, i.e.,
within 30 days of non-automatic transactions or within 30 days of the date of
your consolidated quarterly statement, in the case of automatic transactions, we
will deem you to have ratified the transaction.
No later than January 31 of each year, we will send you reports that you
may use in completing your U.S. income tax return. See the Shareholder Services
Guide for more information.
Each year, we will send you an annual and a semiannual report relating to
your fund. The annual report includes audited financial statements and a list of
portfolio securities as of the fiscal year end. The semiannual report
25
includes unaudited financial statements for the first six months of the fiscal
year, as well as a list of portfolio securities at the end of the period. You
also will receive an updated prospectus at lease once each year. Please read
these materials carefully as they will help you understand your fund.
EMPLOYER SPONSORED RETIREMENT PLANS AND INSTITUTIONAL ACCOUNTS
If you own or are considering purchasing Fund shares through an
employer-sponsored retirement plan, your ability to purchase shares of the
Funds, exchange them for shares of other Twentieth Century or Benham funds, and
redeem them will depend on the terms of your plan. If you own or are considering
purchasing Fund shares through a bank, broker-dealer, insurance company or other
financial intermediary, your ability to purchase, exchange and redeem shares
will depend on your agreement with, and the policies of, such financial
intermediary. You may reach one of our Institutional Investor Services
Representatives by calling 1-800-345-3533 to request information about our
funds, to obtain a current prospectus or to get answers to any questions about
our funds that you are unable to obtain through your plan administrator or
financial intermediary.
26
ADDITIONAL INFORMATION YOU SHOULD KNOW
- --------------------------------------------------------------------------------
SHARE PRICE
WHEN SHARE PRICE IS DETERMINED
The price of your shares is also referred to as their net asset value. 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 at the close of regular trading on
each day that the New York Stock Exchange (the "Exchange") is open.
Investments and requests to redeem or exchange shares will receive the
share price next determined after receipt by us of the investment or redemption
or exchange request. For example, investments and requests to redeem or exchange
shares received by us or one of our authorized agents before the close of
business on the New York Stock Exchange, usually 3 p.m. Central time, are
effective on, and will receive the price determined, that day as of the close of
the Exchange. Investment redemption and exchange requests received thereafter
are effective on, and will 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 payment is received by
us. Wired funds are considered received on the day they are deposited in our
bank account if they are deposited before the close of business on the Exchange,
usually 3 p.m. Central time.
If you invest in Fund shares through an employer-sponsored retirement plan
or other financial intermediary, it is the responsibility of your plan
recordkeeper or financial intermediary to transmit your purchase, exchange and
redemption requests to the Funds' transfer agent prior to the applicable cut-off
time for receiving orders and to make payment for any purchase transactions in
accordance with the Funds' procedures or any contractual arrangement with the
Funds or the Funds' distributor in order for you to receive that day's price.
HOW SHARE PRICE IS DETERMINED
The valuation of assets for determining net asset value may be summarized
as follows:
The portfolio securities of each Fund, except as otherwise noted, listed or
traded on a domestic securities exchange are valued at the last sale price on
that exchange. If no sale is reported, the mean of the latest bid and asked
price is used. Portfolio securities primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on the exchange where primarily traded. If no sale is reported, or if
local convention or regulation so provides, the mean of the latest bid and asked
prices is used. Depending on local convention or regulation, securities traded
over-the-counter are priced at the mean of the latest bid and asked prices, or
at the last sale price. When market quotations are not readily available,
securities and other assets are valued at fair value as determined in accordance
with procedures adopted by the board of trustees.
Debt securities not traded on a principal securities exchange are valued
through valuations obtained from a commercial pricing service or at the most
recent mean of the bid and asked prices provided by investment dealers in
accordance with procedures established by the board of trustees.
Pursuant to a determination by the Funds' board of trustees that such value
represents fair value, debt securities with maturities of 60 days or less are
valued at amortized cost. When a security is valued at amortized cost, it is
valued at its cost when purchased, and thereafter by assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument.
27
WHERE TO FIND INFORMATION ABOUT SHARE PRICE
The net asset values of the retail class of Twentieth Century's Funds are
published in leading newspapers daily. The yields of the Money Market Funds are
published weekly in leading financial publications and daily in many local
newspapers. The net asset values, as well as yield information on all of the
Funds and other funds in the Twentieth Century family of funds, may also be
obtained by calling us.
DISTRIBUTIONS
At the close of each day including Saturdays, Sundays and holidays, net
income of the Variable Price Funds is determined and declared as a distribution.
The distribution will be paid monthly on the last Friday of each month.
You will begin to participate in the distributions the day AFTER your
purchase is effective. (See "When Share Price is Determined," page ___.) If you
redeem shares, you will receive the distribution declared for the day of the
redemption. If all shares are redeemed (other than by CheckWriting), the
distribution on the redeemed shares will be included with your redemption
proceeds.
Distributions from net realized securities gains, if any, generally are
declared and paid once a year, but the Funds may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code, in all events in a manner consistent with the provisions of the
1940 Act.
Participants in employer-sponsored retirement or savings plans must
reinvest all distributions. For shareholders investing through taxable accounts,
distributions will be reinvested unless you elect to receive them in cash.
Distributions of less than $10 and distributions on shares purchased within the
last 15 days, however, will not be paid in cash and will be reinvested. You may
elect to have distributions on shares held in Individual Retirement Accounts and
403(b) plans paid in cash only if you are 59 1/2 years old or permanently and
totally disabled. Distribution checks normally are mailed within seven days
after the record date. Please consult our Shareholder Service Guide for further
information regarding your distribution options.
The board of trustees may elect not to distribute capital gains in whole or
in part to take advantage of loss carryovers.
TAXES
Each of the Funds has elected to be taxed under Subchapter M of the Code,
which means that to the extent its income is distributed to shareholders, it
pays no income taxes.
TAX-DEFERRED ACCOUNTS
If the Funds' shares are purchased through tax-deferred accounts, such as a
qualified employer-sponsored retirement or savings plan, income and capital
gains distributions paid by the Funds will generally not be subject to current
taxation, but will accumulate in your account under the plan on a tax-deferred
basis.
Employer-sponsored retirement and savings plans are governed by complex tax
rules. If you elect to participate in your employer's plan, consult your plan
administrator, your plan's summary plan description, or a professional tax
advisor regarding the tax consequences of participation in the plan,
contributions to, and withdrawals or distributions from the plan.
TAXABLE ACCOUNTS
Distributions of net investment income and net short-term capital gains are
taxable to you as ordinary income, except as described below. The dividends from
net income of the Variable Price Funds do not qualify for the 70%
dividends-received deduction for corporations since they are derived from
interest income. Dividends representing income derived from tax-
28
exempt bonds generally retain the bonds' tax-exempt character in a shareholder's
hands. Distributions which represent short-term capital gains are taxable as
ordinary income. Distributions from net long-term capital gains are taxable as
long-term capital gains regardless of the length of time the shares on which
such distributions are paid have been held by the shareholder. However, you
should note that any loss realized upon the sale or redemption of shares held
for six months or less will be treated as a long-term capital loss to the extent
of any distribution of long-term capital gain to you with respect to such
shares.
Distributions of capital gains are taxable to you regardless of whether
they are taken in cash or reinvested, even if the value of your shares is below
your cost. If you purchase shares shortly before a capital gain distribution,
you must pay income taxes on the distribution, even though the value of your
investment (plus cash received, if any) will not have increased. In addition,
the share price at the time you purchase shares may include unrealized gains in
the securities held in the investment portfolio of the Fund. If these portfolio
securities are subsequently sold and the gains are realized, they will, to the
extent not offset by capital losses, be paid to you as a distribution of capital
gains and will be taxable to you as short-term or long-term capital gains.
In January of the year following the distribution, we or your financial
intermediary will send you a Form 1099-DIV notifying you of the status of your
distributions for federal income tax purposes. The Funds anticipate that
substantially all of the dividends to be paid by the Funds will be exempt from
federal income taxes to an individual unless, due to that person's own tax
situation, he or she is subject to the AMT. In that case, it is likely that a
portion of the dividends will be taxable to that shareholder while remaining
tax-exempt in the hands of most other shareholders. The Funds will advise
shareholders of the percentage, if any, of the dividends not exempt from federal
income tax, and the percentage, if any, subject to the individual AMT should a
shareholder be subject to it.
Distributions may also be subject to state and local taxes, even if all or
a substantial part of such distribution are derived from interest on U.S.
government obligations which, if you received them directly, would be exempt
from state income tax. However, most but not all states allow this tax exemption
to pass through to Fund shareholders when a Fund pays distributions to its
shareholders. You should consult your tax adviser about the tax status of such
distributions in your own state.
If you have not complied with certain provisions of the Code and
Regulations, we are required by federal law to withhold and remit to the IRS 31%
of reportable payments (which may include dividends, capital gains distributions
and redemptions). Those regulations require you to certify that the social
security number or tax identification number you provide is correct and that you
are not subject to 31% withholding for previous under-reporting to the IRS. You
will be asked to make the appropriate certification on your application.
PAYMENTS REPORTED BY US THAT OMIT YOUR SOCIAL SECURITY NUMBER OR TAX
IDENTIFICATION NUMBER WILL SUBJECT US TO A PENALTY OF $50, WHICH WILL BE CHARGED
AGAINST YOUR ACCOUNT IF YOU FAIL TO PROVIDE THE CERTIFICATION BY THE TIME THE
REPORT IS FILED, AND IS NOT REFUNDABLE.
Redemption of shares of a Fund (including redemptions made in an exchange
transaction) will be a taxable transaction for federal income tax purposes and
shareholders will generally recognize a gain or loss in an amount equal to the
difference between the basis of the shares and the amount received. Assuming
that shareholders hold such shares as a capital asset, the gain or loss will be
a capital gain or loss and will generally be long term if shareholders have held
such shares for a period of more than one year. If a loss is realized on
29
the redemption of Fund shares, the reinvestment in additional Fund shares
within 30 days before or after the redemption may be subject to the "wash sale"
rules of the Code, resulting in a postponement of the recognition of such loss
for federal income tax purposes.
SPECIAL TAX INFORMATION
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 as described above.
MUNICIPAL SECURITIES
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 and BMC 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 from any other
investment.
AMT LIABILITY
To the extent that the Arizona and the Florida Funds invest in municipal
obligations (private activity bonds) whose interest is treated as a tax
preference item in calculating AMT liability, shareholders who calculate AMT
liability will be required to include a portion of the Fund's dividends as a tax
preference item in making this calculation. In addition, corporate shareholders
may be required to include all dividends and distributions by the Fund in an
adjustment of alternative minimum taxable income for purposes of the AMT and the
environmental tax imposed under Code Sections 55 and 59A, respectively.
ARIZONA FUND
Under a ruling by the Arizona Department of Revenue, shareholders who are
otherwise subject to Arizona income tax will not be subject to such tax on Fund
dividends to the extent that such dividends are attributable to either (1)
obligations of the state of Arizona or its political subdivisions or (2)
obligations issued by the governments of Guam, Puerto Rico, or the Virgin
Islands.
In addition, Arizona Fund dividends that are attributable to interest
payments on direct obligations of the U.S. government will not be subject to
Arizona income tax if, as intended, the Arizona Fund qualifies as a regulated
investment company under Subchapter M of the Code. Other distributions from the
Fund, however, such as distributions of short-term or long-term capital gains or
income earned on obligations of other states, will generally be subject to
income, personal property, intangibles or similar taxes in their respective
states and localities.
FLORIDA FUNDS
Florida currently does not have a personal income tax, so dividends from
the Florida Funds and distributions earned by Florida residents will not be
subject to such a tax. However, if you are domiciled outside of Florida,
dividends and distributions from the Florida Funds may be subject to your
state's taxes. Dividends and distributions earned by corporate shareholders that
are subject to the Florida corporate income tax may be taxable by
30
Florida; these shareholders should consult their tax advisors regarding the
application of the Florida corporate income tax to dividends and distributions
from the Florida Funds.
The Florida Funds may apply for rulings from the Florida Department of
Revenue to the effect that shares of a Florida Fund be exempt from the Florida
intangibles tax each year if the Florida Fund's portfolio of investments on
January 1 of that year consists of qualifying investments.
Investments exempt from the Florida intangibles tax include but are not
limited to (1) notes, bonds and other obligations issued by Florida or its
municipalities, counties and other taxing districts and (2) notes, bonds, and
other obligations issued by the U.S. government and its agencies. Obligations
issued by the governments of Puerto Rico, Guam and the Virgin Islands are also
exempt if permitted by ruling.
If a Florida Fund's portfolio of investments on January 1 of each year
includes investments that are not exempt from the Florida intangibles tax, the
Florida Fund's shares could be subject to the Florida intangibles tax. The
Florida Funds intend that on January 1 of each year, each Florida Fund's
portfolio of investments will consist solely of investments exempt from the
Florida intangibles tax. Shareholders who are domiciled outside of Florida may
be subject to income, personal property, intangibles or similar taxes in their
respective states.
MANAGEMENT
INVESTMENT MANAGEMENT
The Funds are series of the Benham Municipal Trust (the "Trust"). Under the
laws of the Commonwealth of Massachusetts, the board of trustees is responsible
for managing the business and affairs of the Trust. Acting pursuant to an
investment management agreement entered into with the Trust, Benham Management
Corporation ("BMC") serves as the investment manager of the Funds. Its principal
place of business is 1665 Charleston Road, Mountain View, California 94043. BMC
has been providing investment advisory services to investment companies and
other clients since 1971.
In June 1995, Twentieth Century Companies, Inc. ("TCC") acquired Benham
Management International, Inc., the then-parent company of BMC. TCC is the
parent company of Investors Research Corporation ("IRC"), which provides
investment management services to the Twentieth Century family of funds. In the
acquisition, BMC became a wholly owned subsidiary of TCC. Certain employees of
BMC provide investment management services to the Twentieth Century family of
funds, while certain Twentieth Century employees provide investment management
services to Benham funds.
