<PAGE>
File No. 2-99356
Rule 497(e)
MUNICIPAL MONEY FUND seeks maximum current income exempt from
Federal income tax. Beginning September 28, 1995, the Fund will
seek to achieve its objective by investing all of its net
investable assets in shares of SR&F Municipal Money Market
Portfolio, a portfolio of SR&F Base Trust that has the same
investment objective and substantially the same investment
restrictions as the Fund. The Fund and the Portfolio attempt to
maintain relative stability of principal and liquidity by investing
principally in a diversified portfolio of short-term Municipal
Securities. (See Organization and Description of Shares--Special
Considerations Regarding Master Fund/Feeder Fund Structure.)
INTERMEDIATE MUNICIPALS seeks a high current yield exempt from
Federal income tax, consistent with the preservation of capital.
It invests primarily in a diversified portfolio of intermediate-
term Municipal Securities.
MANAGED MUNICIPALS seeks a high level of current income exempt from
Federal income tax, consistent with the preservation of capital.
It invests primarily in a diversified portfolio of long-term
Municipal Securities.
HIGH-YIELD MUNICIPALS seeks a high current yield exempt from
Federal income tax. It invests principally in a diversified
portfolio of long-term medium- or lower-quality Municipal
Securities, which may involve greater risk. (See How the Funds
Invest--High-Yield Municipals.)
Each Fund is a "no-load" fund. There are no sales or redemption
charges, and the Funds have no 12b-1 plans. The Funds are series
of STEINROE MUNICIPAL TRUST and the Portfolio is a series of SR&F
Base Trust. Each trust is a diversified open-end management
investment company. This prospectus contains information you
should know before investing in the Funds. Please read it
carefully and retain it for future reference.
Municipal Money Fund is a money market fund, and attempts to
maintain its net asset value at $1.00 per share. SHARES OF THE
FUND ARE NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND
THERE CAN BE NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
A Statement of Additional Information dated August 7, 1995,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. The
Statement of Additional Information and the most recent financial
statements may be obtained without charge by writing to the
Secretary at the address shown on the back cover or by calling 1-
800-338-2550.
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.
The date of this prospectus is August 7, 1995.
<PAGE>
TABLE OF CONTENTS
Page
Summary.........................3
Fee Table ......................6
Financial Highlights............9
The Funds .....................14
How the Funds Invest...........15
Municipal Money Fund........15
Intermediate Municipals ....16
Managed Municipals .........17
High-Yield Municipals.......17
Portfolio Investments and
Strategies..................19
Restrictions on the Funds'
Investments..................21
Risks and Investment
Considerations ..............22
How to Purchase Shares ........24
By Check ...................24
By Wire ....................24
By Electronic Transfer .....25
By Exchange ................25
Purchase Price and
Effective Date.........25
Conditions of Purchase .....25
Purchases Through Third
Parties..................26
How to Redeem Shares...........26
By Written Request .........26
By Exchange ................27
Special Redemption
Privileges ................27
General Redemption
Policies .................29
Shareholder Services ..........31
Net Asset Value ...............33
Distributions and Income Taxes.34
Investment Return .............35
Management of the Funds .......36
Organization and
Description of Shares.......39
Certificate of Authorization ..44
SUMMARY
SteinRoe Municipal Money Market Fund ("Municipal Money Fund"),
SteinRoe Intermediate Municipals ("Intermediate Municipals"),
SteinRoe Managed Municipals ("Managed Municipals"), and SteinRoe
High-Yield Municipals ("High-Yield Municipals") are series of
SteinRoe Municipal Trust, an open-end diversified management
investment company organized as a Massachusetts business trust.
Each Fund is a "no-load" fund. There are no sales or redemption
charges. (See The Funds and Organization and Description of
Shares.)
INVESTMENT OBJECTIVES AND POLICIES. Each Fund seeks a high level
of current income that is exempt from Federal income tax by
investing in various types of Municipal Securities. (See Portfolio
Investments and Strategies.)
MUNICIPAL MONEY FUND will invest all of its net investable assets
in SR&F Municipal Money Market Portfolio (the "Portfolio")
beginning on September 28, 1995. The Portfolio invests in a
diversified portfolio of securities in accordance with an
investment objective and investment policies identical to those of
the Fund.
The Fund and the Portfolio seek current income exempt from Federal
income tax by investing principally in "short-term" Municipal
Securities. In pursuing that objective, the Fund and the Portfolio
attempt to maintain relative stability of principal and liquidity.
Although there can be no assurance that either the Portfolio or the
Fund will always be able to do so, each of them follows procedures
that are intended to afford a reasonable expectation that its price
per share will be stabilized at $1.00. The Fund and the Portfolio
invest primarily in Municipal Securities rated within the top two
grades assigned by Moody's or S&P, except for certain types of
issues which must carry the highest rating. The Fund and the
Portfolio may also invest in unrated securities that, in the
opinion of the Board of Trustees, are at least equal in quality to
the foregoing ratings.
INTERMEDIATE MUNICIPALS seeks a high current yield exempt from
Federal income tax, consistent with the preservation of capital, by
investing primarily in "intermediate-term" Municipal Securities.
At least 75% of the Fund's investments in Municipal Securities will
be (i) rated at the time of purchase within the three highest
ratings by Moody's or S&P (except that if the Fund relies on
ratings by S&P for municipal notes, such notes must be within the
two highest ratings), (ii) if unrated, of comparable quality as
determined by the Adviser, or (iii) backed by the full faith and
credit or guarantee of the U.S. Government.
MANAGED MUNICIPALS seeks a high level of current income that is
exempt from Federal income tax, consistent with the preservation of
capital, by investing primarily in long-term Municipal Securities.
At least 75% of the Fund's investments in Municipal Securities will
be (i) rated at the time of purchase within the three highest
ratings assigned by Moody's or S&P (except that if the Fund relies
on ratings by S&P for municipal notes, such notes must be within
the two highest ratings for such securities), or (ii) backed by the
full faith and credit or guarantee of the U.S. Government.
HIGH-YIELD MUNICIPALS seeks a high current yield exempt from
Federal income tax by investing principally in long-term, medium-
or lower-quality Municipal Securities. Medium-quality Municipal
Securities are obligations of issuers that the Adviser believes
possess adequate, but not outstanding, capacities to service the
obligations. Lower-quality Municipal Securities are obligations of
issuers that are considered predominantly speculative with respect
to the issuer's capacity to pay interest and repay principal
according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer
default and bankruptcy, and are commonly referred to as "junk
bonds." The Adviser attributes to medium- and lower-quality
obligations the same general characteristics as do rating services.
Because many issuers of medium- and lower-quality Municipal
Securities choose not to have their obligations rated by a rating
agency, many of the obligations in the Fund's portfolio may be
unrated. The market for unrated securities is usually less broad
than for rated obligations, which could adversely affect their
marketability.
INVESTMENT RISKS. The risks inherent in each Fund and the
Portfolio depend primarily upon the maturity and quality of the
obligations in their respective portfolios, as well as on market
conditions. Municipal Money Fund is designed for investors who
seek little or no fluctuation in portfolio value. Intermediate
Municipals is appropriate for investors who seek more tax-exempt
income than is usually available from tax-exempt money funds and
who can accept some fluctuation in portfolio value. Managed
Municipals is appropriate for investors who seek higher tax-exempt
income than normally provided by shorter-term tax-exempt securities
and who can accept the greater portfolio fluctuation associated
with long-term Municipal Securities. High-Yield Municipals is
designed for investors who seek a high level of tax-exempt income
and who can accept still greater fluctuation in portfolio value and
other risks, such as increased credit risk, associated with medium-
or lower-quality long-term Municipal Securities. See Risks and
Investment Considerations for further information.
Each Fund and the Portfolio may invest in Municipal Securities the
interest on which is subject to the alternative minimum tax. For a
more detailed discussion of their investment objective and
policies, please see How the Funds Invest. There is, of course, no
assurance that a Fund or the Portfolio will achieve its investment
objective.
PURCHASES. The minimum initial investment for each Fund is $2,500,
and additional investments must be at least $100 (only $50 for
purchases by electronic transfer). Shares may be purchased by
check, by bank wire, by electronic transfer, or by exchange from
another SteinRoe Fund. For more detailed information, see How to
Purchase Shares.
REDEMPTIONS. For information on redeeming Fund shares, including
the special redemption privileges, see How to Redeem Shares.
DISTRIBUTIONS. Dividends are declared each business day and are
paid monthly. Dividends will be reinvested into your Fund account
unless you elect to have them paid in cash, deposited by electronic
transfer into your bank checking account, or invested into another
SteinRoe Fund account. (See Distributions and Income Taxes and
Shareholder Services.)
MANAGEMENT AND FEES. Stein Roe & Farnham Incorporated (the
"Adviser") is investment adviser to Intermediate Municipals,
Managed Municipals, High-Yield Municipals, the Portfolio, and
(through September 27, 1995) Municipal Money Fund. In addition, it
provides administrative and bookkeeping and accounting services to
each Fund and the Portfolio. For a description of the Adviser and
the fees it receives for these services, see Management of the
Funds.
If you have any additional questions about the Funds, please feel
free to discuss them with an account representative by calling 1-
800-338-2550.
FEE TABLE
Municipal High-
Money Intermediate Managed Yield
Fund Municipals Municipals Municipals
-------- ------------ ---------- ---------
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None None None None
Sales Load Imposed on Reinvested
Dividends None None None None
Deferred Sales Load None None None None
Redemption Fees None* None None None
Exchange Fees None None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average
net assets)
Management and Administrative
Fees ...50% .56% .52% .54%
12b-1 Fees None None None None
Other Expenses . 20% .15% .20% .27%
--- ---- ---- ----
Total Fund Operating Expenses 70% .71% .72% .81%
--- ---- ---- ----
--- ---- ---- ----
----------------------------
*There is a $3.50 charge for wiring redemption proceeds to your bank.
EXAMPLES. You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption at the
end of each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Municipal Money Fund $7 $22 $39 $87
Intermediate Municipals 7 23 40 88
Managed Municipals 7 23 40 89
High-Yield Municipals 8 26 45 100
The purpose of the Fee Table is to assist you in understanding the
various costs and expenses that you will bear directly or
indirectly as an investor in a Fund. The information in the table
is based upon actual expenses incurred in the fiscal year ended
June 30, 1994, except for Managed Municipals and High-Yield
Municipals, which have been adjusted to reflect changes in the
Funds' transfer agency services and fees. (Also see Management of
the Funds--Fees and Expenses.)
On September 28, 1995, Municipal Money Fund will begin investing
all of its net investable assets in the Portfolio and its
management fee structure will change. As of that date, the Fund
will begin paying the Adviser an administrative fee based on the
Fund's average daily net assets and the Portfolio will begin paying
the Adviser a management fee based on the Portfolio's average daily
net assets. The management and expenses of both Municipal Money
Fund and the Portfolio are summarized in the Fee Table and are
described under Management of the Funds. The Fund will bear its
proportionate share of Portfolio expenses. The trustees of the
Trust have considered whether the annual operating expenses of
Municipal Money Fund, including its proportionate share of the
expenses of the Portfolio, would be more or less than if the Fund
invested directly in the securities held by the Portfolio, and
concluded that the Fund's expenses would not be greater in such
case.
From time to time, the Adviser may voluntarily absorb certain
expenses of a Fund. The Adviser has agreed to voluntarily absorb
the expenses of each of Municipal Money Fund and Intermediate
Municipals to the extent that the Fund's expenses exceed .7 of 1%
of its annual average net assets through October 31, 1995, subject
to earlier termination by the Adviser on 30 days' notice. This
undertaking became effective on May 1, 1995 for Intermediate
Municipals and, therefore, is not reflected in the above Fee Table.
There was no expense absorption for Municipal Money Fund during the
last fiscal year because the Fund's actual expenses were less than
the amount of the expense limitation. Any such absorption will
temporarily lower a Fund's overall expense ratio and increase its
overall return to investors.
For purposes of the Examples above, the figures assume that the
percentage amounts listed for the respective Funds under Annual
Fund Operating Expenses remain the same during each of the periods,
that all income dividends and capital gain distributions are
reinvested in additional Fund shares, and that, for purposes of
management fee breakpoints, if any, the Funds' respective net
assets remain at the same levels as in the most recently completed
fiscal year.