BMC supervises and manages the investment portfolio of each of the Funds
and directs the purchase and sale of their investment securities. BMC utilizes a
team of portfolio managers, assistant portfolio managers and analysts acting
together to manage the assets of the Funds. The team meets regularly to review
portfolio holdings and to discuss purchase and sale activity. The team adjusts
holdings in the Funds' portfolios and the Funds' asset mix as it deems
appropriate in pursuit of the Funds' investment objectives. Individual portfolio
manager members of the team may also adjust portfolio holdings of the Funds or
of sectors of the Funds as necessary between team meetings.
The portfolio manager members of the teams managing the funds described in
this prospectus and their work experience for the last five years are listed as
follows:
G. DAVID MACEWEN is the manager of the portfolio management team which
manages the Funds and has primary responsibility for the day-to-day operations
of the Funds. Mr. MacEwen joined Benham in 1991 as a Senior
31
Municipal Portfolio Manager, and currently maintains principal management
responsibility for the Benham California Tax-Free Short-Term, Benham California
Tax-Free Intermediate-Term, Benham California Tax-Free Long-Term and Benham
California Tax-Free Insured Funds. Mr. MacEwen is also a member of the team that
manages the Twentieth Century Investors Tax-Exempt Long-Term Fund.
The activities of BMC are subject only to directions of the Trust's board
of trustees. For the services provided to the Funds, BMC receives an annual fee
which cannot exceed .50% of average daily net assets. BMC's fee drops to a
marginal rate of .19% of average daily net assets as Trust assets increase.
CODE OF ETHICS
The Trust and BMC have adopted a Code of Ethics, which restricts personal
investing practices by employees of BMC and its affiliates. Among other
provisions, the Code of Ethics requires that employees with access to
information about the purchase or sale of securities in the Funds' portfolios
obtain preclearance before executing personal trades. With respect to portfolio
managers and other investment personnel, the Code of Ethics prohibits
acquisition of securities in an initial public offering, as well as profits
derived from the purchase and sale of the same security within 60 calendar days.
These provisions are designed to ensure that the interests of the Fund
shareholders come before the interests of the people who manage those Funds.
TRANSFER AND ADMINISTRATIVE SERVICES
Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri,
64141, ("TCS") acts as transfer, administrative services and dividend paying
agent for the Funds. TCS provides facilities, equipment and personnel to the
Funds and is paid for such services by the Funds. For administrative services,
each Fund pays TCS 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
managed by BMC. The administrative fee rate ranges from .11% to .08% of average
daily net assets, dropping as assets managed by BMC increase. For transfer agent
services, each Fund pays TCS a monthly fee for each shareholder account
maintained and for each shareholder transaction executed during that month.
The Funds charge no sales commissions, or "loads," of any kind. However,
investors who do not choose to purchase or sell Fund shares directly from TCS
may purchase or sell Fund shares through registered broker-dealers and other
qualified service providers, who may charge investors fees for their services.
These broker-dealers and service providers generally provide shareholder,
administrative and/or accounting services which would otherwise be provided by
TCS as the Funds' transfer agent. To accommodate these investors, BMC and its
affiliates have entered into agreements with some broker-dealers and service
providers to provide these services. Fees for such services are borne normally
by the Funds at the rates normally paid to TCS, which would otherwise provide
the services. Any distribution expenses associated with these arrangements are
borne by BMC.
From time to time, special services may be offered to shareholders who
maintain higher share balances in our family of Funds. These services may
include the waiver of minimum investment requirements, expedited confirmation of
shareholder transactions, newsletters and a team of personal representatives.
Any expenses associated with these special services will be paid by BMC or its
affiliates.
BMC and Twentieth Century Services, Inc., are both wholly owned by
Twentieth Century Companies, Inc.
32
DISTRIBUTION OF FUND SHARES
The Funds' shares are distributed by Twentieth Century Securities, Inc.
(the "Distributor"), a wholly-owned subsidiary of TCC, and BMC distribute and
market the Funds and their related services. BMC pays all expenses for promoting
sales of and distributing the Funds' shares.
EXPENSES
Each Fund pays certain operating expenses directly, including, but not
limited to: custodian, audit, and legal fees; fees of the independent directors
or 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 Fund's shares for sale under
federal and state securities laws. See the Statements of Additional Information
for a more detailed discussion of independent director/trustee compensation.
FURTHER INFORMATION ABOUT THE FUNDS
The Trust was organized as a Massachusetts business trust on May 1, 1984.
The Trust is a diversified, open-end management investment company. Its business
and affairs are managed by its officers under the direction of its board of
trustees.
The principal office of the Trust is Twentieth Century Tower, 4500 Main
Street, P.O. Box 419200, Kansas City, Missouri 64141-6200. All inquiries may be
made by mail to that address, or by phone to 1-800-345-2021. (For local Kansas
City area or international callers: 816-531-5575.)
The Funds are individual series of the Trust which issues shares with no
par value. The assets belonging to each series of shares are held separately by
the custodian and in effect each series is a separate fund.
Each share, irrespective of series, is entitled to one vote for each dollar
of net asset value applicable to such share on all questions, except those
matters which must be voted on separately by the series of shares affected.
Matters affecting only one Fund are voted upon only by that Fund.
Shares have non-cumulative voting rights, which means that the holders of
more than 50% of the shares voting for the election of trustees can elect all of
the trustees if they choose to do so, and in such event the holders of the
remaining less-than 50% of the shares will not be able to elect any person or
persons to the board of trustees.
Unless required by the 1940 Act, it will not be necessary for the Trust to
hold annual meetings of shareholders. As a result, shareholders may not vote
each year on the election of trustees or the appointment of auditors. However,
pursuant to the Trust's by-laws, the holders of shares representing at least 10%
of the votes entitled to be cast may request that the Trust hold a special
meeting of shareholders. We will assist in the communication with other
shareholders.
WE RESERVE THE RIGHT TO CHANGE ANY OF OUR POLICIES, PRACTICES AND
PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF ADDITIONAL
INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE INSTANCES WHERE
SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED.
THIS PROSPECTUS CONSTITUTES AN OFFER TO SELL SECURITIES OF A FUND ONLY IN
THOSE STATES WHERE THE FUND'S SHARES HAVE BEEN REGISTERED OR OTHERWISE QUALIFIED
FOR SALE. A FUND WILL NOT ACCEPT APPLICATIONS FROM PERSONS RESIDING IN STATES
WHERE THE FUND'S SHARES ARE NOT REGISTERED.
33
BENHAM MUNICIPAL FUNDS
Benham Arizona Municipal
Intermediate-Term Fund
Benham Florida Municipal Money
Market Fund
Benham Florida Municipal
Intermediate-Term Fund
Benham National Tax-Free
Money Market Fund
Benham National Tax-Free
Intermediate-Term Fund
Benham National Tax-Free
Long-Term Fund
PROSPECTUS
SEPTEMBER 3, 1996
[company logo]
- ---------------------------------
P.O. Box 419200
Kansas City, Missouri
64141-6200
- ---------------------------------
Person-to-person assistance:
- ---------------------------------
1-800-345-2021 or 816-531-5575
- ---------------------------------
Automated:
- ---------------------------------
Telecommunications for the deaf:
- ---------------------------------
Fax:
- ---------------------------------
<PAGE>
BENHAM FLORIDA MUNICIPAL MONEY MARKET FUND
BENHAM FLORIDA MUNICIPAL INTERMEDIATE-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
Funds' 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
Special Considerations Regarding Florida Municipal Securities 9
Investment Restrictions 10
Portfolio Transactions 12
Valuation of Portfolio Securities 12
Performance 14
Taxes 16
About the Trust 19
Trustees and Officers 20
Investment Advisory Services 22
Administrative and Transfer Agent Services 23
Direct Fund Expenses 23
Expense Limitation Agreements 24
Additional Purchase and Redemption Information 24
Other Information 25
Financial Statements 29
NOTE: Throughout this Statement of Additional Information, Benham Florida
Municipal Money Market Fund will be referred to as the Money Market Fund, and
Benham Florida Municipal Intermediate-Term Fund will be referred to as the
Intermediate-Term Fund.
1
<PAGE>
INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of the 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.
INDUSTRIAL DEVELOPMENT BONDS (IDBs), a type of revenue bond, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business,
2
<PAGE>
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 an IDB
depends 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.
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 from financial
intermediaries. Floating-rate securities 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
typically is based on an index. These rate formulas are designed to result in a
market value for the VRDO or FRDO that approximates par value.
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.
Benham Management Corporation (BMC), the Funds' investment advisor, 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
portfolio 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 (IRS).
Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, puts normally will be determined to have a value of zero,
regardless of whether any direct or indirect consideration is paid. Accordingly,
puts as separate securities are not expected to affect 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.
TENDER OPTION BONDS
Tender option bonds (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, either Fund may purchase these instruments.
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
3
<PAGE>
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.
There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, 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.
WHEN-ISSUED AND FORWARD-COMMITMENTS
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 risk of price and
yield fluctuations. While the Funds 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, each Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, U.S. government 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 the sale of securities, or, although it would not
normally expect to do so, through sales of 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.
4
<PAGE>
As an operating policy, each Fund will not commit greater than 50% of its total
assets to when-issued or forward-commitment agreements. If fluctuations in the
value of securities held cause more than 50% of a Fund's total 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 below 50% of total assets.
MUNICIPAL LEASE OBLIGATIONS
Each Fund may invest 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, and conditional sale contracts (which normally
provide for the 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 their constitutional and statutory requirements for the issuance
of debt.
Many leases and contracts include nonappropriation clauses providing that the
governmental 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.
INVERSE FLOATERS (INTERMEDIATE-TERM FUND)
The Intermediate-Term Fund may buy or sell inverse floaters. An inverse floater
is a type of derivative that bears an interest rate that moves inversely to
market interest rates. As market interest rates rise, the interest rate on
inverse floaters 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:
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(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 the 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 which 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.
SHORT-TERM SECURITIES (INTERMEDIATE-TERM FUND)
Under certain circumstances, the Intermediate-Term Fund 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 the Funds' investments in short-term securities to
exceed 35% of total assets. If the 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 Fund 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 (SEC), for liquidity purposes, the Intermediate-Term Fund
may invest up to 5% of its total 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
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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 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 or means of financing municipal projects, material or
manpower shortages, and declining demand for the projects or facilities financed
by the municipal bonds.
FUTURES AND OPTIONS (INTERMEDIATE-TERM FUND)
The Intermediate-Term 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 the Fund's investments against
price fluctuations. Other strategies, such as buying futures, writing puts, and
buying calls, tend to increase market exposure.
The Fund does not use futures and options transactions for speculative purposes.
Although other techniques may be used to control the Fund's exposure to market
fluctuations, the use of futures contracts may 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 the
transaction costs incurred in the purchase and sale of the underlying
securities.
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 Commodity Futures
Trading Commission (CFTC), a U.S. government agency. The Fund may engage in
futures and options transactions based on securities indexes, such as the Bond
Buyer Index of Municipal Bonds, that are consistent with the Funds' investment
objectives. The Fund may also engage in futures and options transactions based
on specific securities, such as U.S. Treasury bonds or notes.
Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the
Municipal Bond Index. Although other types of 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 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 open positions in a futures contract, a Fund would be
required to make a good faith margin deposit in cash or government securities
with a futures 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 deposit 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
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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.
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 suffer losses 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 may 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, the 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,
the Fund may be required to deliver or take delivery of instruments underlying
futures contracts it holds. BMC will seek to minimize these risks by limiting
the contracts it enters into on behalf of the Fund to those traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The Fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments or if securities underlying
futures contracts purchased by the Fund had different maturities than those of
the portfolio securities being hedged. Such imperfect correlation may give rise
to circumstances in which the 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 could 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. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily 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, the 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. The
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 the Fund to make margin payments unless the
option is exercised.
Although it does not currently intend to do so, the Fund 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 Fund would give up
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some ability to participate in a price increase on the underlying security. If
the Fund were to engage in options transactions, it would own the futures
contract at the time a call were 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. The Intermediate-Term
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 (i) for hedging purposes without regard to the percentage
of assets committed to initial margin and option premiums or (ii) 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, the Fund will set aside cash and appropriate liquid assets in a segregated
account to cover its obligations related to futures contracts and options.
The Fund intends to comply with tax rules applicable to regulated investment
companies, including a requirement that gains from the sales of securities and
certain other instruments 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 Fund's
investments in such instruments.
SPECIAL CONSIDERATIONS REGARDING FLORIDA MUNICIPAL SECURITIES
As briefly discussed in the Prospectus, the Funds are susceptible to political,
economic, and regulatory events that affect issuers of Florida municipal
obligations. The following information about risk factors is provided in view of
the Funds' policies of concentrating their assets in Florida municipal
securities. This information is based on independent municipal credit reports
relating to securities offerings of Florida issuers and other publicly available
sources. It does not constitute a complete description of the risk associated
with investing in securities of these issuers. While BMC has not independently
verified this information, it has no reason to believe the information is
inaccurate.
Because the Funds invest primarily in Florida municipal securities, the Funds
will be affected by political and economic conditions and developments within
the state of Florida. In general, the credit quality and credit risk of any
issuer's debt depend on the state and local economy, the health of the issuer's
finances, the amount of the issuer's debt, the quality of management, and the
strength of legal provisions in debt documents that protect debt holders. Credit
risk is usually lower whenever the economy is strong, growing and diversified,
financial operations are sound, and the debt burden is reasonable.
The state of Florida's economy is characterized by a large service sector, a
dependence on the tourism and construction industries, and a large retirement
population. The management of rapid growth has been the major challenge facing
state and local governments. Florida's population has grown rapidly and is now
the fourth largest state; this growth is expected to continue, but at reduced
rates. The retiree component is expected to continue to be a major factor. As
this growth continues, particularly within the retirement population, the demand
for both public and private services will increase, which may strain the service
sector's capacity and impede the state's budget balancing efforts.
In recent years, the Florida economy has been transforming from a narrow base of
agriculture and seasonal tourism into a service and trade economy, with
substantial insurance, banking, and export participation as well as greater
year-round attraction. The outlook for the Florida economy is continued
expansion fueled by population growth but at a slower rate than that of the
1980s.
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Debt levels in the state of Florida are moderate to high, reflecting the
tremendous capital demands associated with rapid population growth. Florida is
unusual among states in that all general obligation full faith and credit debt
issues of municipalities must be approved by public referendum and are,
therefore, relatively rare. Most debt instruments issued by local municipalities
and authorities have a narrower pledge of security, such as a sales tax stream,
special assessment revenue, user fees, utility taxes, or fuel taxes. Credit
quality of such debt instruments tends to be somewhat lower than that of general
obligation debt. The state of Florida issues general obligation debt for a
variety of purposes; however, the state constitution requires a specific revenue
stream to be pledged to state general obligation bonds as well.
The state of Florida is heavily dependent upon sales tax, which makes the
state's general fund vulnerable to recession and presents difficulties in
expanding the tax base in an economy increasingly geared to services. This
dependence upon sales tax, combined with economic recession, has resulted in
budgetary shortfalls in the past; Florida has reacted to preserve an adequate
financial position primarily through expenditure reductions. State officials,
however, still face tremendous capital and operating pressures due to the growth
that will continue to strain the state's narrow revenue base. Future budgets may
require a wider revenue base to meet such demands; the most likely candidate for
such revenue enhancement is a tax on consumer services. The creation of a
Florida personal income tax is a remote possibility because it would require an
amendment to the state's constitution. However, there can be no assurance that a
personal income tax will not be implemented in the future if such a tax were to
be imposed, there is no assurance that interest earned on Florida municipal
obligations would be exempt from this tax.
INVESTMENT RESTRICTIONS
Each of the Fund's 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.
A FUND MAY NOT
(1) Borrow money, except from a bank as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes and provided
that the Fund maintains asset coverage of at least 300% for all such
borrowings. A Fund may borrow money for temporary or emergency purposes
from other funds or portfolios for which BMC is the investment advisor or
from a joint account of such funds or portfolios as permitted by federal
regulatory agencies. Before such borrowing from another fund would be
permissible, the Fund would need to obtain exemptive relief from the staff
of the SEC. The Fund has no current intent of obtaining such relief.
(2) Act as an underwriter of securities issued by others, except to the extent
that the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities, and
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.
(3) Purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent a Fund from
investing in securities or other instruments backed by real estate or
securities of issuers engaged in the real estate business); physical
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commodities or contracts relating to physical commodities; or interests in
oil, gas and/or mineral exploration or development programs or leases. This
restriction shall not be deemed to prohibit a Fund from purchasing or
selling currencies; entering into futures contracts on securities,
currencies, or on indexes of such securities or currencies, or any other
financial instruments; and purchasing and selling options on such futures
contracts.
(4) Make loans to others, except in accordance with the Fund's investment
objective and policies.
(5) Issue senior securities, except as permitted under the Investment Company
Act of 1940.
The Funds are also subject to the following restrictions, which are not
fundamental and may therefore be changed by the board of trustees without
shareholder approval.
A FUND MAY NOT
(a) Purchase equity securities in any companies, including warrants or bonds
with warrants attached, or any preferred stocks, convertible bonds, or
convertible debentures.
(b) Sell securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short, and provided
that transactions in options and futures contracts are not deemed to
constitute short sales of securities.
(c) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and
options on futures contracts shall not constitute the purchase of
securities on margin.
(d) 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 Florida Municipal Money
Market Fund's net assets or more than 15% of the Intermediate-Term Fund's
net assets would be invested in illiquid securities.
(e) Acquire or retain the securities of any other investment company if, as a
result, more than 3% of such investment company's outstanding shares would
be held by the Fund, more than 5% of the value of the Fund's assets would
be invested in shares of such investment company, or more than 10% of the
value of the Fund's assets would be invested in shares of investment
companies in the aggregate, or except in connection with a merger,
consolidation, acquisition, or reorganization.
(f) Invest in securities of an issuer that, together with any predecessor or
unconditional guarantor, has been in operation for less than three years
if, as a result, more than 5% of the total assets of the Fund would then be
invested in such securities, except obligations issued or guaranteed by the
U.S. government or its agencies and municipal securities.
(g) 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 activities 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 limitations on
borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or
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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, in either case, the creating
government or some other entity were to guarantee 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 the board of trustees may issue 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%. 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 Intermediate-Term Fund's portfolio turnover rate for the fiscal year ended
May 31, 1995, was 36.63%.
Investment decisions are made for each Fund independently from those made for
other funds advised by BMC. From time to time, however, two or more funds
advised by BMC may hold the same security. When two or more funds are
simultaneously engaged in purchasing or selling a security, the prices and
amounts are allocated in a manner believed by BMC to be equitable to each of the
funds involved. In some instances, simultaneous transactions could have a
detrimental effect on the price or value of a security as far as the
participating funds are concerned. In other instances, however, the ability to
participate in volume transactions will produce better prices and executions for
the funds.
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.
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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 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 generally 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 method of valuation 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 determined by its directors or trustees to present minimal credit
risks and that are (i) 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 the
obligation) or (ii) 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.
The trustees have established procedures designed to stabilize, to the extent
reasonably possible, the Florida Municipal 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, a Fund's weighted average maturity
exceeds 90 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 further
action.
The board of trustees monitors the levels of illiquid securities, however if the
levels are exceeded, they will take action to rectify these levels.
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.
INTERMEDIATE-TERM FUND. Securities held by the Intermediate-Term Fund are
normally priced by an independent pricing service, provided that such prices are
believed by BMC to reflect the fair market value of portfolio securities.
Because there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services are
generally determined without regard to
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bid or last sale prices. In valuing securities, the pricing services generally
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 ask 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 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 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
4.25%, and its effective yield was 4.34%.
For the INTERMEDIATE-TERM FUND, yield quotations are based on the investment
income per share earned during a particular 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.
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For the 30-day period ended May 31, 1995, the Intermediate-Term Fund's yield was
4.96%.
Total returns quoted in advertising and sales literature 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 total 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 total 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.
Performance for the fiscal year ended May 31, 1995 is listed in the chart below:
MONEY MARKET FUND INTERMEDIATE-TERM FUND
One Year 3.71% 7.31%
Since Inception 3.62 8.07
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 percentages 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. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
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 comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for 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.
15
<PAGE>
The Funds' shares are sold without a sales charge (or "load"). No-load funds
offer an advantage to investors when compared to load funds with comparable
investment objectives and strategies. For example, if you invest $10,000 in a
no-load fund, 100% of your investment is used to buy shares. If you invest
$10,000 in a fund with a 5.5% load, only $9,450 ($10,000 minus $550) is used to
buy shares. Over time, this difference can have a significant effect on total
return. Assuming a compounded annual growth rate of 10% for both investments,
the no-load fund investment would be worth $25,937 after 10 years, whereas the
load fund investment would be worth only $24,511.
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 that invests primarily in zero-coupon U.S. Treasury
securities, the first no-load double tax-free California money market and
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.
BMC may obtain fund ratings on the safety of Fund shares from one or more
nationally recognized statistical rating organizations (rating agencies) and may
publish these ratings in advertisements and sales literature.
TAXES
FEDERAL INCOME TAX
Each 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, each Fund will not incur federal income and state 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 qualify to pay "exempt-interest dividends" (as defined
in the Code) to shareholders. Each 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 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.
Each Fund will determine periodically which distributions will be designated as
exempt-interest dividends. If a Fund earns income that is not eligible to be so
designated, 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 each Fund from investment in
debt securities other than municipal securities, of ordinary income realized
upon the disposition of market discount bonds (including tax-exempt market
discount bonds), and of any net realized short-term capital gains 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.
16
<PAGE>
The timing of an investment could have undesirable tax consequences. If a
shareholder opens an account or buys shares for an account before the day a
dividend or distribution is declared, the shareholder may receive a portion of
the investment back as taxable income if that dividend or distribution is not an
exempt-interest dividend.
Under the Code, any distribution designated as being made from a fund's net
realized long-term capital gains is taxable to shareholders as long-term capital
gains, regardless of the length of time shares have been held.
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 Fund's investments in
such instruments.
Upon the sale or exchange of shares, a shareholder generally will realize a
taxable gain or loss depending upon his or 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. However, any loss realized upon a sale or redemption of shares
within six months of their purchase will be treated as long-term capital loss to
the extent of capital gain dividends received on such gains.
Any loss realized from a disposition of a Fund's shares held for six months or
less will be disallowed to the extent that dividends received from the Fund have
been designated as exempt-interest dividends. Any loss realized on a sale or
exchange of the Fund's 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.
Interest on certain types of industrial development bonds is not exempt from
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% in the equity value of the substantial user.
Certain options, futures contracts, and forward contracts in which the Funds may
invest are "section 1256 contracts." Gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses (60-40). Also, section 1256 contracts held by a Fund at the end of each
taxable year (and, in some cases, for purposes of the 4% excise tax, on October
31 of each year) are marked to market with the result that unrealized gains or
losses are treated as though they were realized.
17
<PAGE>
The hedging transactions undertaken by the Funds may result in straddles for
federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by a fund. In addition, losses realized by a fund on
positions that are part of a straddle may be deferred under the straddle rules,
rather than being taken into account in calculating the taxable income for the
taxable year in which such losses are realized. Because only a few regulations
implementing the straddle rules have been promulgated, the tax consequences to
the Funds of hedging transactions are not entirely clear. The hedging
transactions may increase the amount of short-term capital gains realized by the
Funds, which are taxed as ordinary income when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code that
are applicable to straddles. If the Fund makes any of the elections, the amount,
character, and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
elections made. The rules applicable under certain of the elections may operate
to accelerate the recognition of gains or losses from the affected straddle
positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses, and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount that must be distributed to
shareholders and that will be taxed to shareholders as ordinary income or as a
long-term capital gain may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
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 Fund's 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 reevaluate the Funds' investment
objectives and policies and would consider either changes in the structure of
the Trust or its dissolution.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally tax-exempt, interest on certain nonessential
or private activity securities issued after August 7, 1986, while tax-exempt,
constitutes a tax-preference item for taxpayers in determining alternative
minimum tax liability under the Code and income tax provisions of several
states. The interest on private activity securities could subject a shareholder
to, or increase liability under, the federal alternative minimum tax, depending
on the shareholder's tax situation.
All distributions derived from interest exempt from regular federal income tax
may subject corporate shareholders to, or increase their liability under, the
alternative minimum tax because these distributions are included in the
corporation's adjusted current earnings.
The Trust will inform shareholders annually as to the dollar amount of
distributions derived from interest payments on private activity securities.
18
<PAGE>
STATE AND LOCAL TAXES
Dividends and distributions paid by the Funds to individuals who are Florida
residents will not be subject to personal income taxation by Florida because
Florida does not have a personal income tax. Corporate shareholders that are
subject to the Florida corporate income tax should consult with their tax
advisor regarding the application of the Florida corporate income tax to
dividends and distributions paid by the Funds.
The Funds may apply for rulings from the Florida Department of Revenue (FDR) to
the effect that shares of a Fund will be exempt from the Florida intangibles tax
each year if the Fund's portfolio of investments on January 1 of that year
consists of investments exempt from the Florida intangibles tax. Investments
exempt from the Florida intangibles tax include, but are not limited to, (i)
notes, bonds and other obligations issued by the state of Florida or its
municipalities, counties, and other taxing districts and (ii) notes, bonds, and
other obligations issued by the U.S. government and its agencies. Obligations
issued by the government of Puerto Rico are also exempt if permitted by ruling.
If a Fund's portfolio of investments on January 1 of each year includes
investments that are not exempt from the Florida intangibles tax, the Fund's
shares could be wholly or partially subject to the Florida intangibles tax. The
Funds intend that on January 1 of each year, each Fund's portfolio of
investments will consist solely of investments exempt from the Florida
intangibles tax.
The Funds' dividends may not qualify for exemption under income or other tax
laws of state or local taxing authorities outside of Florida. Shareholders
should consult their tax advisors or state or local tax authorities about the
status of distributions from the Funds in this regard.
The information above is only a summary of some of the tax considerations
affecting the Funds and their shareholders. No attempt has been made to discuss
individual tax consequences. To determine whether the Funds are a suitable
investment based on his or her tax 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"). Two 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; 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. Shares of each series have
equal voting rights, although each series votes separately on matters affecting
that series exclusively.
19
<PAGE>
The 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 on account 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 bank 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, CA 94111, serves as the Trust'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
received from the Funds for the Funds' 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 $367 (Money Market) Not Applicable Not Applicable $67,999
342 (Intermediate-Term)
- ----------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $368 (Money Market) Not Applicable Not Applicable $76,500
347 (Intermediate-Term)
- ----------------------------------------------------------------------------------------------------------------
Ezra Solomon $381 (Money Market) Not Applicable Not Applicable $79,251
389 (Intermediate-Term)
- ----------------------------------------------------------------------------------------------------------------
Isaac Stein $373 (Money Market) Not Applicable Not Applicable $72,001
348 (Intermediate-Term)
- ----------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $376 (Money Market) Not Applicable Not Applicable $75,500
345 (Intermediate-Term)
- ----------------------------------------------------------------------------------------------------------------
+ Elected on May 31, 1995, and received no compensation for fiscal year.
* The Benham Group fund complex currently consists of 41 investment companies.
</TABLE>
As of August 31, 1995, the Trust's officers and trustees, as a group, owned less
than 1% of the each Fund's outstanding shares.
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 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 outstanding
shares or by vote of a majority of the Fund's directors, including a majority of
those directors 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.
22
<PAGE>
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 assists the Fund's
officers in carrying out decisions made by the board of directors.
For these services, each Fund pays BMC a monthly investment advisory fee based
on its pro rata share of the dollar amount derived from applying the Fund's
average daily net assets to the following investment advisory fee rate 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
Due to reimbursements, the Funds paid no investment advisory fees to BMC during
the fiscal period from April 11, 1994 (commencement of operations), through May
31, 1995.
ADMINISTRATIVE AND TRANSFER AGENT SERVICES
Benham Financial Services, Inc., 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 schedule:
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 monthly fees of $1.3958 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during the month.
Due to reimbursements, the Funds paid no administrative services or transfer
agent fees to BFS during the fiscal period from April 11, 1994 (commencement of
operations), through May 31, 1994, and for the year ended May 31, 1995.
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
23
<PAGE>
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 below.