The figures in the Examples are not necessarily indicative of past
or future expenses, and actual expenses may be greater or less than
those shown. Although information such as that shown above is
useful in reviewing the Funds' expenses and in providing a basis
for comparison with other mutual funds, it should not be used for
comparison with other investments using different assumptions or
time periods.
FINANCIAL HIGHLIGHTS
The tables below reflect the results of operations of the Funds on
a per-share basis for the periods shown. The tables up through the
year ended June 30, 1994 for Municipal Money Fund and High-Yield
Municipals and information for the periods beginning after December
31, 1987 for Managed Municipals and Intermediate Municipals have
been audited by Ernst & Young LLP, independent auditors. All of
the auditors' reports related to information for these periods were
unqualified. The information for the six months ended December 31,
1994 is unaudited. These tables should be read in conjunction with
the respective Fund's financial statements and notes thereto. The
Funds' annual report, which may be obtained from the Trust upon
request without charge, contains additional performance
information.
MUNICIPAL MONEY FUND
<TABLE>
<CAPTION>
Six Six
Months Months
Ended Ended
Years Ended December 31, June 30, Years Ended June 30, Dec. 31,
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1994
---- ---- ---- ------- ---- ---- ---- ---- ---- ----- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net investment income .054 .047 .041 .040 .021 .056 .054 .046 .032 .020 .019 .013
Distributions from
net investment income (.054) (.047) (.041) (.040) (.021) (.056) (.054) (.046) (.032) (.020) (.019) (.013)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of expenses
to average net
assets (b) 0.60% 0.60% 0.60% 0.69% *0.67% 0.67% 0.67% 0.68% 0.70% 0.70% 0.70% *0.70%
Ratio of net
investment income to
average net assets
(c) 5.45% 4.74% 4.05% 4.08% *4.25% 5.57% 5.40% 4.66% 3.19% 1.96% 1.88% *2.61%
Total return 5.59% 4.82% 4.22% 4.11% *4.29% 5.74% 5.52% 4.74% 3.25% 1.97% 1.90% *2.61%
Net assets, end of
period (000 omitted) $145,291 $152,277 $251,465 $306,971 $294,116 $254,261 $255,953 $237,403 $199,037 $195,887 $165,820 $173,935
</TABLE>
INTERMEDIATE MUNICIPALS
<TABLE>
<CAPTION>
Six Six
Period Months Months
Ended Years Ended Ended Ended
Dec. 31, December 31, June 30, Years Ended June 30, Dec. 31,
1985 (a) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1994
------- ---- ---- ------- ---- ----- ---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $10.00 $10.14 $10.76 $10.37 $10.43 $10.50 $10.54 $10.73 $11.06 $11.57 $11.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from
Investment Operations
Net investment income .12 .58 .57 .29 .62 .63 .62 .57 .54 .53 .26
Net realized and
unrealized gains
(losses) on
investments .14 .62 (.38) .06 .07 .07 .22 .50 .63 (.39) (.30)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations .26 1.20 .19 .35 .69 .70 .84 1.07 1.17 .14 (.04)
Distributions
Net investment income (.12) (.58) (.57) (.29) (.62) (.63) (.62) (.57) (.54) (.53) (.26)
Net realized capital
gains -- -- (.01) -- -- (.03) (.03) (.17) (.12) (.17) --
In excess of realized
gains -- -- -- -- -- -- -- -- -- (.01) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions (.12) (.58) (.58) (.29) (.62) (.66) (.65) (.74) (.66) (.71) (.26)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE, END
OF PERIOD $10.14 $10.76 $10.37 $10.43 $10.50 $10.54 $10.73 $11.06 $11.57 $11.00 $10.70
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratio of net expenses
to average net
assets (b) *0.80% 0.80% 0.80% *0.80% 0.80% 0.80% 0.80% 0.79% 0.72% 0.71% *0.75%
Ratio of net
investment income to
average net assets
(c) *5.82% 5.45% 5.47% *5.66% 5.96% 5.96% 5.79% 5.23% 4.79% 4.63% *4.95%
Portfolio turnover
rate 0% 10% 49% **22% 83% 141% 96% 109% 96% 55% **26%
Total return **2.61% 12.09% 1.93% **3.45% 6.85% 6.85% 8.18% 10.31% 10.92% 1.16% **(0.29%)
Net assets, end of
period (000 omitted) $22,973 $104,750 $96,143 $97,308 $91,304 $98,918 $118,651 $165,401 $245,441 $238,053 $216,030
</TABLE>
MANAGED MUNICIPALS
<TABLE>
<CAPTION>
Six Six
Months Months
Ended Ended
Years Ended December 31, June 30, Years Ended June 30, Dec. 31,
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD $ 7.71 $ 7.89 $ 8.93 $ 9.22 $ 8.50 $ 8.61 $ 9.02 $ 8.71 $ 8.85 $ 9.11 $ 9.38 $ 8.70
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Income from
Investment Operations
Net investment income .67 .68 .67 .61 .30 .61 .59 .56 .55 .52 .50 .25
Net realized and
unrealized gains
(losses) on
investments .18 1.07 1.21 (.59) .11 .44 (.06) .19 .46 .42 (.51) (.34)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total from investment
operations .85 1.75 1.88 .02 .41 1.05 .53 .75 1.01 .94 (.01) (.09)
Distributions
Net investment income (.67) (.68) (.67) (.61) (.30) (.61) (.59) (.56) (.55) (.52) (.50) (.25)
Net realized capital
gains -- (.03) (.92) (.13) -- (.03) (.25) (.05) (.20) (.15) (.11) --
In excess of realized
gains -- -- -- -- -- -- -- -- -- -- (.06) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total distributions (.67) (.71) (1.59) (.74) (.30) (.64) (.84) (.61) (.75) (.67) (.67) (.25)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
NET ASSET VALUE,
END OF PERIOD $ 7.89 $ 8.93 $ 9.22 $ 8.50 $ 8.61 $ 9.02 $ 8.71 $ 8.85 $ 9.11 $ 9.38 $ 8.70 $ 8.36
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Ratio of expenses to
average net assets 0.64% 0.65% 0.65% 0.65% *0.65% 0.65% 0.66% 0.66% 0.64% 0.64% 0.65% *0.66%
Ratio of net
investment income
to average net
assets 8.74% 8.11% 7.04% 6.99% *7.03% 7.00% 6.66% 6.39% 6.17% 5.65% 5.45% *5.90%
Portfolio turnover
rate 190% 113% 92% 113% **28% 102% 95% 203% 94% 63% 36% **9%
Total return 11.63% 23.00% 21.70% 0.39% **4.90% 12.69% 6.15% 8.92% 11.95% 10.79% (0.29%) **(1.01%)
Net assets, end
of period
(000 omitted) $242,693 $357,360 $523,947 458,170 $467,595 $514,898 $584,081 $655,930 $725,472 $776,694 $687,252 $604,376
</TABLE>
HIGH-YIELD MUNICIPALS
<TABLE>
<CAPTION> Six Six
Period Months Months
Ended Years Ended Ended Ended
Dec. 31, December 31, June 30, Years Ended June 30, Dec. 31,
1984(a) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1994
------- ---- ---- ---- ------- ---- ---- ---- ---- ---- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $10.00 $10.02 $11.10 $12.06 $11.06 $11.37 $11.97 $11.78 $11.79 $11.83 $11.84 $11.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Income from Investment
Operations
Net investment income .73 .94 .90 .87 .44 .88 .85 .82 .80 .71 .67 .33
Net realized and
unrealized gains
(losses) on
investments .02 1.08 1.11 (.89) .31 .63 .02 .17 .22 .18 (.54) (.42)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total from investment
operations .75 2.02 2.01 (.02) .75 1.51 .87 .99 1.02 .89 .13 (.09)
Distributions
Net investment income (.73) (.94) (.90) (.87) (.44) (.88) (.85) (.82) (.80) (.71) (.67) (.33)
Net realized capital
gains -- -- (.15) (.11) -- (.03) (.21) (.16) (.18) (.17) (.17) --
In excess of realized
gains -- -- -- -- -- -- -- -- -- -- (.07) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total distributions (.73) (.94) (1.05) (.98) (.44) (.91) (1.06) (.98) (.98) (.88) (.91) (.33)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
NET ASSET VALUE,
END OF PERIOD $10.02 $11.10 $12.06 $11.06 $11.37 $11.97 $11.78 $11.79 $11.83 $11.84 $11.06 $10.64
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Ratio of net expenses
to average net
assets (b) *0.80% 0.80% 0.76% 0.73% *0.76% 0.73% 0.71% 0.71% 0.69% 0.73% 0.76% *0.89%
Ratio of net investment
income to average
net assets (c) *9.60% 8.89% 7.77% 8.20% *7.87% 7.54% 7.22% 7.00% 6.75% 6.04% 5.76% *5.94%
Portfolio turnover
rate **68% 46% 34% 110% **53% 208% 261% 195% 88% 75% 36% **7%
Total return **7.97% 20.96% 18.64% (0.16%) **6.89% 13.79% 7.59% 8.79% 9.01% 7.88% 0.95% **(0.88%)
Net assets,
end of period
(000 omitted) $32,780 $99,796 $225,883 181,600 $201,274 $277,620 $310,582 $373,948 $410,613 $359,103 $308,181 $264,801
<FN>
*Annualized.
**Not annualized.
(a) The Funds commenced operations on the following dates: Intermediate
Municipals, October 9, 1985 and High-Yield Municipals, March 5, 1984.
(b) If the Funds had paid all of their expenses and there had been no
reimbursement of expenses by the Adviser, these ratios would have
been: for Municipal Money Fund, 0.70%, 0.72%, and 0.70% for the years
ended December 31, 1984, 1985 and 1986, respectively, and 0.75% for
the six months ended December 31, 1994; for Intermediate Municipals,
2.38% for the period ended December 31, 1985, 0.94% and 0.83% for the
years ended December 31, 1986 and 1987, respectively, 0.87% for the
six months ended June 30, 1988, and 0.82%, 0.81%, and 0.81% for the
years ended June 30, 1989 through 1991, respectively; and for High-
Yield Municipals, 1.43% for the period ended December 31, 1984 and
0.81% for the year ended December 31, 1985.
(c) Computed giving effect to the Adviser's expense limitation
undertaking.
</TABLE>
THE FUNDS
The mutual funds offered by this prospectus are SteinRoe Municipal
Money Market Fund ("Municipal Money Fund"), SteinRoe Intermediate
Municipals ("Intermediate Municipals"), SteinRoe Managed Municipals
("Managed Municipals"), and SteinRoe High-Yield Municipals ("High-
Yield Municipals") (collectively, the "Funds"). Each of the Funds
is a no-load, diversified "mutual fund." Mutual funds sell their
own shares to investors and invest the proceeds in a portfolio of
securities. A mutual fund allows you to pool your money with that
of other investors in order to obtain professional investment
management. Mutual funds generally make it possible for you to
obtain greater diversification of your investments and simplify
your recordkeeping. The Funds do not impose commissions or charges
when shares are purchased or redeemed.
The Funds are series of the SteinRoe Municipal Trust (the
"Municipal Trust"), an open-end management investment company,
which is authorized to issue shares of beneficial interest in
separate series. Each series represents interests in a separate
portfolio of securities and other assets, with its own investment
objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory, administrative, and accounting and
recordkeeping services to the Funds and the Portfolio. The Adviser
also manages several other no-load mutual funds with different
investment objectives, including international funds, equity funds,
taxable bond funds, and money market funds. To obtain prospectuses
and other information on any of those mutual funds, please call 1-
800-338-2550.
Rather than invest in securities directly, each Fund may seek to
achieve its investment objective by converting to a "master
fund/feeder fund" structure. Under that structure, the Fund and
other mutual funds with the same investment objective would invest
their assets in another investment company having the same
investment objective and substantially the same investment policies
and restrictions as the Fund. The purpose of such an arrangement is
to achieve greater operational efficiencies and reduce costs. It
is expected that any such investment company would be managed by
the Adviser in substantially the same manner as the Fund. The only
Fund scheduled to operate under the Master Fund/Feeder Fund
structure is Municipal Money Fund, which will convert to the Master
Fund/Feeder Fund structure on September 28, 1995. If another Fund
were to convert to the Master Fund/Feeder Fund structure,
shareholders of that Fund would be given at least 30 days' prior
notice, although they would not be entitled to vote on the action.
Such investment would be made only if the Trustees determine it to
be in the best interests of a Fund and its shareholders. (See
Organization and Description of Shares--Special Considerations
Regarding Master Fund/Feeder Fund Structure.)
HOW THE FUNDS INVEST
Each Fund seeks a high level of current income that is exempt from
Federal income tax by investing in Municipal Securities (described
under Portfolio Investments and Strategies below), consistent with
specified maturity and quality standards that differ among the
Funds. Each Fund will invest as described below and also may
employ the investment techniques described elsewhere in this
prospectus.
MUNICIPAL MONEY FUND. Municipal Money Fund will seek to achieve
its objective by investing all of its assets in the Portfolio,
beginning on September 28, 1995. The investment policies of the
Portfolio and the Fund are identical.
The Fund and the Portfolio seek maximum current income exempt from
Federal income tax by investing principally in a diversified
portfolio of "short-term" Municipal Securities. In pursuing that
objective, the Fund and the Portfolio attempt to maintain relative
stability of principal and liquidity. Generally, "short-term"
securities are those with remaining maturities of no more than
thirteen months. Although there can be no assurance that it will
always be able to do so, the Fund and the Portfolio follow
procedures that its Board of Trustees believes are reasonably
designed to stabilize its price per share at $1.00. These
procedures and the definition of "short-term" are described in
detail in the Statement of Additional Information.
It is a fundamental policy /1/ that normally at least 80% of the
Fund's or the Portfolio's investments will produce income that is
exempt from Federal income tax, except for periods that the Adviser
believes require a defensive position /2/ for the protection of
shareholders.
-----------------
/1/ A fundamental policy of a Fund or Portfolio may be changed only
with the approval of a "majority of its outstanding voting
securities" as defined in the Investment Company Act of 1940.
/2/ A defensive position is one that temporarily reduces a Fund's
or Portfolio's exposure to anticipated adverse market changes.
-----------------
The Fund and the Portfolio may invest in Municipal Securities that,
at the time of purchase, are rated within the two highest ratings
assigned by Moody's Investors Service, Inc. ("Moody's") or Standard
& Poor's Corporation ("S&P"), except that if it relies on ratings
by Moody's for municipal commercial paper or ratings by S&P for
short-term municipal notes, such securities must carry the highest
rating assigned by the respective rating service. /3/ The Fund and
the Portfolio may also invest in unrated securities that, in the
opinion of its Board of Trustees, are at least equal in quality to
the foregoing ratings. The Fund and the Portfolio also may invest
in [i] securities backed by the full faith and credit of the U.S.
Government or [ii] securities as to which payment of principal and
interest is collateralized by an escrow of securities issued or
guaranteed by the U.S. Government or by its agencies or
instrumentalities ["U.S. Government Securities"]. The policies
described in the preceding three sentences (except for the portions
in brackets) are fundamental policies. In accordance with SEC Rule
2a-7 under the Investment Company Act, each security in which the
Fund or the Portfolio invests will be U.S. dollar denominated and
(i) rated (or be issued by an issuer that is rated with respect to
its short-term debt) within the two highest rating categories for
short-term debt by at least two nationally recognized statistical
rating organizations ("NRSRO") or, if rated by only one NRSRO,
rated within the two highest rating categories by that NRSRO, or,
if unrated, determined by or under the direction of the Board of
Trustees to be of comparable quality, and (ii) determined by or
under the direction of the Board of Trustees to present minimal
credit risks.
-------------------
/3/ For a description of Moody's and S&P ratings, see the Appendix
to the Statement of Additional Information. All references to
ratings apply to any ratings adopted in the future by a rating
service that are determined by the Board of Trustees to be
equivalent to current ratings.
-------------------
INTERMEDIATE MUNICIPALS. This Fund seeks a high current yield
exempt from Federal income tax, consistent with the preservation of
capital, by investing primarily in a diversified portfolio of
"intermediate-term" Municipal Securities. Normally, at least 65%
of the Fund's assets will be invested in Municipal Securities with
a maturity of ten years or less (including Municipal Securities
with longer maturities, but under which the holder is entitled to
receive, upon demand at a stated time within ten years, the entire
principal and accrued interest). In addition, the Fund's portfolio
is expected to have a dollar-weighted average maturity of between
three and ten years.
It is a fundamental policy that normally at least 80% of the Fund's
investments will produce income that is exempt from Federal income
tax, except during periods that the Adviser believes require a
temporary defensive position for the protection of shareholders.
At least 75% of the Fund's investments in Municipal Securities will
be (i) rated at the time of purchase within the three highest
ratings by Moody's or S&P (except that if the Fund relies on
ratings by S&P for municipal notes, such notes must be within the
two highest ratings), (ii) if unrated, of comparable quality as
determined by the Adviser, or (iii) backed by the U.S. Government
or by an agency or instrumentality of the U.S. Government or by
U.S. Government Securities. The Fund may also invest up to 25% of
its assets in other Municipal Securities without any minimum credit
quality requirement, including those for which a limited market may
exist, which normally involve greater risk of loss of principal or
income and higher yield.
MANAGED MUNICIPALS. This Fund seeks a high level of current income
that is exempt from Federal income tax, consistent with the
preservation of capital, by investing in a diversified portfolio of
Municipal Securities. The Fund invests primarily in long-term
Municipal Securities (generally maturing in more than ten years)
but may also invest in shorter-term securities as a temporary
defensive move.
It is a fundamental policy that the Fund's assets will be invested
so that at least 80% of its income will be exempt from Federal
income tax, except during periods in which the Adviser believes a
temporary defensive position is advisable.
At least 75% of the Fund's investments in Municipal Securities will
be (i) rated at the time of purchase within the three highest
ratings assigned by Moody's or S&P (except that if the Fund relies
on ratings by S&P for municipal notes, such notes must be within
the two highest ratings for such securities) or (ii) backed by the
U.S. Government, by an agency or instrumentality of the U.S.
Government or by U.S. Government Securities. The Fund may also
invest up to 25% of its assets in other Municipal Securities
without any minimum credit quality requirement, including those for
which a limited market may exist, which normally involve greater
risk of loss of principal or income and higher yield.
HIGH-YIELD MUNICIPALS. This Fund seeks a high current yield exempt
from Federal income tax by investing primarily in a diversified
portfolio of Municipal Securities. The Fund invests principally in
long-term (generally maturing in more than ten years) medium- or
lower-quality Municipal Securities bearing a high rate of interest
income; possible capital appreciation is of secondary importance.
It is a fundamental policy that normally the Fund's assets will be
invested so that at least 80% of its gross income will be derived
from securities the interest on which is exempt from Federal income
tax in the opinion of counsel for the issuers of such securities,
except during periods in which the Adviser believes a temporary
defensive position is advisable.
Medium-quality Municipal Securities are obligations of issuers that
the Adviser believes possess adequate, but not outstanding,
capacities to service the obligations. Lower-quality Municipal
Securities are obligations of issuers that are considered
predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal according to the terms of the
obligation and, therefore, carry greater investment risk, including
the possibility of issuer default and bankruptcy, and are commonly
referred to as "junk bonds." The lowest rating assigned by Moody's
is for bonds that can be regarded as having extremely poor
prospects of ever attaining any real investment standing. The
Adviser attributes to medium- and lower-quality obligations the
same general characteristics as do rating services. Because many
issuers of medium- and lower-quality Municipal Securities choose
not to have their obligations rated by a rating agency, many of the
obligations in the Fund's portfolio may be unrated.
Investment in medium- or lower-quality debt securities involves
greater investment risk, including the possibility of issuer
default or bankruptcy. An economic downturn could severely disrupt
this market and adversely affect the value of outstanding bonds and
the ability of the issuers to repay principal and interest. During
a period of adverse economic changes, including a period of rising
interest rates, issuers of such bonds may experience difficulty in
servicing their principal and interest payment obligations.
Medium- and lower-quality debt securities tend to be less
marketable than higher-quality debt securities because the market
for them is less broad. The market for unrated debt securities is
even narrower. During periods of thin trading in these markets,
the spread between bid and asked prices is likely to increase
significantly, and the Fund may have greater difficulty selling its
portfolio securities.
Although the Fund invests principally in medium- or lower-quality
Municipal Securities, it may invest in Municipal Securities of
higher quality when the Adviser believes it is appropriate to do
so.
For the fiscal year ended June 30, 1994, the Fund's portfolio was
invested, on average, as follows: high-quality short-term
instruments, 2.72%; AAA, 9.34%; AA, 19.54%; A, 33.20%; BBB, 18.08%;
BB, 3.40%; CC, 0.36%; and unrated, 13.36%. The ratings are based
on a dollar-weighted average, computed monthly, and reflect the
higher of S&P or Moody's ratings. The ratings do not necessarily
reflect the current or future composition of the Fund's portfolio.
PORTFOLIO INVESTMENTS AND STRATEGIES
MUNICIPAL SECURITIES. Municipal Securities are debt obligations
issued by or on behalf of the governments of states, territories or
possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities, the
interest on which is generally exempt from the regular Federal
income tax. Except with respect to Municipal Money Fund and the
Portfolio and subject to each Fund's investment policies described
above, each Fund may invest in Municipal Securities rated with any
credit rating below investment grade. Medium- and lower-quality
Municipal Securities involve greater investment risk, as discussed
above under How the Funds Invest--High-Yield Municipals.
The two principal classifications of Municipal Securities are
"general obligation" and "revenue" bonds. "General obligation"
bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. "Revenue"
bonds are usually payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from
the proceeds of a special excise tax or other specific revenue
source. Industrial development bonds are usually revenue bonds,
the credit quality of which is normally directly related to the
credit standing of the industrial user involved. Municipal
Securities may bear either fixed or variable rates of interest.
Variable rate securities bear rates of interest that are adjusted
periodically according to formulae intended to minimize fluctuation
in values of the instruments.
Within the principal classifications of Municipal Securities, there
are various types of instruments, including municipal bonds,
municipal notes, municipal leases, custodial receipts, and
participation certificates. Municipal notes include tax, revenue,
and bond anticipation notes of short maturity, generally less than
three years, which are issued to obtain temporary funds for various
public purposes. Municipal lease securities, and participation
certificates therein, evidence certain types of interests in lease
or installment purchase contract obligations of a municipal
authority or other entity. Custodial receipts represent ownership
in future interest or principal payments (or both) on certain
Municipal Securities and are underwritten by securities dealers or
banks. Some Municipal Securities may not be backed by the faith,
credit, and taxing power of the issuer and may involve "non-
appropriation" clauses which provide that the municipal authority
is not obligated to make lease or other contractual payments,
unless specific annual appropriations are made by the municipality.
Each Fund may invest more than 5% of its net assets in municipal
bonds and notes, but does not expect to invest more than 5% of its
net assets in the other Municipal Securities described in this
paragraph.
The Funds may also purchase Municipal Securities that are insured
as to the timely payment of interest and principal. Such insured
Municipal Securities may already be insured when purchased by a
Fund or the Fund may purchase insurance in order to turn an
uninsured Municipal Security into an insured Municipal Security.
Some Municipal Securities are backed by (i) the full faith and
credit of the U.S. Government, (ii) agencies or instrumentalities
of the U.S. Government, or (iii) U.S. Government Securities.
Except with respect to Municipal Securities with a demand feature
acquired by Municipal Money Fund and the Portfolio (see the
definition of "short-term" in the Statement of Additional
Information), if, after purchase by a Fund, an issue of Municipal
Securities ceases to meet the required rating standards, if any,
the Fund is not required to sell such security, but the Adviser
would consider such an event in deciding whether the Fund should
retain the security in its portfolio. In the case of Municipal
Securities with a demand feature acquired by Municipal Money Fund
or the Portfolio, if the quality of such a security falls below the
minimum level applicable at the time of acquisition, the Fund must
dispose of the security, unless the Board of Trustees determines
that it is in the best interests of the Fund and its shareholders
to retain the security.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. Each Fund's assets
may include securities purchased on a when-issued or delayed-
delivery basis. Although the payment and interest terms of these
securities are established at the time the purchaser enters into
the commitment, the securities may be delivered and paid for a
month or more after the date of purchase, when their value may have
changed. The Funds make such commitments only with the intention
of actually acquiring the securities, but may sell the securities
before settlement date if it is deemed advisable for investment
reasons. Securities purchased in this manner involve a risk of
loss if the value of the security purchased declines before
settlement date.
STANDBY COMMITMENTS. To facilitate portfolio liquidity, each Fund
may obtain standby commitments when it purchases Municipal
Securities. A standby commitment gives the holder the right to
sell the underlying security to the seller at an agreed-upon price
on certain dates or within a specified period.