FUND EXPENSE LIMIT
Money Market Fund .65%
Intermediate-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 reimbursements paid by BMC for the year ended May 31, 1995, were $201,445
and $70,638 for the Money Market Fund and Intermediate-Term Fund, respectively.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds' shares are available only to residents of California, Florida,
Georgia, Illinois, Michigan, New Jersey, and Pennsylvania. The Funds' shares are
continuously offered at net asset value. 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. The matrix
below shows the names, addresses, and holdings of all shareholders of record who
owned more than 5% of a Fund's outstanding shares.
<TABLE>
<CAPTION>
=============================================================================================
FUND SHAREHOLDER # OF SHARES HELD % OF TOTAL
NAME AND ADDRESS SHARES OUTSTANDING
=============================================================================================
<S> <C> <C> <C>
Intermediate-Term Charles Schwab & Co. 175,882.451 18.3654
Fund 101 Montgomery Street
San Francisco, CA 94104
Pershing Div. of Donaldson 97,700.761 10.2018
Lufkin & Jenrette Sec. Corp.
P.O. Box 2052
Jersey City, NJ 07303-2052
=============================================================================================
As of August 31, 1995, to the knowledge of the Trust, no other shareholder was the record
shareholder or beneficial owner of 5% or more of a Fund's total shares outstanding.
</TABLE>
24
<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 to BFS.
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
and Exchange Commission.
For further information, refer to the registration statement 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.
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:
Aaa: Bonds that are rated "Aaa" are judged to be of the highest 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.
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 that
suggest a susceptibility to impairment sometime in the future.
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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.
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,
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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.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial or economic conditions, it is not
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likely to have the capacity to pay interest and repay principal. The "CCC"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "B" or "B-" rating.
CC: The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
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 are 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."
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BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND
A 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
Fund's current Prospectus dated September 30, 1995. The Fund's 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
Special Considerations Regarding Arizona Municipal Securities 9
Investment Restrictions 10
Portfolio Transactions 12
Valuation of Portfolio Securities 12
Performance 13
Taxes 15
About the Trust 18
Trustees and Officers 19
Investment Advisory Services 20
Administrative and Transfer Agent Services 22
Direct Fund Expenses 22
Expense Limitation Agreements 22
Additional Purchase and Redemption Information 23
Other Information 23
Financial Statements 28
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INVESTMENT POLICIES AND TECHNIQUES
The following pages provide a more detailed description of the 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.
INDUSTRIAL DEVELOPMENT BONDS (IDBs), a type of revenue bond, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business,
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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 an IDB
depends 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.
VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS
The Fund 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 from financial
intermediaries. Floating-rate securities 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
typically is based on an index. These rate formulas are designed to result in a
market value for the VRDO or FRDO that approximates par value.
OBLIGATIONS WITH TERM PUTS ATTACHED
The 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 Fund to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.
Benham Management Corporation (BMC), the Fund's investment advisor, expects that
the Fund will pay more for securities with puts attached than for securities
without these liquidity features. BMC may buy securities with puts attached to
keep the Fund fully invested in municipal securities while maintaining
sufficient portfolio liquidity to meet redemption requests or to facilitate
management of the Fund's investments. To ensure that the interest on municipal
securities subject to puts is tax-exempt to the Fund, BMC limits the Fund's 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, puts normally will be determined to have a value of zero,
regardless of whether any direct or indirect consideration is paid. Accordingly,
puts as separate securities are not expected to affect the Fund's weighted
average maturities. When the 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) the Fund attempts to exercise the put. To
minimize such risks, the Fund will purchase obligations with puts attached only
from sellers deemed creditworthy by BMC.
TENDER OPTION BONDS
Tender option bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations. 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.
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There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, BMC
monitors the credit quality of bonds underlying the Fund's 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.
WHEN-ISSUED AND FORWARD-COMMITMENT AGREEMENTS
The Fund may engage in municipal 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 risk 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 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 the sale of securities, or, although it would not
normally expect to do so, through sales of 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, the Fund will not commit greater than 50% of its total
assets to when-issued or forward-commitment agreements. If fluctuations in the
value of securities held cause more than 50% of the Fund's total 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
4
<PAGE>
agreements on behalf of the Fund until the percentage of assets committed to
such agreements is below 50% of total assets.
MUNICIPAL LEASE OBLIGATIONS
The Fund may invest 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 Fund 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, and 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 providing that the
governmental 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.
INVERSE FLOATERS
The Fund may buy or sell inverse floaters. An inverse floater is a type of
derivative that bears an interest rate that moves inversely to market interest
rates. As market interest rates rise, the interest rate on inverse floaters 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.
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(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 the 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 which time interest on the floater is
capped at a predetermined rate.
The secondary market for floaters and inverse floaters may be limited. Changes
in the market value of inverse floaters tend to be significantly greater than
those of fixed-rate bonds because of the way interest payments are determined.
The interest rates on inverse floaters may be significantly reduced, even to
zero, if interest rates rise.
SHORT-TERM SECURITIES
Under certain circumstances, the Fund 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 the Fund's investments in short-term securities to exceed 35% of
total assets. If the 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 Fund 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, the 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 the 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 the 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 could
suffer as a class. Additional financing might be required to comply with the new
environmental requirements, and outstanding debt might be downgraded in
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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 or means of financing municipal projects, material or manpower
shortages, and declining demand for the projects or facilities financed by the
municipal bonds.
FUTURES AND OPTIONS
The 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 the Fund's investments against price
fluctuations. Other strategies, such as buying futures, writing puts, and buying
calls, tend to increase market exposure. The Fund does not use futures and
options transactions for speculative purposes.
Although other techniques may be used to control the Fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the Fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
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 Commodity Futures
Trading Commission (CFTC), a U.S. government agency. The Fund may engage in
futures and options transactions based on securities indexes, such as the Bond
Buyer Index of Municipal Bonds, that are consistent with the Fund's investment
objectives. The Fund may also engage in futures and options transactions based
on specific securities, such as U.S. Treasury bonds or notes.
Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the
Municipal Bond Index. Although other types of 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 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 open positions in a futures contract, the Fund would be
required to make a good faith margin deposit in cash or government securities
with a futures 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 deposit 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 Fund's investment
restrictions.
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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 the Fund's return.
The Fund could suffer losses 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 may 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, the 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, the Fund may be required to deliver or take delivery of instruments
underlying futures contracts it holds. BMC will seek to minimize these risks by
limiting the contracts it enters into on behalf of the Fund to those traded on
national futures exchanges and for which there appears to be a liquid secondary
market.
The Fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments or if securities underlying
futures contracts purchased by the Fund had different maturities than those of
the portfolio securities being hedged. Such imperfect correlation might give
rise to circumstances in which the Fund lost money on a futures contract at the
same time that it experienced a decline in the value of its hedged portfolio
securities. The Fund could also lose margin payments it had deposited with a
margin broker if, for example, the broker became 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. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily 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, the 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. The 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 the Fund to make margin payments unless the
option is exercised. Although it does not currently intend to do so, the Fund
may write (or sell) call options that obligate it 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 Fund would
give up some ability to participate in a price increase on the underlying
security. If the Fund were to engage in options transactions, it would own the
futures contract at the time a call were 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. The Fund may enter
into futures contracts, options, or options on futures contracts, provided that
such obligations represent no more
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than 20% of the Fund's net assets. Under the Commodity Exchange Act, the Fund
may enter into futures and options transactions (i) for hedging purposes without
regard to the percentage of assets committed to initial margin and option
premiums or (ii) 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, the Fund will set aside cash and appropriate
liquid assets in a segregated account to cover its obligations related to
futures contracts and options.
The Fund intends to comply with tax rules applicable to regulated investment
companies, including a requirement that gains from the sale of securities and
certain other instruments held less than three months constitute less than 30%
of the 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 Fund's
investments in such instruments.
SPECIAL CONSIDERATIONS REGARDING ARIZONA MUNICIPAL SECURITIES
As briefly discussed in the Prospectus, the Fund is susceptible to political,
economic, and regulatory events that affect issuers of Arizona municipal
obligations. The following information about risk factors is provided in view of
the Fund's policy of concentrating its assets in Arizona municipal securities.
This information is based on certain official statements of the state of Arizona
published in connection with the issuance of specific Arizona municipal
securities as well as from other publicly available sources. It does not
constitute a complete description of the risk associated with investing in
securities of these issuers. While BMC has not independently verified the
information contained in the official statements, it has no reason to believe
the information is inaccurate.
Located in the country's sunbelt, Arizona has been, and is projected to continue
to be, one of the faster growing areas in the United States. Over the last
several decades, the state has outpaced most other regions of the country in
population and personal income growth, gross state product, and job creation.
Geographically, Arizona is the nation's sixth largest state in terms of area. It
is divided into three distinct topographic regions: the northern third which is
high plateau country traversed by deep canyons, such as Grand Canyon National
Park; central Arizona which is rugged, mountainous, and heavily forested; and
the southern third which encompasses desert areas and flat, fertile agricultural
lands in valleys between mountains rich in mineral deposits. These topographic
areas all have different climates, which have distinctively influenced
development in each region. Land ownership is vested largely in the federal and
state governments: 32% is owned by the federal government, 28% is held as
Federal Trust Land (Indian), 17% is in private ownership, and 13% is held by the
state, leaving approximately 10% held in other categories.
Over the last twenty-five years, the state's emphasis on the mining and
agricultural employment sectors has diminished, and significant job growth has
occurred in the areas of aerospace and high technology, construction, finance,
insurance, and real estate. Arizona's economy has continued to grow in recent
years, although at a slower rate of growth than was experienced in earlier
periods.
Under its constitution, the state of Arizona is not permitted to issue general
obligation bonds secured by the full faith and credit of the state. However,
certain agencies and instrumentalities of the state are authorized to issue
bonds secured by revenues from specific projects and activities, and the state
and local governmental units may enter into lease transactions. The particular
source of payments and security for an Arizona municipal obligation is detailed
in the instruments themselves and in related offering materials.
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The state and local governmental units are subject to limitations imposed by
Arizona law with respect to ad valorem taxation, bonded indebtedness, the amount
of annual increases in taxes, and other matters. These limitations may affect
the ability of the issuers to generate revenues to satisfy their debt
obligations. There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that may be levied without voter approval. If such a proposal were enacted,
there might be an adverse impact on state or local government financing.
Arizona is required by law to maintain a balanced budget. In the past, the state
has used a combination of spending reductions and tax increases to avoid
potential budgetary shortfalls and may be required to do so again in the future.
INVESTMENT RESTRICTIONS
The Fund's investment restrictions set forth below 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.
THE FUND MAY NOT
(1) Borrow money, except from a bank as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes and provided
that the Fund maintains asset coverage of at least 300% for all such
borrowings. The Fund may borrow money for temporary or emergency purposes
from other funds or portfolios for which BMC is the investment advisor or
from a joint account of such funds or portfolios as permitted by federal
regulatory agencies. Before such borrowing from another fund would be
permissible, the Fund would need to obtain exemptive relief from the staff
of the SEC. The Fund has no current intention to obtain such relief.
(2) Act as an underwriter of securities issued by others, except to the extent
that the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities, and
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.
(3) Purchase or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or
securities of issuers engaged in the real estate business); physical
commodities or contracts relating to physical commodities; or interests in
oil, gas and/or mineral exploration or development programs or leases. This
restriction shall not be deemed to prohibit the Fund from purchasing or
selling currencies; entering into futures contracts on securities,
currencies, or on indexes of such securities or currencies, or any other
financial instruments; and purchasing and selling options on such futures
contracts.
(4) Make loans to others, except in accordance with the Fund's investment
objective and policies.
(5) Issue senior securities, except as permitted under the Investment Company
Act of 1940.
The Fund is also subject to the following restrictions, which are not
fundamental and may therefore be changed by the board of trustees without
shareholder approval.
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THE FUND MAY NOT
(a) Purchase equity securities in any company, including warrants, or bonds
with warrants attached, or any preferred stocks, convertible bonds, or
convertible debentures.
(b) Sell securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short, and provided
that transactions in options and futures contracts are not deemed to
constitute short sales of securities.
(c) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and
options on futures contracts shall not constitute the purchase of
securities on margin.
(d) 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. The Fund may not invest more than 10%
of its net assets in repurchase agreements providing for settlement in more
than seven days, or options that are traded in the over-the-counter market
and investments hedged by such options.
(e) Acquire or retain the securities of any other investment company if, as a
result, more than 3% of such investment company's outstanding shares would
be held by the Fund, more than 5% of the value of the Fund's assets would
be invested in shares of such investment company, or more than 10% of the
value of the Fund's assets would be invested in shares of investment
companies in the aggregate, or except in connection with a merger,
consolidation, acquisition, or reorganization.
(f) Invest in securities of an issuer that, together with any predecessor or
unconditional guarantor, has been in operation for less than three years
if, as a result, more than 5% of the total assets of the Fund would then be
invested in such securities, except obligations issued or guaranteed by the
U.S. government or its agencies and municipal securities.
(g) 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 activities 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 limitations on
borrowing, 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 Fund's 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 is deemed the sole issuer. If, in either case, the creating government or
some other entity were to guarantee the security, the guarantee would be
considered a separate security and would be treated as an issue of the
guaranteeing entity.
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PORTFOLIO TRANSACTIONS
The 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 Fund.
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 the board of
trustees may issue from time to time. BMC will select broker-dealers to execute
portfolio transactions on behalf of the Fund solely on the basis of best price
and execution.
Under normal conditions, the Fund's annual portfolio turnover rate is not
expected to exceed 100%. 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 Fund's portfolio turnover rate for the fiscal period from April 11, 1994
(commencement of operations) through May 31, 1994, was 18.14%, and for the year
ended May 31, 1995, was 33.22%.
Investment decisions are made for the Fund independently from those made for
other funds advised by BMC. From time to time, however, two or more funds
advised by BMC may hold the same security. When two or more funds are
simultaneously engaged in purchasing or selling a security, the prices and
amounts are allocated in a manner believed by BMC to be equitable to each of the
funds involved. In some instances, simultaneous transactions could have a
detrimental effect on the price or value of a security as far as the
participating funds are concerned. In other instances, however, the ability to
participate in volume transactions will produce better prices and executions for
the funds.
VALUATION OF PORTFOLIO SECURITIES
The 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.