PARTICIPATION INTERESTS. Each Fund may also purchase participation
interests or certificates of participation in all or part of
specific holdings of Municipal Securities, including municipal
lease obligations. Some participation interests, certificates of
participation, and municipal lease obligations are illiquid and, as
such, will be subject to the Funds' 10% limit on investments in
illiquid securities.
FUTURES AND OPTIONS. Each of Intermediate Municipals, Managed
Municipals, and High Yield Municipals may purchase and write both
call options and put options on securities and on indexes, and
enter into interest rate and index futures contracts and options on
such futures contracts in order to provide additional revenue, or
to hedge against changes in security prices or interest rates.
Each Fund may write a call or put option only if the option is
covered. As the writer of a covered call option, the Fund
foregoes, during the option's life, the opportunity to profit from
increases in market value of the security covering the call option
above the sum of the premium and the exercise price of the call.
Because of low margin deposits required, the use of futures
contracts involves a high degree of leverage, and may result in
losses in excess of the amount of the margin deposit. Since there
can be no assurance that a liquid market will exist when the Fund
seeks to close out a position, these risks may become magnified.
RESTRICTIONS ON THE FUNDS' INVESTMENTS
For purposes of discussion under Restrictions on the Funds'
Investments and Risks and Investment Considerations, the term
"the Fund" refers to Municipal Money Fund, Intermediate Municipals,
Managed Municipals, High-Yield Municipals, and the Portfolio.
No Fund will: (i) with respect to 75% of its total assets, invest
more than 5% of its total assets in the securities of any one
issuer (except for obligations issued or guaranteed by the U.S.
Government or by its agencies or instrumentalities or repurchase
agreements for such securities; guarantees or letters of credit of
a single guarantor may exceed this limit; see the Statement of
Additional Information); or (ii) invest more than 25% of its total
assets in securities of non-governmental issuers whose principal
business activities are in the same industry. Notwithstanding
these limitations, each Fund, but not the Portfolio, may invest all
or substantially all of its assets in another registered investment
company having the same investment objective and substantially
similar investment policies as the Fund. No Fund may borrow money
or pledge or mortgage its assets except as a temporary measure for
extraordinary or emergency purposes, and then the aggregate
borrowings at any one time (including any reverse repurchase
agreements) may not exceed 33 1/3% of its assets (at market value).
No Fund may purchase additional securities when its borrowings,
less proceeds receivable from sales of portfolio securities, exceed
5% of its total assets. (See, however, Risks and Investment
Considerations.) The restrictions described in this section are
fundamental policies of the Funds. All of the investment
restrictions are set forth in the Statement of Additional
Information.
RISKS AND INVESTMENT CONSIDERATIONS
All investments, including those in mutual funds, have risks. No
investment is suitable for all investors. Although each Fund seeks
to reduce risk by investing (directly or, in the case of Municipal
Money Fund, beginning September 28, 1995, through the Portfolio) in
a diversified portfolio, this does not eliminate all risk. The
risks inherent in each Fund depend primarily upon the maturity and
quality of the obligations in which the Fund invests, as well as
on market conditions. A decline in prevailing levels of interest
rates generally increases the value of securities in which a Fund
invests, while an increase in rates usually reduces the value of
those securities.
Generally, high-quality short-term obligations offer lower yields
and less fluctuation in value than long-term low-quality
obligations. Consequently, Municipal Money Fund is designed for
investors who seek little or no fluctuation in portfolio value.
Intermediate Municipals is appropriate for investors who seek more
tax-exempt income than is usually available from tax-exempt money
funds and who can accept some fluctuation in portfolio value.
Managed Municipals is appropriate for investors who seek higher
tax-exempt income than normally provided by shorter-term tax-exempt
securities and who can accept the greater portfolio fluctuation
associated with long-term Municipal Securities. High-Yield
Municipals is designed for investors who seek a high level of tax-
exempt income and who can accept still greater fluctuation in
portfolio value and other risks, such as increased credit risk,
associated with medium- and lower-quality long-term Municipal
Securities.
Although the Funds currently limit their investments in Municipal
Securities to those the interest on which is exempt from the
regular Federal income tax, each Fund may invest up to 100% of its
total assets in Municipal Securities the interest on which is
subject to the Federal alternative minimum tax. (See Distributions
and Income Taxes.)
Each Fund's objective is not fundamental and may be changed by the
Board of Trustees without a vote of shareholders. If there is a
change in a Fund's investment objective, shareholders should
consider whether the Fund remains an appropriate investment in
light of their then-current financial position and needs. There
can be no assurance that a Fund will achieve its objective, nor can
a Fund assure that payments of interest and principal on portfolio
obligations will be made when due. In seeking to attain its
objective, a Fund may sell securities without regard to the period
of time they have been held. As a result, the turnover rate may
vary from year to year. A high rate of portfolio turnover may
result in increased transaction costs and the realization of
capital gains or losses.
Each Fund may invest 25% or more of its assets in Municipal
Securities that are related in such a way that an economic,
business, or political development affecting one such security
could also affect the other securities. For example, Municipal
Securities the interest upon which is paid from revenues of
similar-type projects, such as hospitals, utilities, or housing,
would be so related. Each Fund may invest 25% or more of its
assets in industrial development bonds (subject to the
concentration restrictions described in this prospectus under
Restrictions on the Funds' Investments and in the Statement of
Additional Information). Assets of a Fund that are not invested in
Municipal Securities may be held in cash or invested in short-term
taxable investments. /4/
-----------------
/4/ The policy expressed in this sentence is a fundamental policy
of Municipal Money Fund, the Portfolio, and Managed Municipals
-----------------
HOW TO PURCHASE SHARES
You may purchase shares of any of the Funds by check, by wire,
by electronic transfer, or by exchange from your account with
another SteinRoe Fund. The initial purchase minimum per Fund
account is $2,500; the minimum for Uniform Gifts/Transfers to
Minors Act ("UGMA") accounts is $1,000; and the minimum for
accounts established under an automatic investment plan (i.e.,
Regular Investments, Dividend Purchase Option, or the Automatic
Exchange Plan) is $1,000 for regular accounts and $500 for UGMA
accounts. The initial purchase minimum is waived for shareholders
who participate in the SteinRoe Counselor [service mark] or
SteinRoe Counselor Preferred [service mark] Programs and for
clients of the Adviser. Subsequent purchases must be at least
$100, or at least $50 if you purchase by electronic transfer. (See
Shareholder Services.)
BY CHECK. To make an initial purchase of shares of a Fund, please
complete and sign the Application and mail it to P.O. Box 804058,
Chicago, Illinois 60680, together with a check made payable to
SteinRoe Funds.
You may make subsequent investments by submitting a check along
with either the stub from your Fund account confirmation statement
or a note indicating the amount of the purchase, your account
number, and the name in which your account is registered. Each
individual check submitted for purchase must be at least $100, and
the Trust generally will not accept cash, drafts, third party
checks, or checks drawn on banks outside of the United States.
Should an order to purchase shares of a Fund be cancelled because
your check does not clear, you will be responsible for any
resulting loss incurred by that Fund.
BY WIRE. You may also pay for shares by instructing your bank to
wire Federal funds (monies of member banks within the Federal
Reserve System) to the Funds' custodian bank. Your bank may charge
you a fee for sending the wire. If you are opening a new account
by wire transfer, you must first telephone the Trust to request an
account number and furnish your social security or other tax
identification number. Neither the Funds nor the Trust will be
responsible for the consequences of delays, including delays in the
banking or Federal Reserve wire systems. Your bank must include
the full name(s) in which your account is registered and your Fund
account number, and should address its wire as follows:
State Street Bank and Trust Company
ABA Routing No. 011000028
Boston, Massachusetts
Attention: Custody
Fund No. ____; SteinRoe _______
Account of (exact name(s) in registration)
Shareholder Account No. _____
Fund Numbers:
7101--Managed Municipals
7110--Municipal Money Fund
7113--High-Yield Municipals
7114--Intermediate Municipals
BY ELECTRONIC TRANSFER. You may also make subsequent investments
by an electronic transfer of funds from your bank checking account.
Electronic transfer allows you to make purchases at your request
("Special Investments") by calling 1-800-338-2550 or at pre-
scheduled intervals ("Regular Investments"). (See Shareholder
Services.) Electronic transfer purchases are subject to a $50
minimum and a $100,000 maximum. You may not open a new account
through electronic transfer. Should an order to purchase shares of
a Fund be cancelled because your electronic transfer does not
clear, you will be responsible for any resulting loss incurred by
that Fund.
BY EXCHANGE. You may purchase shares by exchange of shares from
another SteinRoe Fund account either by phone (if the Telephone
Exchange Privilege has been established on the account from which
the exchange is being made), by mail, in person, or automatically
at regular intervals (if you have elected Automatic Exchanges).
Restrictions apply; please review the information under How to
Redeem Shares--By Exchange.
PURCHASE PRICE AND EFFECTIVE DATE. Each purchase of a Fund's
shares is made at that Fund's net asset value (see Net Asset Value)
next determined after receipt of payment as follows:
A purchase by check or wire transfer is made at the net asset value
next determined after receipt by the Fund of the check or wire
transfer of funds in payment of the purchase.
A purchase by electronic transfer is made at the net asset value
next determined after the Fund receives the electronic transfer
from your bank. A Special Electronic Transfer Investment order
received by telephone on a business day before 2:00 p.m., Chicago
time, is effective on the next business day. Shares begin earning
dividends on the day following the day on which they are purchased.
CONDITIONS OF PURCHASE. Each purchase order for a Fund must be
accepted by an authorized officer of Municipal Trust in Chicago and
is not binding until accepted and entered on the books of that
Fund. Once your purchase order has been accepted, you may not
cancel or revoke it; however, you may redeem the shares. Municipal
Trust reserves the right not to accept any purchase order that it
determines not to be in the best interest of the Trust or of a
Fund's shareholders. Municipal Trust also reserves the right to
waive or lower its investment minimums for any reason. The Trust
does not issue certificates for shares.
PURCHASES THROUGH THIRD PARTIES. You may purchase (or redeem)
shares through investment dealers, banks, or other financial
institutions. These institutions may charge for their services or
place limitations on the extent to which you may use the services
offered by Municipal Trust. There are no charges or limitations
imposed by the Trust (other than those described in this
prospectus) if shares are purchased (or redeemed) directly from the
Trust.
Some financial institutions which maintain nominee accounts with
the Fund for their clients who are Fund shareholders charge an
annual fee of up to 0.25% of the average net assets held in such
accounts for accounting, servicing, and distribution services they
provide with respect to the underlying Fund shares. Such fees are
paid by the Adviser.
HOW TO REDEEM SHARES
BY WRITTEN REQUEST. You may redeem all or a portion of your shares
of a Fund by submitting a written request in "good order" to
Municipal Trust at P.O. Box 804058, Chicago, Illinois 60680. A
redemption request will be considered to have been received in good
order if the following conditions are satisfied:
(1) the request must be in writing, indicate the number of shares
or dollar amount to be redeemed, and identify the shareholder's
account number;
(2) the request must be signed by the shareholder(s) exactly as the
shares are registered;
(3) the request must be accompanied by any certificates for the
shares, either properly endorsed for transfer, or accompanied by
a stock assignment properly endorsed exactly as the shares are
registered;
(4) the signatures on either the written redemption request or the
certificates (or the accompanying stock power) must be
guaranteed (a signature guarantee is not a notarization, but is
a widely accepted way to protect you and the Funds by verifying
your signature);
(5) corporations and associations must submit with each request a
completed Certificate of Authorization included in this
prospectus (or a form of resolution acceptable to the Trust);
and
(6) other supporting legal documents may be required from
organizations, executors, administrators, trustees, or others
acting on accounts not registered in their names.
BY EXCHANGE. You may redeem all or any portion of your Fund shares
and use the proceeds to purchase shares of any other SteinRoe Fund
offered for sale in your state if your signed, properly completed
Application is on file. An exchange transaction is a sale and
purchase of shares for Federal income tax purposes and may result
in capital gain or loss. Before exercising the Exchange Privilege,
you should obtain the prospectus for the SteinRoe Fund in which you
wish to invest and read it carefully. The registration of the
account to which you are making an exchange must be exactly the
same as that of the Fund account from which the exchange is made
and the amount you exchange must meet any applicable minimum
investment of the SteinRoe Fund being purchased. Unless you have
elected to receive your dividends in cash, on an exchange of all
shares, any accrued unpaid dividends will be invested in the
SteinRoe Fund to which you exchange on the next business day. An
exchange may be made by following the redemption procedure
described above under By Written Request and indicating the
SteinRoe Fund to be purchased, except that a signature guarantee
normally is not required. (See also the discussion below of the
Telephone Exchange Privilege and Automatic Exchanges.)
SPECIAL REDEMPTION PRIVILEGES. The Telephone Exchange Privilege
and the Telephone Redemption by Check Privilege will be established
automatically for you when you open your account unless you decline
these Privileges on your Application. Other Privileges must be
specifically elected. If you do not want the Telephone Exchange
and Redemption Privileges, check the box(es) under the section
"Telephone Redemption Options" when completing your Application.
In addition, a signature guarantee may be required to establish a
Privilege after you open your account. If you establish both the
Telephone Redemption by Wire Privilege and the Electronic Transfer
Privilege, the bank account that you designate for both Privileges
must be the same.
You may not use any of the Special Redemption Privileges if you
hold certificates for any of your Fund shares. (See also General
Redemption Policies.)
Telephone Exchange Privilege. You may use the Telephone Exchange
Privilege to exchange an amount of $1,000 or more from your account
by calling 1-800-338-2550 or by sending a telegram; new accounts
opened by exchange are subject to the $2,500 initial purchase
minimum. Generally, you will be limited to four Telephone Exchange
round-trips per year and the Funds may refuse requests for
Telephone Exchanges in excess of four round-trips (a round-trip
being the exchange out of a Fund into another SteinRoe Fund, and
then back to that Fund). Also, Municipal Trust's general
redemption policies apply to redemptions of shares by Telephone
Exchange. (See General Redemption Policies.)
Municipal Trust reserves the right at any time without prior notice
to suspend or terminate the use of the Telephone Exchange Privilege
by any person or class of persons. The Trust believes that use of
the Telephone Exchange Privilege by investors utilizing market-
timing strategies adversely affects the Funds. Therefore, the
Trust generally will not honor requests for Telephone Exchanges by
shareholders identified by the Trust as "market-timers." Moreover,
the Trust reserves the right at any time without prior notice to
suspend, limit, modify, or terminate the Telephone Exchange
Privilege in its entirety. Because such a step would be taken only
if the Board of Trustees believes it would be in the best interests
of the Funds, the Trust expects that it would provide shareholders
with prior written notice of any such action unless it appears that
the resulting delay in the suspension, limitation, modification, or
termination of the Telephone Exchange Privilege would adversely
affect the Funds. If the Trust were to suspend, limit, modify, or
terminate the Telephone Exchange Privilege, a shareholder expecting
to make a Telephone Exchange might find that an exchange could not
be processed or that there might be a delay in the implementation
of the exchange. (See How to Redeem Shares--By Exchange.) During
periods of volatile economic and market conditions, you may have
difficulty placing your exchange by telephone.
Automatic Exchanges. You may use the Automatic Exchange Privilege
to automatically redeem a fixed amount from your Fund account for
investment in another SteinRoe Fund account on a regular basis.
Telephone Redemption by Check Privilege. You may use the Telephone
Redemption by Check Privilege to redeem an amount of $1,000 or more
from your account by calling 1-800-338-2550. The proceeds will be
sent by check to your registered address.
Telephone Redemption by Wire Privilege (Municipal Money Fund
accounts only). You may use this Privilege to redeem an amount of
$1,000 or more from your account by calling 1-800-338-2550. The
proceeds will be transmitted by wire to your account at a
commercial bank previously designated by you that is a member of
the Federal Reserve System. The fee for wiring proceeds (currently
$3.50 per transaction) will be deducted from the amount wired.
Check-Writing Privilege (Municipal Money Fund accounts only). You
may also redeem shares by writing special checks in the amounts of
$50 or more. Your checks are drawn against a special checking
account maintained with the custodian, and you will be subject to
the custodian's procedures and rules relating to its checking
accounts and to this Privilege.
Electronic Transfer Privilege. You may redeem shares by calling 1-
800-338-2550 and requesting an electronic transfer ("Special
Redemption") of the proceeds to a checking account previously
designated by you at a bank that is a member of the Automated
Clearing House or at scheduled intervals ("Automatic Redemptions"--
see Shareholder Services). Electronic transfers are subject to a
$50 minimum and a $100,000 maximum. A Special Redemption request
received by telephone after 2:00 p.m., Chicago time, is deemed
received on the next business day.
GENERAL REDEMPTION POLICIES. You may not cancel or revoke your
redemption order once instructions have been received and accepted.
The Trust cannot accept a redemption request that specifies a
particular date or price for redemption or any special conditions.
Please telephone the Trust if you have any questions about
requirements for a redemption before submitting your request. The
Trust reserves the right to require a properly completed
Application before making payment for shares redeemed.
The price at which your redemption order will be executed is the
net asset value next determined after proper redemption
instructions are received. (See Net Asset Value.) Because the
redemption price you receive depends upon that Fund's net asset
value per share at the time of redemption, it may be more or less
than the price you originally paid for the shares and may result in
a realized capital gain or loss.
The Trust will generally mail payment for shares redeemed within
seven days after proper instructions are received. However,
Municipal Money Fund normally intends to pay proceeds of a written
redemption within two business days and proceeds of a Telephone
Redemption paid by wire on the next business day. The Trust will
not be responsible for the consequences of delays, including delays
in the mail, banking, or Federal Reserve wire systems. If you
attempt to redeem shares within 15 days after they have been
purchased by check or electronic transfer, the Trust may delay
payment of the redemption proceeds to you until it can verify that
payment for the purchase of those shares has been (or will be)
collected. To reduce such delays, the Trust recommends that your
purchase be made by Federal funds wire through your bank.
The Trust reserves the right at any time without prior notice to
suspend, limit, modify, or terminate any Privilege or its use in
any manner by any person or class.
Neither the Trust, its transfer agent, nor their respective
officers, trustees, directors, employees, or agents will be
responsible for the authenticity of instructions provided under the
Privileges, nor for any loss, liability, cost or expense for acting
upon instructions furnished thereunder if they reasonably believe
that such instructions are genuine. The Funds employ procedures
reasonably designed to confirm that instructions communicated by
telephone under any Special Redemption Privilege or the Special
Electronic Transfer Redemption Privilege are genuine. Use of any
Special Redemption Privilege or the Special Electronic Transfer
Redemption Privilege authorizes the Funds and their transfer agent
to tape-record all instructions to redeem. In addition, callers
are asked to identify the account number and registration, and may
be required to provide other forms of identification. Written
confirmations of transactions are mailed promptly to the registered
address; a legend on the confirmation requests the shareholder to
review the transactions and inform the Fund immediately if there is
a problem. If a Fund does not follow reasonable procedures for
protecting shareholders against loss on telephone transactions, it
may be liable for any losses due to unauthorized or fraudulent
instructions.
Generally, you may not use the Exchange Privilege or any Special
Redemption Privilege to redeem shares purchased by check (other
than certified or cashiers' checks) or electronic transfer until 15
days after their date of purchase.
The Trust reserves the right to redeem shares in any account and
send the proceeds to the owner if the shares in the account do not
have a value of at least $1,000.
Shares in any account you maintain with a Fund or any of the other
SteinRoe Funds may be redeemed to the extent necessary to reimburse
any SteinRoe Fund for any loss it sustains that is caused by you
(such as losses from uncollected checks and electronic transfers or
any SteinRoe Fund liability under the Internal Revenue Code
provisions on backup withholding).
SHAREHOLDER SERVICES
REPORTING TO SHAREHOLDERS. You will receive a confirmation
statement reflecting each of your purchases and redemptions of
shares of a Fund, as well as periodic statements detailing
distributions made by that Fund. Shares purchased by reinvestment
of dividends, by cross-reinvestment of dividends from another Fund,
or pursuant to an automatic investment plan will be confirmed to
you quarterly. In addition, the Trust will send you semiannual and
annual reports showing Fund portfolio holdings and will provide you
annually with tax information.
FUNDS-ON-CALL [REGISTERD TRADEMARK] 24-HOUR INFORMATION SERVICE.
To access the SteinRoe Funds-on-Call [REGISTERD TRADEMARK]
automated telephone service, just call 1-800-338-2550 on any touch-
tone telephone and follow the recorded instructions. Funds-on-Call
[REGISTERD TRADEMARK] provides yields, prices, latest dividends,
account balances, last transaction, and other information 24 hours
a day, seven days a week.
FUNDS-ON-CALL [REGISTERD TRADEMARK] AUTOMATED TELEPHONE
TRANSACTIONS. If you have established the Funds-on-Call [REGISTERD
TRADEMARK] transaction privilege (Funds-on-Call [REGISTERD
TRADEMARK] Application will be required), you may initiate Special
Investments and Redemptions, Telephone Exchanges, and Telephone
Redemptions by Check 24 hours a day, seven days a week by calling
1-800-338-2550 on a touch-tone telephone. These transactions are
subject to the terms and conditions of the individual privileges.
(See How to Purchase Shares and How to Redeem Shares.)
STEINROE COUNSELOR [service mark] PROGRAM. The Adviser offers a
SteinRoe Counselor [service mark] and a SteinRoe Counselor
Preferred [service mark] program. The programs are designed to
provide investment guidance in helping investors to select a
portfolio of SteinRoe Mutual Funds. The SteinRoe Counselor
Preferred [service mark] program, which automatically adjusts
client portfolios, has a fee of up to 1% of assets.
RECORDKEEPING AND ADMINISTRATION SERVICES. If you oversee or
administer investments for a group of investors, we offer a variety
of services.
SPECIAL SERVICES. The following special services are available to
shareholders. Please call 1-800-338-2550 or write the Trust for
additional information and forms.
Dividend Purchase Option--to diversify your Fund investments by
having distributions from one Fund account automatically invested
in another SteinRoe Fund account. Before establishing this option,
you should obtain and read carefully the prospectus of the SteinRoe
Fund into which you wish to have your distributions invested. The
account from which distributions are made must be of sufficient
size that each distribution will usually be at least $25. The
account into which distributions are to be invested may be opened
with an initial investment of only $1,000.
Automatic Dividend Deposit (electronic transfer)--to have income
dividends and capital gain distributions deposited directly into
your bank checking account.
Telephone Redemption by Check Privilege and Telephone Exchange
Privilege--established automatically when you open your account
unless you decline them on your Application ($1,000 minimum). (See
How to Redeem Shares--Special Redemption Privileges.)
Telephone Redemption by Wire Privilege--to redeem shares from your
account by phone and have the proceeds transmitted by wire to your
checking account ($1,000 minimum). (This Privilege is available
only for Municipal Money Fund accounts.)
Check-Writing Privilege--to redeem shares by writing special checks
against your Fund account ($50 minimum per check). (This Privilege
is available only for Municipal Money Fund accounts.)
Special Redemption Option (electronic transfer)--to redeem shares
at any time and have the proceeds deposited directly to your bank
checking account ($50 minimum; $100,000 maximum).
Regular Investments (electronic transfer)--to purchase Fund shares
at regular intervals directly from your bank checking account ($50
minimum; $100,000 maximum).
Special Investments (electronic transfer)--to purchase Fund shares
by telephone and pay for them by electronic transfer of funds from
your checking account ($50 minimum; $100,000 maximum).
Automatic Exchange Plan--to automatically redeem a fixed dollar
amount from your Fund account and invest it in another SteinRoe
Fund account on a regular basis ($50 minimum; $100,000 maximum).
Automatic Redemptions (electronic transfer)--to have a fixed dollar
amount redeemed and sent at regular intervals directly to your bank
checking account ($50 minimum; $100,000 maximum).
Systematic Withdrawals--to have a fixed dollar amount, declining
balance, or fixed percentage of your account redeemed and sent at
regular intervals by check to you or another payee.
NET ASSET VALUE
The purchase and redemption price of each Fund's shares is its net
asset value per share. Each Fund and the Portfolio determines the
net asset value of its shares as of the close of trading on the New
York Stock Exchange (currently 3:00 p.m., Chicago time) by dividing
the difference between the values of its assets and liabilities by
the number of its shares outstanding. In the case of Municipal
Money Fund, beginning September 28, 1995, its shares of the
Portfolio will be valued at their net asset value.