The 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.
Securities held by the Fund are normally priced by an independent pricing
service, provided that such prices are believed by BMC to reflect the fair
market value of portfolio securities.
Because the majority of outstanding municipal issues do not trade daily, the
prices provided by pricing services are generally determined without regard to
bid or last sale prices. In valuing securities, the pricing services generally
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
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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 ask 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 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. The
amortized cost 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
generally 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.
PERFORMANCE
The Fund's yields and total returns may be quoted in advertising and sales
literature. Yields and total return will vary, and past performance should not
be considered an indication of future results.
Yield quotations for the Fund are based on the investment income per share
earned during a particular 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 Fund's yield was 4.94%.
Total returns quoted in advertising and sales literature reflect all aspects of
the 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 total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in the 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
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decline in value had been constant throughout the period. For example, a
cumulative return of 100% over ten years would produce an average annual 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 Fund's 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.
Performance for the fiscal year ended May 31, 1995 is listed in the chart below:
INTERMEDIATE-TERM FUND
One Year 7.52%
Since Inception 8.45
In addition to average annual total returns, the 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 percentages 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. Performance information may be quoted numerically or in a table, graph,
or similar illustration.
The Fund's 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 comparisons with funds that, unlike Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for 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.
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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 that invests 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
FEDERAL INCOME TAX
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, each Fund will not incur federal and Arizona income taxes on its net
investment income and on net realized capital gains to the extent distributed to
shareholders.
It is intended that the Fund's assets will be sufficiently invested in municipal
securities to qualify to pay "exempt-interest dividends" (as defined in the
Code) to shareholders. The 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 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 Fund will determine periodically which distributions will be designated as
exempt-interest dividends. If the Fund earns income that 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 the Fund from investments in
debt securities other than municipal securities, of ordinary income realized
upon the disposition of market discount bonds (including tax-exempt market
discount bonds), and of any net realized short-term capital gains will be
taxable to shareholders as ordinary income. Because the Fund's 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 the Fund's net realized long-term capital
gains is taxable to shareholders as long-term capital gains, regardless of the
length of time shares have been held.
As of May 31, 1995, the Fund had a capital loss carryover of $4,892, which was
scheduled to expire on May 31, 2003. 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.
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The Fund intends 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 the 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 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. However, any loss realized upon a sale or redemption of shares
within six months of their purchase will be treated as long-term capital loss to
the extent of capital gain dividends received on such shares.
Any loss realized from a disposition of Fund shares held for six months or less
will be disallowed to the extent that dividends received from the Fund have been
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.
Interest on certain types of industrial development bonds is not exempt from
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 Fund
may invest periodically in industrial development bonds and, therefore, may not
be an appropriate investment 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 or his 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.
Certain options, futures contracts, and forward contracts in which the Fund may
invest are "section 1256 contracts." Gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses (60-40). Also, section 1256 contracts held by the Fund at the end of each
taxable year (and, in some cases, for purposes of the 4% excise tax, on October
31 of each year) are marked to market with the result that unrealized gains or
losses are treated as though they were realized.
The hedging transactions undertaken by the Fund may result in straddles for
federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences to the Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gains
realized by the Fund, which are taxed as ordinary income when distributed to
shareholders.
The Fund may make one or more of the elections available under the Code that are
applicable to straddles. If the Fund makes any of the elections, the amount,
character, and timing of the recognition
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<PAGE>
of gains or losses from the affected straddle positions will be determined under
rules that vary according to the elections made. The rules applicable under
certain of the elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.
Because application of the straddle rules may affect the character of gains or
losses, defer losses, and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount that must be distributed to
shareholders and that will be taxed to shareholders as ordinary income or a
long-term capital gain may be substantially more or less than for a fund that
did not engage in such hedging transactions.
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 Fund's 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 Fund and the Fund's NAV would be adversely affected. Under
these circumstances, the trustees would reevaluate the Fund's investment
objectives and policies and would consider either changes in the structure of
the Trust or its dissolution.
ALTERNATIVE MINIMUM TAX
While the interest on bonds issued to finance essential state and local
government operations is generally tax-exempt, interest on certain nonessential
or private activity securities issued after August 7, 1986, while tax-exempt for
regular federal income tax purposes, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states. The interest on private activity
securities could subject a shareholder to, or increase liability under, the
federal alternative minimum tax, depending on the shareholder's tax situation.
All distributions derived from interest exempt from regular federal income tax
may subject corporate shareholders to, or increase their liability under, the
alternative minimum tax because these distributions are included in the
corporation's adjusted current earnings.
The Trust will inform shareholders annually as to the dollar amount of
distributions derived from interest payments on private activity securities.
STATE AND LOCAL TAXES
Under a ruling by the Arizona Department of Revenue, shareholders who are
otherwise subject to Arizona income tax will not be subject to such tax on
dividends paid by the Fund to the extent that such dividends are attributable to
either (i) obligations of the State of Arizona or its political subdivisions
thereof or (ii) obligations issued by the governments of Guam, Puerto Rico, or
the Virgin Islands. In addition, dividends paid by the Fund that are
attributable to interest payments on direct obligations of the United States
government will not be subject to Arizona income tax so long as the Fund
qualifies as a regulated investment company under subchapter M of the Code.
Other distributions from the Fund, however, such as distributions of short-term
or long-term capital gains, will generally not be exempt from Arizona income
tax.
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<PAGE>
The Fund's dividends may not qualify for exemption under income or other tax
laws of state or local taxing authorities outside of Arizona. Shareholders
should consult their tax advisors or state or local tax authorities about the
status of distributions from the Fund in this regard.
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 tax situation, a prospective shareholder 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"). One 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.
The series votes separately on matters affecting that series exclusively. Voting
rights are not cumulative; 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. The shareholder has rights to
dividends and distributions declared by the Fund and in the net assets of such
Fund upon its liquidation or dissolution proportionate to his or her share
ownership interest in the Fund.
The 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 on account 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 bank 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.
18
<PAGE>
INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 3 Embarcadero Center, San
Francisco, CA 94111, serves as the Trust'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. The trustees
listed below serve as trustees or directors 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 69111.
*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).
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).
19
<PAGE>
*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 below summarizes the compensation that the trustees received from the
Fund for the Fund's fiscal year ended March 31, 1995, as well as the
compensation received for serving as a director or trustee of all other Benham
funds.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED
MARCH 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 $353 Not Applicable Not Applicable $67,999
- -----------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $352 Not Applicable Not Applicable $76,500
- -----------------------------------------------------------------------------------------------------------------
Ezra Solomon $363 Not Applicable Not Applicable $79,251
- -----------------------------------------------------------------------------------------------------------------
Isaac Stein $356 Not Applicable Not Applicable $72,001
- -----------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $360 Not Applicable Not Applicable $75,500
- -----------------------------------------------------------------------------------------------------------------
+ Elected on May 31, 1995, and received no compensation for fiscal year.
* The Benham Group fund complex currently consists of 41 investment companies.
</TABLE>
As of August 31, 1995, the Trust's officers and trustees, as a group, owned less
than 1% of the Fund's outstanding shares.
INVESTMENT ADVISORY SERVICES
The Fund has an investment advisory agreement with Benham Management Corporation
(BMC) dated June 1, 1995, that was approved by shareholders on May 31, 1995.
20
<PAGE>
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 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.
The 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 outstanding
shares or by vote of a majority of the Fund's directors, including a majority of
those directors 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.
The 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 assists the Fund's
officers in carrying out decisions made by the board of directors.
For these services, the Fund pays BMC a monthly investment advisory fee based on
its pro rata share of the dollar amount derived from applying the Fund's average
daily net assets to the following investment advisory fee rate 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; and
.19% of net assets over $6.5 billion;
Investment advisory fees paid by the Fund to BMC for the fiscal period ended May
31, 1995, is indicated in the following table. Fee amounts are net of expense
limitations/recoupments as described below.
FISCAL PERIOD INVESTMENT ADVISORY FEES
Year ended 5/31/95 0
April 11, 1994-May 31, 1995 0
21
<PAGE>
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, the 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 schedule:
GROUP ASSETS ADMINISTRATIVE FEE RATE
up to $4.5 billion .11%
up to $6.0 billion .10
up to $9.0 billion .09
over $9.0 billion .08
This fee rate schedule was approved by the board of trustees on February 7,
1994.
For transfer agent services, the Fund pays BFS monthly fees of $1.3958 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during that month.
Due to reimbursements, the Fund paid no administrative services or transfer
agent fees to BFS during the fiscal period from April 11, 1994 (commencement of
operations), through May 31, 1994, and for the year ended May 31, 1995.
DIRECT FUND EXPENSES
The 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.
The Funds' contractual expense limit is subject to annual renewal. The expense
limit for the year ended May 31, 1995 was .66% of average daily net assets.
Effective June 1, 1995, the expense limit was .69% of average daily net assets.
Net reimbursements paid by BMC for the fiscal year ended May 31, 1995, were
$139,257.
22
<PAGE>
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund's shares are available only to residents of Arizona, California,
Colorado, Nevada, Oregon, Washington, and Texas. The Fund's 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. The matrix
below shows the names, addresses, and holdings of all shareholders of record who
owned more than 5% of a Fund's outstanding shares.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
FUND SHAREHOLDER # OF SHARES HELD % OF TOTAL
NAME AND ADDRESS SHARES OUTSTANDING
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Charles Schwab & Co. 254,208.524 12.3998
Fund 101 Montgomery Street
San Francisco, CA 94104
Louis R. Becker 116,564.141 5.6858
5625 N. 12th Avenue
Phoenix, AZ 85013-1753
- ---------------------------------------------------------------------------------------
</TABLE>
As of August 31, 1995, to the knowledge of the Trust, no other shareholder was
the beneficial shareholder or record shareholder of more than 5% of a Fund's
shares outstanding.
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.
OTHER INFORMATION
The Fund's investment advisor, Benham Management Corporation (BMC), has been
continuously registered with the Securities and Exchange Commission 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
and Exchange Commission.
For further information, refer to the registration statement and exhibits on
file with the Securities and Exchange Commission in Washington, D.C. These
documents are available upon payment of a
23
<PAGE>
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.
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.
Aa: Bonds that are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they constitute 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
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
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.
24
<PAGE>
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.
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.
25
<PAGE>
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.
BB: Debt rated "BB" has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions that could lead to
inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B: Debt rated "B" has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The "B" rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied "BB" or "BB-"
rating.
CCC: Debt rated "CCC" has a currently identifiable vulnerability to default and
is dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The "CCC" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"B" or "B-" rating.
CC: The rating "CC" typically is applied to debt subordinated to senior debt
that is assigned an actual or implied "CCC" debt rating.
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.
26
<PAGE>
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 are 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."
27
<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.
1
<PAGE>
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.
2
<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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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
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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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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.
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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
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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
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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.
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(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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(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
13
<PAGE>
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.
14
<PAGE>
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%.
15
<PAGE>
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."
<PAGE>
BENHAM MUNICIPAL TRUST
1933 Act Post-Effective Amendment No. 17
1940 Act Amendment No. 18
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) FINANCIAL STATEMENTS.
Audited financial statements for each series of the Benham Municipal Trust
for the fiscal year ended May 31, 1995, are incorporated into each Fund's
respective Statement of Additional Information.
(b) EXHIBITS.
(1) Amended Declaration of Trust dated May 31, 1995, is incorporated
herein by reference to Exhibit 1(a) of Post Effective Amendment No. 16
filed on July 28, 1995.
(2) Amended and Restated Bylaws dated May 17, 1995 are included herein as
EX-99.B2.
(3) Not applicable.
(4) a) A specimen copy of each National Tax-Free Fund's share certificate
is incorporated herein by reference to Exhibit 4 to Post-Effective
Amendment No. 10.
b) Specimen copy of Benham Florida Municipal Money Market Fund's share
certificate is incorporated herein by reference to Exhibit 4(b) to
Post-Effective Amendment No. 15.
c) Specimen copy of Benham Florida Municipal Intermediate-Term Fund's
share certificate is incorporated herein by reference to Exhibit 4(c)
to Post-Effective Amendment No. 15.
d) Specimen copy of Benham Florida Municipal Long-Term Fund's share
certificate is incorporated herein by reference to Exhibit 4(d) to
Post-Effective Amendment No. 15.
e) Specimen copy Benham Arizona Municipal Intermediate-Term Fund's
share certificate is incorporated herein by reference to Exhibit 4(e)
to Post-Effective Amendment No. 15.
f) Specimen copy Benham Arizona Municipal Long-Term Fund's share
certificate is incorporated herein by reference to Exhibit 4(f) to
Post-Effective Amendment No. 15.
(5) Investment Advisory Agreement between Benham Municipal Trust on behalf
of all of its series and Benham Management Corporation dated June 1,
1995, is filed herein as EX-99.B5.
(6) Distribution Agreement between Benham Municipal Trust and Benham
Distributors, Inc. dated June 1, 1995, is incorporated herein by
reference to Exhibit 6 to Post-Effective Amendment No. 3 of Benham
Investment Trust filed on April 24, 1996 (Accession No.
908406-96-000004).
(7) Not applicable.
(8) Custodian Agreement between Benham Municipal Trust and State Street
Bank & Trust Company dated August 10, 1993, Amendment No. 1 dated
December 1, 1994 to the Custodian Agreement and Amendment No. 2 dated
March 4, 1996 to the Custodian Agreement are incorporated herein as
Exhibit 8 to Post Effective Amendment No. 7 of Benham International
Funds filed on April 22, 1996 (Accession No. 880268-96-000010).
(9) Administrative Services and Transfer Agency Agreement between Benham
Municipal Trust and Benham Financial Services, Inc. dated June 1,
1995, is incorporated by reference to Exhibit 9 to Post-Effective
Amendment No. 3 of Benham Investment Trust filed on April 24, 1996
(Accession No. 908406-96-000004).
(10) Not applicable.
(11) Consent of KPMG Peat Marwick, independent auditors, is incorporated
herein by reference as Exhibit 11(a) to Post Effective Amendment No.
16 filed on July 28, 1995.
(12) Not applicable.
(13) Not applicable.
(14) Not applicable.
(15) Not applicable.
(16) Schedule for computation of each performance quotation provided in
response to Item 22 will be filed by amendment.