Net asset value will not be determined on days when the Exchange is
closed unless, in the judgment of the Board of Trustees, the net
asset value of a Fund should be determined on any such day, in
which case the determination will be made at 3:00 p.m., Chicago
time.
Securities held by Intermediate Municipals, Managed Municipals, or
High-Yield Municipals are valued based on valuations provided by a
pricing service. These valuations are reviewed by the Adviser. If
the Adviser believes that a valuation received from the service
does not represent a fair value, it values the obligation by a
method that the Board of Municipal Trust believes will determine a
fair value. The Board may approve the use of another pricing
service and any pricing service used may employ electronic data
processing techniques, including a so-called "matrix" system, to
determine valuations. Other assets and securities are valued by a
method that the Board believes will determine a fair value.
Securities held by the Municipal Money Fund or the Portfolio are
valued at their amortized cost, which does not take into account
unrealized gains or losses, in an attempt to maintain the net asset
value of each of the Portfolio and Municipal Money Fund at $1.00
per share. The extent of any deviation between the net asset value
based upon market quotations or equivalents and $1.00 per share
based on amortized cost will be examined by the Board of Trustees
of the appropriate Trust. If such deviation were to exceed 1/2 of
1%, the Board would consider what action, if any, should be taken,
including selling portfolio securities, increasing, reducing or
suspending distributions, or redeeming shares in kind. Other
assets and securities of the Municipal Money Fund or the Portfolio
for which this valuation method does not produce a fair value are
valued at a fair value determined by its Board.
DISTRIBUTIONS AND INCOME TAXES
DISTRIBUTIONS. Income dividends are declared each business day,
and are paid monthly and confirmed at least quarterly. For Federal
income tax purposes, any distribution that is paid in January but
was declared in the prior calendar year is deemed paid in the prior
calendar year. Each Fund intends to distribute by the end of each
calendar year at least 98% of any net capital gains realized from
the sale of securities during the twelve-month period ended October
31 in that year. The Funds intend to distribute any undistributed
net realized capital gains in the following year.
All of your income dividends and capital gain distributions will be
reinvested in additional shares unless you elect to have
distributions either (1) paid by check, (2) deposited by electronic
transfer into your bank checking account, (3) applied to purchase
shares in your account with another SteinRoe Fund, or (4) applied
to purchase shares in a SteinRoe Fund account of another person.
(See Shareholder Services.) Reinvestment normally occurs on the
payable date. The Trust reserves the right to reinvest the
proceeds and future distributions in additional Fund shares if
checks mailed to you for distributions are returned as
undeliverable or are not presented for payment within six months.
INCOME TAXES. All of the Funds and the Portfolio currently limit
their investments in Municipal Securities to those the interest on
which they believe is exempt from the regular Federal income tax
("exempt-interest dividends"). Each Fund and the Portfolio may
invest up to 100% of its total assets in Municipal Securities the
interest on which is subject to the alternative minimum tax. In
addition, if a Fund or the Portfolio should ever invest in
securities the interest on which is not exempt, dividends paid by
it from such interest would be subject to Federal income tax at
ordinary rates.
The portion of the dividends you receive representing net short-
term capital gain is taxable to you as ordinary income.
Distributions of net long-term capital gain are taxable to you as
long-term capital gain regardless of the length of time you have
held your Fund shares.
Promptly after the end of each calendar year, you will receive a
statement of the Federal income tax status of all dividends and
capital gain distributions paid during the year. The portion of
your dividends and distributions that are taxable will be taxable
to you whether received in cash or reinvested in additional shares.
If you are receiving social security benefits, tax-exempt income,
including exempt-interest dividends received from the Funds, will
be added to your taxable income in determining whether a portion of
your benefits will be subject to Federal income tax. Interest on
borrowings you incur to purchase or carry shares of a Fund is not
deductible for Federal income tax purposes. You may be subject to
state and local taxes on distributions from the Funds, including
those distributions that are exempt from Federal income tax.
For Federal income tax purposes, each Fund is treated as a separate
taxable entity distinct from the other series of the Trust.
This section is not intended to be a full discussion of income tax
laws and their effect on shareholders. You may wish to consult
your own tax advisor.
BACKUP WITHHOLDING. If (a) you fail to (i) furnish your properly
certified social security or other tax identification number or
(ii) certify that your tax identification number is correct or that
you are not subject to backup withholding due to the underreporting
of certain income, or (b) the Internal Revenue Service informs the
Trust that your tax identification number is incorrect, the Trust
may be required to withhold Federal income tax ("backup
withholding") from certain payments (including redemption proceeds)
to you. These certifications are contained in the Application that
you should complete and return when you open an account. The Funds
must promptly pay to the IRS all amounts withheld. Therefore, it
is usually not possible for a Fund to reimburse you for amounts
withheld. However, you may claim the amount withheld as a credit
on your Federal income tax return.
INVESTMENT RETURN
The total return from an investment in a Fund is measured by the
distributions received (assuming reinvestment) plus or minus the
change in the net asset value per share for a given period. A
total return percentage may be calculated by dividing the value of
a share at the end of the period (including reinvestment of
distributions) by the value of the share at the beginning of the
period and subtracting one. For a given period, an average annual
total return may be calculated by finding the average annual
compounded rate that would equate a hypothetical $1,000 investment
to the ending redeemable value.
Because Municipal Money Fund strives to maintain a $1.00 per share
value, its return is usually quoted either as a current seven-day
yield, calculated by totaling the dividends on a Fund share for the
previous seven days and restating that yield as an annual rate, or
as an effective yield, calculated by adjusting the current yield to
assume daily compounding. Municipal Money Fund's current and
effective yields for the seven-day period ended June 30, 1995, were
3.52% and 3.59%, respectively. To obtain current yield
information, you may call 1-800-338-2550 or write to the address
shown on the back cover.
The value of the three other Funds will fluctuate. Therefore, the
current yield of each of these Funds is calculated by dividing its
net investment income per share (a hypothetical figure as defined
in the SEC rules) during a 30-day period by the net asset value per
share on the last day of the period. The yield formula provides
for semiannual compounding, which assumes that net investment
income is earned and reinvested at a constant rate and annualized
at the end of a six-month period.
Comparison of a Fund's yield or total return with those of
alternative investments should consider differences between that
Fund and the alternative investments, the periods and methods used
in the calculation of the return being compared, and the impact of
taxes on alternative investments. Except for Municipal Money Fund,
yield figures are not based on actual dividends paid. Past
performance is not necessarily indicative of future results.
MANAGEMENT OF THE FUNDS
TRUSTEES AND INVESTMENT ADVISEr. The Board of Trustees of
Municipal Trust and the Board of Trustees of Base Trust have
overall management responsibility for the Trust and the Funds and
the Portfolio, respectively. See the Statement of Additional
Information for the names of and other information about the
trustees and officers. Since Municipal Trust and Base Trust have
the same trustees, the trustees have adopted conflict of interest
procedures to monitor and address potential conflicts between the
interests of Municipal Money Fund and the Portfolio.
The Adviser, Stein Roe & Farnham Incorporated, One South Wacker
Drive, Chicago, Illinois 60606, is responsible for managing the
investment portfolios of the Funds and the Portfolio and the
business affairs of the Funds, the Portfolio, Municipal Trust and
Base Trust, subject to the direction of the respective Boards. The
Adviser is registered as an investment adviser under the Investment
Advisers Act. The Adviser was organized in 1986 to succeed to the
business of Stein Roe & Farnham, a partnership that had advised and
managed mutual funds since 1949. The Adviser is a wholly-owned
indirect subsidiary of Liberty Mutual Insurance Company ("Liberty
Mutual").
In approving the use of a single combined prospectus, the Boards
considered the possibility that one Fund (or the Portfolio) might
be liable for misstatements in the prospectus regarding information
concerning another Fund (or the Portfolio).
PORTFOLIO MANAGERS.
M. Jane McCart has been portfolio manager of Managed Municipals
since August 1991 and of High-Yield Municipals since February 1995.
Prior to August 1991, she had been portfolio manager of Municipal
Money Fund since its inception in 1983 and of Intermediate
Municipals since its inception in 1985. Ms. McCart is a vice-
president of the Trust and a senior vice president of the Adviser,
and has been associated with the Adviser since 1983. From 1973 to
1983, she was with the National Bank of Detroit. She received her
B.S.B.A. degree from Lawrence Technological University in 1973 and,
as of June 30, 1994, was responsible for managing $995 million in
mutual fund assets. Ms. McCart is assisted in managing the Funds by
Ms. Costopoulos.
Joanne T. Costopoulos has been portfolio manager of Intermediate
Municipals since August 1991 and is a vice-president of the Trust
and of the Adviser. Responsible for managing $413 million in
mutual fund assets as of June 30, 1994, she joined the Adviser in
1982. In her previous position as a head trader in the fixed-
income area, she traded tax-exempt securities for both
institutional and individual investment portfolios. She received
her B.A. in business administration from Elmhurst College in 1985.
Ms. Costopoulos is assisted in managing the Fund by Ms. McCart.
PORTFOLIO TRANSACTIONS. The Adviser places the orders for the
purchase and sale of portfolio securities for each Fund and the
Portfolio. In doing so, the Adviser seeks to obtain the best
combination of price and execution, which involves a number of
judgmental factors.
FEES AND EXPENSES. The Adviser receives a monthly investment
advisory fee (for investment management and administrative
services), computed and accrued daily based on the average net
assets of each Fund, at the following annual rates: Intermediate
Municipals and High-Yield Municipals, .6 of 1% of the first $100
million of average net assets, .55 of 1% of the next $100 million,
and .5 of 1% thereafter; and Managed Municipals, .6 of 1% of the
first $100 million, .55 of 1% of the next $100 million, .5 of 1% of
the next $800 million, and .45 of 1% thereafter.
Through September 28, 1995, the Adviser receives an investment
advisory fee from Municipal Money Fund at an annual rate of .5 of
1% of average net assets. Effective September 28, 1995, the
Adviser will receive from the Portfolio a monthly portfolio
management fee, computed and accrued daily, based on the
Portfolio's average net assets, at the annual rate of .25 of 1% of
the first $500 million, .20 of 1% of the next $500 million, and .15
of 1% thereafter.
Beginning September 28, 1995, the Adviser will provide
administrative services to Municipal Money Fund under a separate
administrative agreement for a monthly fee, computed and accrued
daily, at an annual rate of .25 of 1% of the first $500 million of
average net assets, .20 of 1% of the next $500 million, and .15 of
1% thereafter.
For the fiscal year ended June 30, 1994, the annualized advisory
fees for Municipal Money Fund, Intermediate Municipals, Managed
Municipals and High-Yield Municipals were .50%, .56%, .52%, and
.54% of average net assets, respectively.
Under a separate agreement with the Trust, the Adviser provides
certain accounting and bookkeeping services to the Funds, including
computation of each Fund's net asset value and calculation of its
net income and capital gains and losses on disposition of Fund
assets.
Please refer to Fee Table for information on the Adviser's
undertaking to limit the Funds' expenses.
TRANSFER AGENT. SteinRoe Services Inc., One South Wacker Drive,
Chicago, Illinois 60606, a wholly-owned indirect subsidiary of
Liberty Mutual, is the agent of the Trust for the transfer of
shares, disbursement of dividends, and maintenance of shareholder
accounting records.
DISTRIBUTOR. The shares of each Fund are offered for sale through
Liberty Securities Corporation ("Distributor") without any sales
commissions or charges to the Funds or to their shareholders. The
Distributor is a wholly-owned indirect subsidiary of Liberty
Mutual. The business address of the Distributor is 600 Atlantic
Avenue, Boston, Massachusetts 02210; however, all Fund
correspondence (including purchase and redemption orders) should be
mailed to the Trust at P.O. Box 804058, Chicago, Illinois 60680.
All distribution and promotional expenses are paid by the Adviser,
including payments to the Distributor for sales of Fund shares.
ORGANIZATION AND DESCRIPTION OF SHARES
Each Fund is a separate series of Municipal Trust, a Massachusetts
business trust organized under an Agreement and Declaration of
Trust ("Declaration of Trust") dated October 6, 1987, which
provides that each shareholder shall be deemed to have agreed to be
bound by the terms thereof. The Declaration of Trust may be
amended by a vote of either Municipal Trust's shareholders or its
trustees. The Trust may issue an unlimited number of shares, in
one or more series as the Board may authorize. Currently, four
series are authorized and outstanding.
Under Massachusetts law, shareholders of a Massachusetts business
trust such as Municipal Trust could, in some circumstances, be held
personally liable for unsatisfied obligations of the trust. The
Declaration of Trust provides that persons extending credit to,
contracting with, or having any claim against, the Trust or any
particular Fund shall look only to the assets of the Trust or of
the respective Fund for payment under such credit, contract or
claim, and that the shareholders, trustees and officers of the
Trust shall have no personal liability therefor. The Declaration
of Trust requires that notice of such disclaimer of liability be
given in each contract, instrument or undertaking executed or made
on behalf of the Trust. The Declaration of Trust provides for
indemnification of any shareholder against any loss and expense
arising from personal liability solely by reason of being or having
been a shareholder. Thus, the risk of a shareholder incurring
financial loss on account of shareholder liability is believed to
be remote, because it would be limited to circumstances in which
the disclaimer was inoperative and the Trust was unable to meet its
obligations.
The risk of a particular Fund incurring financial loss on account
of unsatisfied liability of another Fund of the Trust is also
believed to be remote, because it would be limited to claims to
which the disclaimer did not apply and to circumstances in which
the other Fund was unable to meet its obligations.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND STRUCTURE.
Effective September 28, 1995, Municipal Money Fund, an open-end
management investment company, will seek to achieve its objective
by investing all of its assets in shares of another mutual fund
having an identical investment objective to the Fund. This policy
permitting the Fund to act as a Feeder Fund by investing in the
Portfolio, acting as a Master Fund, was approved by the Fund's
shareholders. Please refer to the Fee Table, How the Funds Invest-
-Municipal Money Fund, and Restrictions on the Funds' Investments
for a description of the investment objectives, policies, and
restrictions of the Fund and the Portfolio. The management and
expenses of both Municipal Money Fund and the Portfolio are
described under the Fee Table and Management of the Funds. The
Fund will bear its proportionate share of Portfolio expenses.
Although most of the mutual funds managed by the Adviser are
conventionally structured funds, the Adviser has been providing
investment management services in connection with another fund
employing the Master Fund/Feeder Fund structure since August, 1991.
SR&F Municipal Money Market Portfolio is a separate series of SR&F
Base Trust (the "Base Trust"), a Massachusetts common trust
organized under an Agreement and Declaration of Trust ("Declaration
of Trust") dated August 23, 1993. The Declaration of Trust of the
Base Trust provides that Municipal Money Fund and other investors
in the Portfolio will each be liable for all obligations of the
Portfolio that are not satisfied by the Portfolio. However, the
risk of Municipal Money Fund incurring financial loss on account of
such liability is limited to circumstances in which both inadequate
insurance existed and the Portfolio itself were unable to meet its
obligations. Accordingly, the Trustees of Municipal Trust believe
that neither Municipal Money Fund nor its shareholders will be
adversely affected by reason of the Fund's investing in the
Portfolio.
The Declaration of Trust of Base Trust provides that the Portfolio
will terminate 120 days after the withdrawal of Municipal Money
Fund or any other investor in the Portfolio, unless the remaining
investors vote to agree to continue the business of the Portfolio.
The Trustees of Municipal Trust may vote the Fund's interests in
the Portfolio for such continuation without approval of the Fund's
shareholders.
The common investment objective of the Fund and the Portfolio is
non-fundamental and may be changed without shareholder approval,
subject, however, to at least 30 days' advance written notice to
the Fund's shareholders.
The fundamental policies of the Fund and the corresponding
fundamental policies of the Portfolio can be changed only with
shareholder approval.
If the Fund, as a Portfolio investor, is requested to vote on a
change in a fundamental policy of the Portfolio or any other matter
pertaining to the Portfolio (other than continuation of the
business of the Portfolio after withdrawal of another investor),
the Fund will solicit proxies from its shareholders and vote its
interest in the Portfolio for and against such matters
proportionately to the instructions to vote for and against such
matters received from Fund shareholders. The Fund will vote shares
for which it receives no voting instructions in the same proportion
as the shares for which it receives voting instructions. If there
are other investors in the Portfolio, there can be no assurance
that any matter receiving a majority of votes cast by Fund
shareholders will receive a majority of votes cast by all Portfolio
investors. If other Portfolio investors hold a majority interest
in the Portfolio, they could have voting control over the
Portfolio.
In the event that the Portfolio's fundamental policies were changed
so as to be inconsistent with those of the Fund, the Board of
Trustees of Municipal Trust would consider what action might be
taken, including changes to the Fund's investment objective or
fundamental policies, withdrawal of the Fund's assets from the
Portfolio and investment of such assets in another pooled
investment entity, or the retention of an investment adviser to
invest those assets directly in Municipal Securities. Any of
these actions would require the approval of the Fund's
shareholders. The Fund's inability to find a substitute master
fund or comparable investment management could have a significant
impact upon its shareholders' investments. Any withdrawal of the
Fund's assets could result in a distribution in kind of portfolio
securities (as opposed to a cash distribution) to the Fund. Should
such a distribution occur, the Fund would incur brokerage fees or
other transaction costs in converting such securities to cash. In
addition, a distribution in kind could result in a less diversified
portfolio of investments for the Fund and could affect the
liquidity of the Fund.
Each investor in the Portfolio, including Municipal Money Fund, may
add to or reduce its investment in the Portfolio on each day the
New York Stock Exchange is open for business. At 3:00 p.m.,
Chicago time, on each such business day, the value of each
investor's beneficial interest in the Portfolio will be determined
by multiplying the net asset value of the Portfolio by the
percentage effective for that day which represents that investor's
share of the aggregate beneficial interests in the Portfolio. Any
additions or withdrawals which are to be effected on that day will
then be effected. The investor's percentage of the aggregate
beneficial interests in the Portfolio will then be recomputed as
the percentage equal to the fraction (i) the numerator of which is
the value of such investor's investment in the Portfolio as of 3:00
p.m., Chicago time, on such day plus or minus, as the case may be,
the amount of any additions to or withdrawals from the investor's
investment in the Portfolio effected on such day, and (ii) the
denominator of which is the aggregate net asset value of the
Portfolio as of 3:00 p.m., Chicago time, on such day plus or minus,
as the case may be, the amount of the net additions to or
withdrawals from the aggregate investment in the Portfolio by all
investors in the Portfolio. The percentage so determined will then
be applied to determine the value of the investor's interest in the
Portfolio as of 3:00 p.m., Chicago time, on the following such
business day.
Base Trust may permit other investment companies and/or other
institutional investors to invest in the Portfolio, but members of
the general public may not invest directly in the Portfolio. Other
investors in the Portfolio are not required to sell their shares at
the same public offering price as the Fund, could have different
administrative fees and expenses than the Fund, and might charge a
sales commission. Therefore, Fund shareholders might have
different investment returns than shareholders in another
investment company that invests exclusively in the Portfolio.
Investment by such other investors in the Portfolio would provide
funds for the purchase of additional portfolio securities and would
tend to reduce the operating expenses as a percentage of the
Portfolio's net assets. Conversely, large-scale redemptions by any
such other investors in the Portfolio could result in untimely
liquidations of the Portfolio's security holdings, loss of
investment flexibility, and increases in the operating expenses of
the Portfolio as a percentage of the Portfolio's net assets. As a
result, the Portfolio's security holdings may become less diverse,
resulting in increased risk.
There is currently no such other investment company that invests in
the Portfolio. Information regarding any investment company that
may invest in the Portfolio in the future may be obtained by
writing to Base Trust at P.O. Box 804058, Chicago, IL 60680 or by
calling 1-800-338-2550. The Adviser may provide administrative or
other services to one or more of such investors.
<PAGE>
CERTIFICATE OF AUTHORIZATION
FOR USE BY CORPORATIONS AND ASSOCIATIONS ONLY)
A corporation or association must complete this Certificate and
submit it with the Fund Application, each written redemption,
transfer or exchange request, and each request to terminate or
change any of the Privileges or special service elections.
If the entity submitting the Certificate is an association, the
word "association" shall be deemed to appear each place the word
"corporation" appears. If the officer signing this Certificate is
named as an authorized person, another officer must countersign the
Certificate. If there is no other officer, the person signing the
Certificate must have his signature guaranteed. If you are not
sure whether you are required to complete this Certificate, call
the office of the SteinRoe Funds, 1-800-338-2550 toll-free.
The undersigned hereby certifies that he is the duly elected Secretary
of __________________________________________________
(the "Corporation") and that the following individual(s)
Authorized Persons
______________________ _______________________________
Name Title
______________________ _______________________________
Name Title
______________________ _______________________________
Name Title
is (are) duly authorized by resolution or otherwise to act on behalf of
the Corporation in connection with the Corporation's ownership of shares
of any mutual fund managed by Stein Roe & Farnham Incorporated
(individually, the "Fund" and collectively, the "Funds") including,
without limitation, furnishing any such Fund and its transfer agent with
instructions to transfer or redeem shares of that Fund payable to any
person or in any manner, or to redeem shares of that Fund and apply the
proceeds of such redemption to purchase shares of another Fund (an
"exchange"), and to execute any necessary forms in connection therewith.
Unless a lesser number is specified, all of the Authorized Persons
must sign written instructions. Number of signatures required:
________.
If the undersigned is the only person authorized to act on behalf
of the Corporation, the undersigned certifies that he is the sole
shareholder, director, and officer of the Corporation and that the
Corporation's Charter and Bylaws provide that he is the only person
authorized to so act.
Unless expressly declined on the Application (or other form
acceptable to the Funds), the undersigned further certifies that the
Corporation has authorized by resolution or otherwise the establishment
of the Telephone Exchange and Telephone Redemption by Check Privileges
for the Corporation's account with any Fund offering any such Privilege.
If elected on the Application (or other form acceptable to the Funds),
the undersigned also certifies that the Corporation has similarly
authorized establishment of the Electronic Transfer, Telephone
Redemption by Wire, and Check-Writing Privileges for the Corporation's
account with any Fund offering said Privileges. The undersigned has
further authorized each Fund and its transfer agent to honor any
written, telephonic, or telegraphic instructions furnished pursuant to
any such Privilege by any person believed by the Fund or its transfer
agent or their agents, officers, directors, trustees, or employees to be
authorized to act on behalf of the Corporation and agrees that neither
the Fund nor its transfer agent, their agents, officers, directors,
trustees, or employees will be liable for any loss, liability, cost, or
expense for acting upon any such instructions.
These authorizations shall continue in effect until five business days
after the Fund and its transfer agent receive written notice from the
Corporation of any change.
IN WITNESS WHEREOF, I have hereunto subscribed my name as Secretary and
affixed the seal of this Corporation this ____ day of
___________________, 19___.
Corporate _________________________
Seal Secretary
Here
_________________________
Signature Guarantee*
*Only required if the person signing the Certificate is the only person
named as "Authorized Person."
<PAGE>
[STEIN ROE & FARNHAM FUNDS LOGO]
THE STEINROE FUNDS
SteinRoe Government Reserves
SteinRoe Cash Reserves
SteinRoe Limited Maturity Income Fund
SteinRoe Government Income Fund
SteinRoe Intermediate Bond Fund
SteinRoe Income Fund
SteinRoe Municipal Money Market Fund
SteinRoe Intermediate Municipals
SteinRoe Managed Municipals
SteinRoe High-Yield Municipals
SteinRoe Total Return Fund
SteinRoe Prime Equities
SteinRoe Growth Stock Fund
SteinRoe Capital Opportunities Fund
SteinRoe Special Fund
SteinRoe International Fund
SteinRoe Young Investor Fund
SteinRoe Special Venture Fund
P.O. Box 804058
Chicago, Illinois 60680
1-800-338-2550
In Chicago, visit our Fund Center
at One South Wacker Drive
Liberty Securities Corporation, Distributor
03008
<PAGE> 1
Statement of Additional Information Dated August 7, 1995
STEINROE MUNICIPAL TRUST
STEINROE MUNICIPAL MONEY MARKET FUND
STEINROE INTERMEDIATE MUNICIPALS
STEINROE MANAGED MUNICIPALS
STEINROE HIGH-YIELD MUNICIPALS
P.O. Box 804058, Chicago, Illinois 60680
1-800-338-2550
The Funds listed above are series of shares of beneficial interest of
the SteinRoe Municipal Trust ("Municipal Trust"). Each series of Municipal
Trust invests in a separate portfolio of securities and other assets, with
its own objectives and policies. Beginning September 28, 1995, SteinRoe
Municipal Money Market Fund ("Municipal Money Fund") will invest all of its
assets in shares of SR&F Municipal Money Market Portfolio ("Portfolio"),
which is a series of shares of beneficial interest of SR&F Base Trust ("Base
Trust"). Municipal Money Fund and the Portfolio have identical investment
objectives and policies.