(17) Power of Attorney dated March 4, 1996 is included herein as EX-99.B17.
Item 25. Persons Controlled by or Under Control with Registrant.
Not applicable.
Item 26. Number of Holders of Securities.
As of June 1, 1996, each operating series of the Registrant had the following
number of record shareholders:
Benham National Tax-Free Money Market Fund 2,261
Benham National Tax-Free Intermediate-Term Fund 1,786
Benham National Tax-Free Long-Term Fund 1,532
Benham Florida Municipal Money Market Fund 1,106
Benham Florida Municipal Intermediate-Term Fund 349
Benham Arizona Municipal Intermediate-Term Fund 728
Item 27. Indemnification.
As stated in Article VII, Section 3 of the Declaration of Trust, incorporated
herein by reference to Exhibit 1 to the Registration Statement, "The Trustees
shall be entitled and empowered to the fullest extent permitted by law to
purchase insurance for and to provide by resolution or in the Bylaws for
indemnification out of Trust assets for liability and for all expenses
reasonably incurred or paid or expected to be paid by a Trustee or officer in
connection with any claim, action, suit, or proceeding in which he or she
becomes involved by virtue of his or her capacity or former capacity with the
Trust. The provisions, including any exceptions and limitations concerning
indemnification, may be set forth in detail in the Bylaws or in a resolution
adopted by the Board of Trustees."
Registrant hereby incorporates by reference, as though set forth fully herein,
Article VI of the Registrant's Bylaws, amended on May 17, 1995, appearing herein
as Exhibit 2(b).
Item 28. Business and Other Connections of Investment Advisor.
The Registrant's investment advisor, Benham Management Corporation, is also
investment advisor to Capital Preservation Fund, Inc., Capital Preservation Fund
II, Inc., Benham California Tax-Free and Municipal Funds, Benham Target
Maturities Trust, Benham Government Income Trust, Benham Equity Funds, Benham
International Funds, Benham Investment Trust, and Benham Manager Funds.
Item 29. Principal Underwriters.
The Registrant's distribution agent, Benham Distributors, Inc., is also
distribution agent for Capital Preservation Fund, Inc., Capital Preservation
Fund II, Inc., Benham California Tax-Free and Municipal Funds, Benham Target
Maturities Trust, Benham Government Income Trust, Benham Equity Funds, Benham
International Funds, Benham Investment Trust, and Benham Manager Funds. The
information required with respect to each director, officer or partner of Benham
Distributors, Inc. is incorporated herein by reference to Benham Distributors'
Form B-D filed on January 19, 1996 (SEC File No. 8-36938; Firm CRD No. 18784).
Item 30. Location of Accounts and Records.
The Registrant, its investment advisor, Benham Management Corporation, and its
agent for transfer and administrative services, Benham Financial Services, Inc.,
maintain, at the Trust's principal office located at 1665 Charleston Road,
Mountain View, CA 94043, physical possession of each account, book, or other
document, and shareholder records as required by ss.31(a) of the Investment
Company Act of 1940 and rules thereunder. The computer and database for
shareholder records are located at Central Computer Facility, 401 North Broad
Street, Sixth Floor, Philadelphia, PA 19108.
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
Registrant undertakes to furnish each person to whom a Prospectus is delivered
with a copy of the Registrant's latest report to shareholders, upon request and
without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 17/Amendment No. 18 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Mountain View, and State of
California, on the 27th day of June, 1996.
BENHAM MUNICIPAL TRUST
By: /s/ Douglas A. Paul
Douglas A. Paul
Vice President, Secretary, and General Counsel
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 17/Amendment No. 18 has been signed below by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Date
<S> <C> <C>
* Chairman of the Board of Trustees, June 27, 1996
- ---------------------------------- President, and Chief Executive Officer
James M. Benham
* Trustee June 27, 1996
- ----------------------------------
Albert A. Eisenstat
* Trustee June 27, 1996
- ----------------------------------
Ronald J. Gilson
* Trustee June 27, 1996
- ----------------------------------
Myron S. Scholes
* Trustee June 27, 1996
- ----------------------------------
Kenneth E. Scott
* Trustee June 27, 1996
- ----------------------------------
Ezra Solomon
* Trustee June 27, 1996
- ----------------------------------
Isaac Stein*
* Trustee June 27, 1996
- ----------------------------------
James E. Stowers III
* Trustee June 27, 1996
- ----------------------------------
Jeanne D. Wohlers
* Chief Financial Officer, Treasurer June 27, 1996
- ----------------------------------
Maryanne Roepke
/s/ Douglas A. Paul
*Douglas A. Paul, Attorney in Fact
(pursuant to a Power of Attorney dated March 4, 1996).
</TABLE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
EX-99.B1 Amended Declaration of Trust dated May 31, 1995 (filed July 28, 1995,
as Exhibit 1(a) to Post-Effective Amendment No. 16 to the Registration
Statement on Form N-1A of the Registrant, File No. 2-91229, and
incorporated herein by reference).
EX-99.B2 Amended and Restated Bylaws dated May 17, 1995 Investment Advisory
Agreement between Benham Municipal Trust and Benham Management
Corporation, dated June 1, 1995.
EX-99.B4 a) A specimen copy of each National Tax-Free Fund's share certificate
(filed as Exhibit 4 to Post-Effective Amendment No. 10 to the
Registration Statement on Form N-1A of the Registrant, File No.
2-91229, and incorporated herein by reference).
b) Specimen copy of Benham Florida Municipal Money Market Fund's share
certificate (filed as Exhibit 4(b) to Post-Effective Amendment No. 15
to the Registration Statement on Form N-1A of the Registrant, File No.
2-91229, and incorporated herein by reference).
c) Specimen copy of Benham Florida Municipal Intermediate-Term Fund's
share certificate (filed as Exhibit 4(c) to Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A of the Registrant,
File No. 2-91229, and incorporated herein by reference).
d) Specimen copy of Benham Florida Municipal Long-Term Fund's share
certificate (filed as Exhibit 4(d) to Post-Effective Amendment No. 15
to the Registration Statement on Form N-1A of the Registrant, File No.
2-91229, and incorporated herein by reference).
e) Specimen copy Benham Arizona Municipal Intermediate-Term Fund's
share certificate (filed as Exhibit 4(e) to Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A of the Registrant,
File No. 2-91229, and incorporated herein by reference).
f) Specimen copy Benham Arizona Municipal Long-Term Fund's share
certificate (filed as Exhibit 4(f) to Post-Effective Amendment No. 15
to the Registration Statement on Form N-1A of the Registrant, File No.
2-91229, and incorporated herein by reference).
EX-99.B5 Investment Advisory Agreement between Benham Municipal Trust on behalf
of all of its series and Benham Management Corporation dated June 1,
1995.
Ex-99.B6 Distribution Agreement between Benham Municipal Trust and Benham
Distributors, Inc. dated June 1, 1995, (filed on April 24, 1996, as
Exhibit 6 to Post-Effective Amendment No.3 to the Registration
Statement on Form N-1A of Benham Investment Trust, Accession No.
908406-96-000004, and incorporated herein by reference).
EX-99.B8 Custodian Agreement between Benham Municipal Trust and State Street
Bank & Trust Company dated August 10, 1993, Amendment No. 1 dated
December 1, 1994 to the Custodian Agreement and Amendment No. 2 dated
March 4, 1996 to the Custodian Agreement (filed on April 22, 1996, as
Exhibit 8 to Post-Effective Amendment No. 7 to the Registration
Statement on Form N-1A of Benham International Funds, Accession No.
880268-96-000010, and incorporated herein by reference).
EX-99.B9 Administrative Services and Transfer Agency Agreement between Benham
Municipal Trust and Benham Financial Services, Inc. dated June 1,
1995, (filed on April 24, 1996, as Exhibit 9 to Post-Effective
Amendment No. 3 to the Registration Statement on Form N-1A of Benham
Investment Trust, Accession No. 908406-96-000004, and incorporated
herein by reference).
EX-99.B11 Consent of KPMG Peat Marwick, independent auditors (filed on July 28,
1995, as Exhibit 11(a) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A of the Registrant, and herein
incorporated by reference).
EX-99.B16 Schedule for computation of each performance quotation provided in
response to Item 22 to be filed by amendment.
EX-99.B17 Power of Attorney dated March 4, 1996.
EX-99.B27 Financial Data Schedules to be filed by amendment.
TABLE OF CONTENTS
BENHAM MUNICIPAL TRUST
BYLAWS
(amended through May 17, 1995)
ARTICLE I. SHAREHOLDERS
1. Place and Time of Meetings
2. Notice of Meetings
3. Consent to Shareholders' Meetings
4. Record Date for Meetings and Other Purposes
5. Proxies
6. Action Without Meeting
7. Organization
8. Inspectors of Election
ARTICLE II. TRUSTEES
1. Number
2. Meeting of Trustees
3. Quorum and Vote
4. Compensation of Trustees
5. Executive and Other Committees
6. Meeting, Quorum and Manner of Acting
7. Indemnification of Trustees
ARTICLE III. OFFICER
1. General Provisions
2. Term of Office and Qualifications
3. Removal and Resignation
4. Bonds and Surety
5. Chairman, President, and Vice-President
6. Secretary
7. Chief Financial Officer
8. Other Officers and Duties
9. Evidence of Authority
10. Compensation
11. Indemnification of Officers, Employees or Agents of the
Trust
ARTICLE IV. RECORDS, REPORTS, CONTRACTS AND CHECKS
1. Books and Records
2. Inspection of Records
3. Checks, Drafts, Etc.
4. Contracts, Etc. - How Executed
5. Reports to Shareholders
6. Fiscal Year
ARTICLE V. SHARES OF BENEFICIAL INTEREST
1. Book Entry Shares
2. Certificates
3. Transfer of Shares
4. Equitable Interest not Recognized
5. Lost, Destroyed or Mutilated Certificates
ARTICLE VI. SEAL
ARTICLE VII. CUSTODIANS
ARTICLE VIII. WAIVERS OF NOTICE
ARTICLE IX. AMENDMENTS
<PAGE>
BYLAWS
OF
BENHAM MUNICIPAL TRUST
JULY 3, 1984
LAST AMENDED MAY 17, 1995
ARTICLE I
SHAREHOLDERS
Section 1. Place and Time of Meetings. Meetings of the Shareholders shall
be held at the principal offices of the Trust in Palo Alto, California, or at
such other places and on such dates and at such times as the Trustees shall
designate.
Section 2. Notice of Meetings. Notice of all meetings of the Shareholders,
stating the time, place, and purposes of the meeting, shall be given by the
Trustees in writing to each Shareholder at his address as recorded with the
Trust on the record date at least ten (10) days and not more than sixty (60)
days before the meeting. Any adjourned meeting may be held as adjourned without
further notice. No notice need be given to any Shareholder who shall have failed
to inform the Trust of his current address or if a written waiver of notice,
executed before or after the meeting by the Shareholder or his attorney, is
filed with the records of the meeting.
Section 3. Consent to Shareholders' Meetings. The transactions of any
meeting of Shareholders, however called and noticed, shall be valid as though
had at a meeting duly held after regular call and notice, if a quorum be present
either in person or by proxy, and if, either before or after the meeting, each
of the Shareholders entitled to vote, not present in person or by proxy, signs a
written waiver of notice, or a consent to the holding of such meeting, or an
approval of the minutes thereof. All such waivers, consents or approvals shall
be filed with the Trust records or made a part of the minutes of the meeting.
Section 4. Record Date for Meetings and Other Purposes. For the purpose of
determining the Shareholders who are entitled to notice of and to vote at any
meeting, including any adjournment thereof, or who are entitled to participate
in any distribution, or for the purpose of any other action, the Trustees may
fix a date not more than (60) days prior to the date of any meeting of
Shareholders or distribution or other action as a record date for the
determination of the persons to be treated as Shareholders of the record for
such purposes, except for dividend payments which shall be governed by the
Declaration of Trust.
Section 5. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote either in person or by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Secretary, or with such other officer or agent of the Trust as the
Secretary may direct, for verification prior to the time at which such vote
shall be taken. Pursuant to a resolution of a majority of the Trustees, proxies
may be solicited in the name of one or more Trustees or one or more officers of
the Trust. Only Shareholders of record shall be entitled to vote. Subject to the
provisions of the Declaration of Trust concerning voting by Series, each full
Share shall be entitled to one vote and fractional Shares shall be entitled to a
vote of such fraction. When any Share is held jointly by several persons, any
one of them may vote at any meeting in person or by proxy in respect of such
Share, but if more than one of them shall be present at such meeting in person
or by proxy, such joint owners or their proxies disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge of management of such Share,
he may vote by his guardian or such other person appointed or having such
control, and such vote may be given in person or by proxy.
Section 6. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if all Shareholders entitled to vote
on the matter (whether for the Trust as a whole or by Series, whichever is
applicable) consent to the action in writing and the written consents are filed
with the records of the meetings of Shareholders. Such consent shall be treated
for all purposes as a vote taken at a meeting of Shareholders.
Section 7. Organization. The President, or in the absence of the President,
any Vice-president, shall call the meeting of the Shareholders to order, and
shall act as Chairman of the meeting. In the absence of the President and all of
the Vice-Presidents, Shareholders shall appoint a Chairman for such meeting. The
Secretary of the Trust shall act as secretary of all meetings of the
Shareholders, but in the absence of the Secretary at any meeting of the
Shareholders, the presiding officer may appoint any person to act as secretary
of the meeting.
Section 8. Inspectors of Election. In advance of any meeting of
Shareholders the Trustees may, if they so elect, appoint inspectors of election
to act at such meeting or any adjournments thereof. If inspectors of election be
not so appointed, the chairman of any such meeting may, and on the request of
any Shareholder or his proxy shall, make such appointment at the meeting. The
number of inspectors shall be either one or three.
ARTICLE II
TRUSTEES
Section 1. Number and Qualification of Trustees. The authorized number of
trustees shall be not less than 7 nor more than 11 until changed by a duly
adopted amendment to the Bylaws or by resolution of the Trustees. The selection
and nomination of disinterested directors is committed solely to the discretion
of a Nominating Committee consisting of all sitting disinterested directors
except where the remaining director or directors are interested persons.
Section 2. Meeting of Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, or by one of
the Trustees, at the time being in office. Notice of the time and place of each
meeting other than regular or stated meetings shall be given by the Secretary or
Assistant Secretary or by the officer or Trustee calling the meeting and shall
be mailed to each Trustee at least two days before the meeting, or shall be
telegraphed, cabled, personally or otherwise delivered to him at least one day
before the meeting. Notice by telephone shall constitute personal delivery for
these purposes. Notice may, however, be waived by any Trustee before or after
any meeting. Neither the business to be transacted at, nor the purpose of any
meeting of the Trustees need to be stated in the notice or waiver of notice of
such meeting, and no notice need be given of action proposed to be taken by
unanimous written consent. The attendance of a Trustee at a meeting shall
constitute a waiver of notice of such meeting except where a Trustee attends a
meeting for the express purpose of objecting to the transaction of any business
on the ground that the meeting has not been lawfully called or convened. The
Trustees may meet by means of a telephone conference circuit or similar
communications equipment by means of which all persons participating in the
meeting can hear each other; provided that, in accordance with the provisions of
the Investment Company Act of 1940, the Board may not transact by such a meeting
any business which involves the entering into, or the renewal, performance, or
approval of any contract or agreement, whereby a person undertakes regularly to
serve or act as the Fund's Investment Advisor or principal underwriter. Such
meetings shall be deemed to have been held at a place designated by the Trustees
at the meeting. Participation in a telephone conference meeting shall constitute
presence in person at such meeting. Any action required or permitted to be taken
at any meeting of the Trustees may be taken by the Trustees without a meeting if
all the Trustees consent to the action in writing and the written consents are
filed with the records of the Trustees' meetings; provided that, in accordance
with the provisions of the Investment Company Act of 1940, such written consent
does not approve the entering into, or the renewal or performance of any
contract or agreement, whereby a person undertakes regularly to serve or act as
the Fund's Investment Advisor or principal underwriter. Any consents shall be
treated as a vote for all purposes permitted hereunder. Notice of the time and
place of reconvening an adjourned meeting need not be given to absent Trustees
if the time and place is fixed at the meeting adjourned.
Section 3. Quorum and Vote. A majority of the Trustees shall be present in
person at any regular or stated meeting of the Trustees in order to constitute a
quorum for the transaction of business at such meeting and (except as otherwise
required by law, the Declaration of Trust or these Bylaws) the act of a majority
of the Trustees present at any meeting at which a quorum is present shall be the
act of the Trustees. In the absence of a quorum, a majority of the Trustees
present may adjourn the meeting from time to time until a quorum shall be
present. Notice of any adjourned meeting need not be given.
Section 4. Compensation of Trustees. The compensation of the Trustees shall
be fixed from time to time by the Trustees. No Trustee shall be precluded from
serving the Trust in any other capacity, as an officer, agent or otherwise, and
receiving compensation therefor. Trustees unaffiliated with the Trust's
investment advisor will be paid by the Trust. Trustees affiliated with the
Trust's investment advisor will be paid by the advisor.
The members of any duly appointed Committee shall receive such compensation
and/or fees as, from time to time, may be fixed by the Trustees.
Section 5. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than two (2) members to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session and such
other powers of the Trustees as the Trustees may, from time to time, delegate to
them except those powers which by law, the Declaration of Trust, or these Bylaws
they are prohibited from delegating. The Trustees may also designate other
Committees from time to time, the Trustees and number of Trustees composing such
Committees, the powers conferred upon the same (subject to the same limitations
as the Executive Committee) and the term of membership on such Committees. The
Trustees may designated a Chairman of any such Committee; in the absence of such
a designation, the Committee may elect its own Chairman.
Section 6. Meeting, Quorum and Manner of Acting. The Trustees may (1)
provide for stated meetings of any committees, (2) specify the manner of calling
and notice required for special meetings of any committee, (3) specify the
number of members of a committee required to constitute a quorum and the number
of members of a Committee required to exercise specified powers delegated to
such Committee, (4) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a committee
without a meeting, and (5) authorize the members of a Committee to meet by means
of a telephone conference circuit or similar means.
All committees shall keep regular minutes of their meetings and records of
decisions taken without a meeting and cause them to be recorded in a book
designated for that purpose and kept in the office of the Trust. All action by
committees shall be reported to the Trustees at their meeting next succeeding
such action.
Section 7. Indemnification of Trustees. Unless otherwise amended by Board
resolution, indemnification of the Trustees of the Trust is governed by the
Declaration of Trust Article XI, Section 4.
ARTICLE III
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall be a
President and a Secretary who shall be elected by the Trustees. The Trustees may
elect or appoint such other officers or agents as the business of the Trust may
require, including a Chairman, a Chief Financial Officer, one or more Vice
Presidents, one or more Assistant Secretaries, and one or more Controllers and
Assistant Controllers. The Trustees may delegate to any officer or committee the
power to appoint any subordinate officers or agents.
Section 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise provided
by law, the Declaration of Trust or these Bylaws, the President and the
Secretary shall each hold office until his successor shall have been duly
elected and qualified, and all other officers shall hold office at the pleasure
of the Trustees. Any two or more of the offices may be held by the same person,
except that the same person may not be both President and Secretary. The
Chairman, if there be such an officer and the President shall be Trustees, but
no other officer of the Trust need be a Trustee.
Section 3. REMOVAL AND RESIGNATION. The Trustees, at any regular or special
meeting of the Trustees, may remove any officer with or without cause by a vote
of the majority of the Trustees. Any officer or agent appointed by any officer
or Committee may be removed with or without cause by such appointing officer or
Committee.
Any officer may resign at any time by giving written notice to the
Trustees, to the President, or to the Secretary of the Trust. Any such
resignation shall take effect at the date of he receipt of such notice or at any
later time specified therein, and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 4. BONDS AND SURETY. Any officer may be required by the Trustees to
be bonded for the faithful performance of his duties in such amount and with
such sureties as the Trustees may determine.
Section 5. CHAIRMAN, PRESIDENT, AND VICE-PRESIDENTS. The Chairman, if there
be such an officer shall, if present, preside at all meetings of the
Shareholders and of the Trustees and shall exercise and perform such other
powers and duties as may be from time to time assigned to him by the Trustees.
Subject to such supervisory powers, if any, as may be given by the and, Trustees
to the Chairman, the President shall be the principal executive officer and the
Chief Executive Officer of the Trust subject to the control of the Trustees,
shall have general supervision, direction and control of the business of the
Trust and of its employees and shall exercise such general powers of management
as are usually vested in the office of President of a corporation. In the
absence of the Chairman, if any, the President shall preside at all meetings of
the Shareholders and of the Trustees. The President shall have the power in the
name and on behalf of the Trust to grant, issue, execute or sign any and all
documents, contracts, agreements, deeds, mortgages, proxies, powers of attorney
or other instruments as may be deemed advisable or necessary in furtherance of
the interests of the Trust. The President shall have the power to employ
attorneys and counsel for the Trust and to employ such subordinate officers,
agents, clerks and employees as he may find necessary to transact the business
of the Trust. The President shall have such further powers and duties as, from
time to time, may be conferred upon him or assigned to him by the Trustees. In
the absence or disability of the President, the Vice-President or, if there by
more than one Vice President, any Vice President designated by the Trustees
shall perform all of the duties of the President, and when so acting shall have
all the powers of the President, subject to the direction of the Trustees. Each
Vice President shall perform such other duties as may be assigned to him from
time to time by the Trustees and the President.
Section 6. SECRETARY. The Secretary shall keep the minutes of all meetings
of, and record all votes of, the Shareholders, the Trustees and Committees, if
any, in proper books provided for that purpose. He shall be custodian of the
seal of the Trust; he shall have charge of the Share transfer books, lists and
records unless the same are in the charge of a transfer agent or other Trust
officer performing such function. He shall attend to the giving and serving of
all notices by the Trust in accordance with the provisions of these Bylaws and
as required by law; and subject to these Bylaws, he shall in general perform all
duties incident to the office of Secretary and such other duties as from time to
time may be assigned to him by the Trustees.
Section 7. CHIEF FINANCIAL OFFICER. The Chief Financial Officer, if there
be such an officer, shall be the principal financial and accounting officer of
the Trust. He shall deliver all funds of the Trust which may come into his hands
to such Custodian, subcustodian, or special depository as the Trustees shall
employ pursuant to Article IX of the Declaration of Trust. He shall render a
statement of condition of the finances of the Trust to the Trustees as often as
they shall require the same and he shall in general perform all the duties
incident to the office of Chief Financial Officer and such other duties as from
time to time may be assigned to him by the Trustees.
Section 8. OTHER OFFICERS AND DUTIES. The Trustees may elect such other
officers and assistant officers as they shall from time to time determine to be
necessary or desirable in order to conduct the business of the Trust. Assistant
officers shall act generally in the absence disability of the officer whom they
assist and shall assist that officer in the duties of his office. Each officer,
employee, and agent of the Trust shall have such other duties and authority as
may be assigned him by the Trustees or delegated to him by the President.
Section 9. EVIDENCE OF AUTHORITY. Anyone dealing with the Trust shall be
fully justified in relying on a copy of a resolution of the Trustees or of any
Committee thereof empowered to act with the authority and power certified as
true by the Secretary or an Assistant Secretary under the seal of the Trust.
Section 10. COMPENSATION. The compensation of the officers shall be fixed
from time to time by the Trustees or by any Committee or officer upon whom such
power may be conferred by the Trustees. No officer shall be prevented from
receiving such compensation by reason of the fact that he is also a Trustee.
Section 11. INDEMNIFICATION OF OFFICERS, EMPLOYEES OR AGENTS OF THE TRUST.
Unless otherwise amended by Board resolution, indemnification of officers,
employees or agents of the Trust is governed by the Declaration of Trust,
Article XI, Section 4.
ARTICLE IV
RECORDS, REPORTS, CONTRACTS AND CHECKS
Section 1. BOOKS AND RECORDS. The books, accounts and records of the Trust,
including the stock ledger or ledgers, may be kept at such offices or agencies
of the Trust as may from time to time be determined by the Trustees or the
President.
Section 2. INSPECTION OF RECORDS. The records, accounts and books of the
Trust shall be open to inspection by Shareholders to the same extent as is
permitted shareholders of a California business corporation.
Section 3. CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money, notes or other evidences of indebtedness, issued in the name
of or payable to the Trust, shall be signed or endorsed by such person or
persons and in such manner as shall be determined from time to time by
resolution of the Trustees.
Section 4. CONTRACTS, ETC. -- HOW EXECUTED. The Trustees, except as
otherwise provided by these Bylaws, may authorize any officer or officers, agent
or agents, to enter into any contract or execute any instrument in the name of
and on behalf of the Trust. Such authority may be general or confined to
specific instances. Unless so authorized by the Trustees, no officer, agent or
employee shall have any power authority to bind the Trust by any contract or
engagement, or to pledge its credit, or to render it liable for any purpose or
to any amount.
Section 5. REPORTS TO SHAREHOLDERS. The Trust shall at least semi-annually
submit to the shareholders a written financial report of the transactions of the
Trust including financial statements which shall at least annually be certified
by independent public accountants.
Section 6. FISCAL YEAR. The fiscal year of the Trust shall begin on the
first day of May JUNE in each year and shall end on the 30th 31ST day of April
MAY in each year, provided, however, that the Trustees may from time to time
change the fiscal year.
ARTICLE V
SHARES OF BENEFICIAL INTEREST
Section 1. BOOK ENTRY SHARES. No certificates need be issued to represent
Shares in the Trust. The Trust shall maintain adequate records to determine the
holdings of each Shareholder of record, and such records shall be deemed the
equivalent of a certificate representing the Shares for all purposes.
Section 2. CERTIFICATES. All certificates for Shares shall be signed by the
Chairman, President or any Vice President and by the Chief Financial Officer,
Secretary or Controller, any Assistant Controller or any Assistant Secretary and
sealed with the seal of the Trust. The signatures may be either manual or
facsimile signatures and the seal may be either facsimile or any other form of
seal. Certificates for Shares for which the Trust has appointed a transfer agent
shall not be valid unless countersigned by such transfer agent.
Section 3. TRANSFER OF SHARES. The Shares of the Trust shall be
transferable, so as to affect the rights of the Trust, only by transfer recorded
in the books of the Trust, in person or by attorney.
Section 4. EQUITABLE INTEREST NOT RECOGNIZED. The Trust shall be entitled
to treat the holder of record of any Share as the absolute owner thereof and
shall not be bound to recognize any equitable or other claim or interest in such
Share on the part of any other person except as may be otherwise expressly
provided by law.
Section 5. LOST, DESTROYED OR MUTILATED CERTIFICATES. In case any
certificate for Shares is lost, mutilated or destroyed, the Trustees may issue a
new certificate in place thereof upon such indemnity to the Trust against loss
and upon such other terms and conditions as the Trustees may deem advisable.
ARTICLE VI
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE VII
CUSTODIANS
Subject to the terms of the Trust's Declaration of Trust, all securities
and cash owned by the Trust shall be held by or deposited with a bank or trust
company having (according to its last published report) not less than two
million dollars ($2,000,000) aggregate capital, surplus and undivided profits
(which bank or trust company is hereby designated at "Custodian"), provided such
a Custodian can be found ready and willing to act.
ARTICLE VIII
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration of Trust or these Bylaws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto. A notice shall be deemed to
have been given if telegraphed, cabled, or sent by wireless at the time when it
has been delivered to a representative of any telegraph, cable or wireless
company with instructions that it be telegraphed, cabled or sent by wireless.
Any notice shall be deemed to have been given if mailed at the time when it has
been deposited in the mail.
ARTICLE IX
AMENDMENTS
These Bylaws may be altered, amended or repealed, in whole or in part, or
new Bylaws may be adopted by (a) vote of a majority of the Shares outstanding
and entitled to vote or (b) by the Trustees, provided, however that no Bylaw may
be amended, adopted or replaced by the Trustees if such amendment, adoption or
repeal requires, pursuant to law, the Declaration of Trust of these Bylaws, a
vote of the Shareholders.
INVESTMENT ADVISORY AGREEMENT
BENHAM MUNICIPAL TRUST
Agreement effective this 1st day of June, 1995, between BENHAM MUNICIPAL
TRUST, a registered open-end management investment company organized as a
business trust in the Commonwealth of Massachusetts (the "Trust"), and BENHAM
MANAGEMENT CORPORATION, a registered investment advisor incorporated in the
State of California (the "Advisor").
Whereas, the Trust is authorized to issue shares of beneficial interest in
one or more series with each such series representing interests in a separate
portfolio of securities and other assets; and
Whereas, the Trust currently offers its shares in six series designated as
the 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,
and Benham Arizona Municipal Intermediate-Term Fund, (the "Initial Series"),
(such Initial Series together with all other series subsequently established by
the Trust with respect to which the Trust desires to retain the Advisor to
render investment advisory services hereunder and with respect to which the
Advisor is willing to do so being herein collectively referred to as the
"Series"). In the event the Trust establishes one or more series other than the
Initial Series with respect to which it desires to retain the Advisor to render
management and investment advisory services hereunder, it shall notify the
Advisor in writing, whereupon such series shall become a Series hereunder.
I. DESCRIPTION OF SERVICES TO BE PROVIDED. In consideration for the
compensation hereinafter described, the Advisor agrees to provide the following
services to the Trust and to the Series:
A. Investment Advice and Portfolio Management. The Advisor shall manage the
investment and reinvestment of the Series' assets in accordance with the
investment objectives and policies of the Series as set forth in the Trust's
registration statement with the Securities and Exchange Commission as amended
from time to time and such instructions as the Trust's board of trustees may
issue. Consistent with the foregoing, the Advisor shall make all determinations
as to the investment of the Series' assets and the purchase and sale of its
portfolio securities and take all steps necessary to implement the same. Such
determinations and services shall also include determining the manner in which
voting rights, rights to consent to corporate actions and other rights
pertaining to the Series' portfolio securities shall be exercised. In placing
orders for the execution of the Series' portfolio transactions, the Advisor
shall use its best efforts to obtain the best possible price and execution and
shall otherwise place such orders subject to and in accordance with any
directions which the Trust's board of trustees may issue from time to time with
respect thereto. The Advisor shall select brokers and dealers for the execution
of portfolio transactions in accordance with the provisions of Section I.B. of
this agreement.
B. Brokerage. In executing transactions for the Series and selecting
brokers or dealers, the Advisor will use its best efforts to seek the best price
and execution available and shall execute or direct the execution of all such
transactions in a manner both permitted by law and that suits the best interest
of the Series and its shareholders. In assessing the best price and execution
available for any Series transaction, the Advisor will consider all factors it
deems relevant including, but not limited to, breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of any commission for
the specific transaction and on a continuing basis. Consistent with the
obligation to obtain best execution, the Advisor may cause a Series to pay a
broker which provides brokerage and research services to the Advisor a
commission for effecting a securities transaction in excess of the amount
another broker might have charged. Such higher commissions may not be paid
unless the Advisor determines in good faith that the amount paid is reasonable
in relation to the services received in terms of the particular transaction or
the Advisor's overall responsibilities to the Series and any other of the
Advisor's clients.
On occasions when the Advisor deems the purchase or sale of a security to
be in the best interest of the Series as permitted by applicable law, the
Advisor may aggregate the securities to be sold or purchased with purchases of
sales of other funds in order to obtain the best execution of the order or lower
brokerage commissions, if any. The Advisor may also on occasion purchase or sell
a particular security for one or more clients in different amounts. On either
occasion, and to the extent permitted by applicable law and regulations,
allocation of the securities so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Advisor in the manner it
considers to be the most equitable and consistent with its fiduciary obligations
to the Trust and to such other customers.
C. Reports and Information. The Advisor shall render regular reports to the
Trust at quarterly meetings of the board of trustees and at such other times as
may reasonably be requested by the Trust's board of (i) the decisions it has
made with respect to the Series' assets and the purchase and sale of its
portfolio securities, (ii) the reasons for such decisions and related actions
and, (iii) the extent to which those decisions have been implemented. In
addition, the Advisor will provide the Trust with such accounting and
statistical data as it requires for the preparation of registration statements,
reports and other documents required by federal and state securities, tax and
other applicable laws and regulations and such additional documents and
information as the Trust may reasonably request for the management of its
affairs.
D. Promotion and Distribution. The Advisor shall promote the sale and
distribution of the Series' shares to the general public in such a manner and at
such times and places as the Advisor shall, in the exercise of reasonable
discretion, determine; and otherwise as the Advisor and the Trust's board of
trustees may from time to time agree.
II. COMPENSATION FOR SERVICES.
(a) Amount of Compensation. As compensation for the services rendered and
duties assumed by the Advisor, the Trust, on behalf of the Series, shall, within
ten (10) days after the last day of each calendar month, pay the Advisor an
advisory fee equal to the amount determined using the following formula: (A) a
Trust Fee plus an Individual Fund Fee (if any), minus (B) the amount by which
the Series' Expenses exceed the Expense Guarantee Rate as defined below, minus
(C) any further amount by which the Advisor publicly announces it will reduce
the Series' Expenses, plus (D) the amount of any recoupment as described below.
The Advisor's compensation shall be computed and accrued daily.
Upon termination of this agreement before the end of any calendar month,
the fee for the period from the end of the calendar month preceding the month of
termination to the date of termination shall be prorated according to the
proportion which the number of calendar days in the month prior to the date of
termination bears to the number of calendar days in the month of termination,
and shall be payable within ten (10) days after the date of termination. For
this purpose, the value of the Series' net assets shall be computed by the same
method at the end of each business day as the Series uses to compute the value
of its net assets in connection with the determination of the net asset value of
Series shares, all as more fully set forth in the Series' prospectus. To the
extent that Expenses of the Series in excess of the Series' Expense Guarantee
Rate exceed the total of the Trust Fee and Individual Fund Fee (if any), plus
any recoupment due, the Advisor will reimburse the Series for such excess.
(b) Determination of Trust Fee. The Trust Fee for each Series shall be
equal to that Series' pro-rata share of the value of the aggregated average
daily net assets of the Trust, determined for each calendar day, pursuant to the
following schedule of annualized rates:
0.50% of the first $100 million;
0.45% of the next $100 million;
0.40% of the next $100 million;
0.35% of the next $100 million;
0.30% of the next $100 million;
0.25% of the next $1 billion;
0.24% of the next $1 billion;
0.23% of the next $1 billion;
0.22% of the next $1 billion;
0.21% of the next $1 billion;
0.20% of the next $1 billion;
and 0.19% of the net assets over $6.5 billion.
(c) Limitation of Fund Expenses.
1. The Expense Guarantee Rate for each Series is set forth on Schedule A,
attached hereto, as such schedule may be amended from time to time by
the Trust's board of trustees.
2. The term "Expenses" as used in Section II of this agreement shall
mean:
A. The Trust Fee plus the Individual Fund Fee (if any).
B. Compensation for administrative and transfer agent services as
specified in Section I.B and II.B of The Administrative Services
Agreement, as such agreement may be amended from time to time by
the Trust's board of trustees or shareholders (the
"Administrative Services Agreement").
C. Direct expenses as specified in Section III.B of the
Administrative Services Agreement.
D. Extraordinary Expenses, as specified in Section III.C of the
Administrative Services Agreement, are excluded from the
definition of Expenses as set forth herein.
3. The Advisor will be legally bound by any public announcement that it
will reduce, in accordance with the terms of its announcement, the
Series' Expenses below the Expense Guarantee Rate.
(d) Recoupment. The Advisor may recover amounts (representing Expenses in
excess of the Expense Guarantee Rate) which reduced the Advisor's compensation
or that it reimbursed to a Series during the preceding 11 months if, and to the
extent that, for any given month, the Series' expense ratio (net of
reimbursements) was lower than the Expense Guarantee Rate in effect at the time,
but not during any period, during which the Advisor has agreed, pursuant to
paragraph (c)3 above, to limit the Series' Expenses to an amount less than the
Expense Guarantee Rate.
III. EXPENSES. Except as hereinafter provided, the Advisor shall pay all of
its expenses incurred in the performance of this agreement, including but not
limited to salaries and other compensation of its officers and employees and all
other costs of providing such advice, portfolio management and information and
reports to the Trust and the Series as are required hereunder, and all expenses
associated with any activity primarily intended to result in the sale of Series'
shares, such as advertising, printing and mailing of prospectuses to other than
current shareholders, printing and mailing of sales literature and compensation
of sales personnel.
IV. ACTIVITIES OF THE ADVISOR. The services of the Advisor to the Series
hereunder are not to be deemed exclusive, and the Advisor shall be free to
render similar services to others. Subject to and in accordance with the
Declaration of Trust and the Bylaws of the Trust and to Section 10(a) of the
Investment Company Act of 1940, it is understood that trustees, officers, agents
and shareholders of the Trust are or may be interested in the Advisor as
directors, officers or shareholders of the Advisor, that directors, officers,
agents or shareholders of the Advisor are or may be interested in the Trust as
trustees, officers, shareholders or otherwise, that the Advisor is or may be
interested in the Trust as a shareholder or otherwise, and that the effect of
any such interest shall be governed by the Trust's Declaration of Trust, its
Bylaws and the Investment Company Act of 1940.
V. LIABILITY OF THE ADVISOR. In the absence of willful misfeasance, bad
faith, gross negligence, or reckless disregard of its obligations and duties
hereunder, the Advisor shall not be subject to liability to the Series or to any
shareholder of the Series for any act or omission in the course of, or connected
with, rendering advice or services hereunder or for any losses that may be
sustained in the purchase, retention or sale of any security. No provision of
this agreement shall be construed to protect any trustee or officer of the Trust
or any director or officer of the Advisor from liability in violation of
Sections 17(h) and (i) of the Investment Company Act of 1940.
VI. LIMITATION OF TRUST'S LIABILITY. The Advisor acknowledges that it has
received notice of and accepts the limitations of the Trust's liability set
forth in its Declaration of Trust. The Advisor agrees that the Trust's
obligations hereunder shall be limited to the Series and to its assets and that
the Advisor shall not seek satisfaction of any such obligation from the
shareholders of the Series nor from any trustee, officer, employee or agent of
the Trust.
VII. RENEWAL, TERMINATION AND AMENDMENT. The term of this agreement shall
be from the date first written above, and shall continue in effect, unless
sooner terminated as provided herein, for two years from such date, and it shall
continue in effect with respect to a Series from year to year thereafter only so
long as such continuance is specifically approved at least annually by the vote
of either a majority of the outstanding voting securities of that Series or a
majority of the Trust's trustees, and the vote of a majority of the Trust's
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. "Approved at least annually" shall mean approval occurring, with
respect to the first continuance of the agreement, during the 90 days prior to
and including the date of its termination in the absence of such approval, and
with respect to any subsequent continuance, during the 90 days prior to and
including the first anniversary of the date upon which the most recent previous
annual continuance of this agreement became effective. This agreement may be
terminated at any time without payment of any penalty, by the board of trustees
of the Trust, or with respect to a Series, by a vote of the majority of the
outstanding voting securities of such Series, upon 60 days' written notice to
the Advisor, and by the Advisor upon 60 days' written notice to the Trust. This
agreement shall terminate automatically in the event of its assignment. The
terms "assignment" and "vote of a majority of the outstanding voting securities"
shall have the meanings set forth for such terms in the Investment Company Act
of 1940 and Rule 18f-2 thereunder.
VIII. SEVERABILITY. If any provision of this agreement shall be held or
made invalid by a court decision, statute, rule or similar authority, the
remainder of this agreement shall not be affected thereby.
IX. APPLICABLE LAW. This agreement shall be construed in accordance with
the laws of the State of California.
In witness whereof, the parties hereto have caused this instrument to be
executed by their officers designated below on the day and year first written
above.
BENHAM MUNICIPAL TRUST
By /s/ John T. Kataoka
John T. Kataoka, President
BENHAM MANAGEMENT CORPORATION
By /s/ James M. Benham
James M. Benham, President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, BENHAM MUNICIPAL
TRUST, hereinafter called the "Trust" and certain trustees and officers of the
Trust, do hereby constitute and appoint James M. Benham, James E. Stowers, III,
William M. Lyons, Douglas A. Paul, and Patrick A. Looby, and each of them
individually, their true and lawful attorneys and agents to take any and all
action and execute any and all instruments which said attorneys and agents may
deem necessary or advisable to enable the Trust to comply with the Securities
Act of 1933 and/or the Investment Company Act of 1940, as amended, and any rules
regulations, orders, or other requirements of the United States Securities and
Exchange Commission thereunder, in connection with the registration under the
Securities Act of 1933 and/or the Investment Company Act of 1940, as amended,
including specifically, but without limitation of the foregoing, power and
authority to sign the name of the Trust in its behalf and to affix its seal, and
to sign the names of each of such trustees and officers in their capacities as
indicated, to any amendment or supplement to the Registration Statement filed
with the Securities and Exchange Commission under the Securities Act of 1933
and/or the Investment Company Act of 1940, as amended, and to any instruments or
documents filed or to be filed as a part of or in connection with such
Registration Statement; and each of the undersigned hereby ratifies and confirms
all that said attorneys and agents shall do or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, the Trust has caused this Power to be executed by its
duly authorized officers on this the 4th day of March, 1996
BENHAM MUNICIPAL TRUST
(A Massachusetts Business Trust)
By: /s/ James M. Benham
James M. Benham, President
SIGNATURE AND TITLE
/s/ James M. Benham /s/ Ezra Solomon
James M. Benham Ezra Solomon
Chairman Director
/s/ Albert A. Eisenstat /s/ Isaac Stein
Albert A. Eisenstat Isaac Stein
Director Director
/s/ Ronad J. Gilson /s/ Jeanne D. Wohlers
Ronald J. Gilson Jeanne D. Wohlers
Director Director
/s/ Myron S. Scholes /s/James E. Stowers III
Myron S. Scholes James E. Stowers, III
Director Director
/s/Kenneth E. Scott /s/ Maryanne Roepke
Kenneth E. Scott Maryanne Roepke
Director Treasurer
Attest:
By: /s/ Douglas A. Paul
Douglas A. Paul, Secretary