This Statement of Additional Information is not a prospectus but
provides additional information that should be read in conjunction with the
Prospectus dated August 7, 1995, and any supplements thereto. The
Prospectus may be obtained at no charge by telephoning 1-800-338-2550.
TABLE OF CONTENTS
Page
General Information and History.............................2
Investment Policies.........................................3
Municipal Money Fund...................................3
Intermediate Municipals................................4
Managed Municipals.....................................5
High-Yield Municipals..................................6
Portfolio Investments and Strategies........................6
Investment Restrictions....................................17
Investment Risks...........................................20
Purchases and Redemptions..................................21
Management.................................................22
Financial Statements.......................................24
Principal Shareholders.....................................25
Investment Advisory Services...............................25
Distributor................................................28
Transfer Agent.............................................28
Custodian..................................................29
Independent Auditors.......................................29
Portfolio Transactions.....................................29
Additional Income Tax Considerations.......................31
Investment Performance.....................................32
Additional Information on Net Asset Value--Municipal
Money Fund and the Portfolio............................39
Glossary...................................................41
Appendix--Ratings Of Municipal Securities..................44
<PAGE> 2
GENERAL INFORMATION AND HISTORY
Stein Roe & Farnham Incorporated (the "Adviser") is responsible for the
business affairs of the Trusts and serves as investment adviser and provides
accounting and recordkeeping services to the Funds (other than Municipal
Money Fund) and the Portfolio. It also provides administrative services to
the Funds and the Portfolio.
As used herein, "Municipal Money Fund," "Intermediate Municipals,"
"Managed Municipals," and "High-Yield Municipals" refer to the series of
Municipal Trust designated SteinRoe Municipal Money Market Fund, SteinRoe
Intermediate Municipals, SteinRoe Managed Municipals, and SteinRoe High-
Yield Municipals, respectively. The "Portfolio" refers to SR&F Municipal
Money Market Portfolio.
Currently, four series of Municipal Trust and two series of Base Trust
are authorized and outstanding. The name of Municipal Trust was changed on
August 1, 1991 from SteinRoe Tax-Exempt Income Trust to SteinRoe Municipal
Trust. The series SteinRoe Municipal Money Market Fund was named SteinRoe
Tax-Exempt Money Fund prior to November 1, 1992.
Each share of a series of Municipal Trust is entitled to participate
pro rata in any dividends and other distributions declared by the Board on
shares of that series, and all shares of a series have equal rights in the
event of liquidation of that series.
Each whole share (or fractional share) of Municipal Trust outstanding
on the record date established in accordance with the By-Laws shall be
entitled to a number of votes on any matter on which it is entitled to vote
equal to the net asset value of the share (or fractional share) in United
States dollars determined at the close of business on the record date (for
example, a share having a net asset value of $10.50 would be entitled to
10.5 votes). As a business trust, Municipal Trust is not required to hold
annual shareholder meetings. However, special meetings may be called for
purposes such as electing or removing trustees, changing fundamental
policies, or approving an investment advisory contract. If requested to do
so by the holders of at least 10% of Municipal Trust's outstanding shares,
Municipal Trust will call a special meeting for the purpose of voting upon
the question of removal of a trustee or trustees and will assist in the
communications with other shareholders as required by Section 16(c) of the
Investment Company Act of 1940. All shares of Municipal Trust are voted
together in the election of trustees. On any other matter submitted to a
vote of shareholders, shares are voted in the aggregate and not by
individual series, except that shares are voted by individual series when
required by the Investment Company Act of 1940 or other applicable law, or
when the Board of Trustees determines that the matter affects only the
interests of one or more series, in which case shareholders of the
unaffected series are not entitled to vote on such matters.
SPECIAL CONSIDERATIONS REGARDING MASTER FUND/FEEDER FUND STRUCTURE
Rather than invest in securities directly, each Fund may seek to
achieve its objective by pooling its assets with assets of other mutual
funds managed by the Adviser for investment in another mutual fund having
the same investment objective and
<PAGE> 3
substantially the same investment policies and restrictions as the Fund.
The purpose of such an arrangement is to achieve greater operational
efficiencies and reduce costs. The Adviser is expected to manage any such
mutual fund in which a Fund would invest. Such investment would be subject
to determination by the Trustees that it was in the best interests of the
Fund and its shareholders, and shareholders would receive advance notice of
any such change. The only Fund scheduled to operate under the Master
Fund/Feeder Fund structure is Municipal Money Fund, which will convert to the
Master Fund/Feeder Fund structure on September 28, 1995. For more
information, please refer to the Prospectus under the caption Organization
and Description of Shares--Special Considerations Regarding the Master
Fund/Feeder Fund Structure.
INVESTMENT POLICIES
The following information supplements the discussion of the Funds'
respective investment objectives and policies described in the Prospectus.
In pursuing its objective, each Fund will invest as described below and may
employ investment techniques described in the Prospectus and elsewhere in
this Statement of Additional Information. Investments and strategies that
are common to two or more Funds are described under Portfolio Investments
and Strategies. Each Fund's investment objective is not fundamental and may
be changed by the Board of Trustees without the approval of a "majority of
the outstanding voting securities" (see definition in the Glossary) of that
Fund.
MUNICIPAL MONEY FUND
This Fund seeks maximum current income exempt from Federal income tax.
Beginning September 28,1995, the Fund will seek to achieve its objective by
investing all of its net investable assets in shares of the Portfolio,
another mutual fund that has an identical investment objective and identical
investment policies to the Fund. In pursuing its objective, the Fund and the
Portfolio attempt to maintain relative stability of principal and liquidity.
The Fund and the Portfolio invest principally in a diversified portfolio of
short-term Municipal Securities (as defined in the Prospectus). "Short-term"
means a remaining maturity of no more than thirteen months (or comparable
period) as defined in the Glossary.
It is a fundamental policy that normally at least 80% of the Fund's and
the Portfolio's investments will produce income that is exempt from Federal
income tax, except for periods in which the Adviser believes require a
defensive position for the protection of shareholders.
As a fundamental policy, the Fund and the Portfolio invest in Municipal
Securities that, at the time of purchase, are: (i) variable rate demand
securities (as defined in the Glossary) whose demand feature is rated within
the two highest ratings assigned by Moody's Investors Service, Inc.
("Moody's"), VMIG 1 or VMIG 2 /1/; (ii) notes rated
-------------------
/1/ The Board of Trustees of Municipal Trust and Base Trust have determined
that the demand feature of a variable rate demand security rated SP-1+, A-1+
or A-1 by S&P or MIG 1, MIG 2 or Prime 1 by Moody's is at least equal in
quality to the demand feature of a variable rate demand security rated VMIG
2 by Moody's. As a non-fundamental policy, the Fund or the Portfolio will
not invest in a variable rate security whose demand feature is conditional
unless the Board of Trustees determines that the security is at least the
economic equivalent of a variable rate security with an unconditional demand
feature or (a) the demand feature is rated within the two highest ratings
assigned by Moody's or within the equivalent ratings assigned by S&P and (b)
the underlying security is rated within the two highest ratings assigned by
Moody's or S&P. The Boards of Trustees has determined that a variable rate
security where the demand feature is suspended only after a default followed
by an acceleration of maturity is the economic equivalent of a variable rate
security with an unconditional demand feature.
<PAGE> 4
within the two highest short-term municipal ratings assigned by Moody's, MIG
1 or MIG 2, or within the highest rating assigned by Standard & Poor's
Corporation ("S&P"), /2/ SP-l+; (iii) municipal commercial paper (short-term
promissory notes) rated Prime-1 by Moody's, or A-l by S&P; (iv) municipal
bonds, including industrial development bonds, rated within the two highest
ratings assigned to municipal bonds by S&P, AAA or AA, or by Moody's, Aaa or
Aa; (v) securities not rated as described in (i) through (iv) but determined
by the Board of Trustees to be at least equal in quality to one or more of
the foregoing ratings, although other types of obligations of the same
issuer might not be within the foregoing ratings; (vi) securities backed by
the full faith and credit of the U.S. Government; or (vii) securities as to
which the payment of principal and interest is collateralized by securities
issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities ["U.S. Government Securities"] deposited in an escrow for
the benefit of holders of the securities. In accordance with SEC Rule 2a-7
under the Investment Company Act, each security in which the Fund or the
Portfolio invests will be U.S. dollar denominated and (i) rated (or be issued
by an issuer that is rated with respect to its short-term debt) within the
two highest rating categories for short-term debt by at least two nationally
recognized statistical rating organizations ("NRSRO") or, if rated by only
one NRSRO, rated within the two highest rating categories by that NRSRO, or,
if unrated, determined by or under the direction of the Board of Trustees to
be of comparable quality, and (ii) determined by or under the direction of
the Board of Trustees to present minimal credit risks.
INTERMEDIATE MUNICIPALS
This Fund seeks a high current yield exempt from Federal income tax,
consistent with the preservation of capital. The Fund attempts to achieve
its objective by investing primarily in a diversified portfolio of
"intermediate-term" Municipal Securities. Normally, at least 65% of the
Fund's assets will be invested in Municipal Securities with a maturity of
ten years or less (including Municipal Securities with a longer maturity,
but under which the holder is entitled to receive, upon demand at a stated
time within ten years, the entire principal and accrued interest). In
addition, the Fund's portfolio is expected to have a dollar-weighted average
maturity of between three and ten years.
It is a fundamental policy that normally at least 80% of the Fund's
investments will produce income that is exempt from Federal income tax,
except during periods that the Adviser believes require a temporary
defensive position for the protection of shareholders.
-------------------
/2/ For a description of Moody's and S&P quality ratings, see the Appendix.
All references to ratings apply to ratings adopted in the future by Moody's
or S&P that are determined by the Boards of Trustees to be equivalent to
current ratings.
<PAGE> 5
The Fund will invest not less than 75% (taken at current value at time
of purchase) of its Municipal Securities investments, in such proportions as
the Adviser shall determine, in municipal bonds rated at the time of
purchase within the three highest grades by Moody's (Aaa, Aa, and A) or by
S&P (AAA, AA and A) (or in variable rate demand securities whose demand
feature is rated VMIG 1, VMIG 2 or Prime-1 by Moody's or SP-1+, A-1+ or A-1
by S&P), or backed by the U.S. Government or by an agency or instrumentality
of the U.S. Government or by U.S. Government Securities, or municipal notes
that are rated at the time of purchase within the three highest ratings for
such securities by Moody's (MIG 1, MIG 2, and MIG 3), within the two highest
ratings for such securities by S&P (SP-1+ and SP-1), or, if unrated, of
comparable quality, as determined by the Adviser. The Fund may also invest
up to 25% of its assets in other Municipal Securities without any minimum
credit quality requirement, including Municipal Securities for which a
limited market may exist. These investments (which are medium- or lower-
quality debt securities) normally involve greater risk of loss of principal
or income and higher yield.
MANAGED MUNICIPALS
This Fund's investment objective is to provide its shareholders a high
level of current income that is exempt from Federal income tax, consistent
with the preservation of capital. The Fund attempts to achieve this
objective by investing in a diversified portfolio of Municipal Securities,
the interest from which is exempt from Federal income tax.
It is a fundamental policy that the Fund's assets will be invested so
that at least 80% of its income will be exempt from Federal income tax,
except for temporary periods during which, in the opinion of the Adviser,
normal market conditions are not expected to prevail, including, without
limitation, circumstances that, in the opinion of the Adviser, require an
unusual defensive position for protection of the Fund's shareholders. For
purposes of this policy the Fund does not regard realized capital gains as
income.
The Fund will invest not less than 75% (taken at current value at time
of purchase) of its Municipal Securities investments, in such proportions as
the Adviser shall determine, in municipal bonds rated at the time of
purchase within the three highest ratings for such securities by Moody's
(Aaa, Aa, and A) or by S&P (AAA, AA, and A) (or in variable rate demand
securities whose demand feature is rated VMIG 1, VMIG 2 or Prime-1 by
Moody's or SP-1+, A-1+ or A-1 by S&P), or backed by the U.S. Government, by
an agency or instrumentality of the U.S. Government or by U.S. Government
Securities, or municipal notes that are rated at the time of purchase within
the three highest ratings for municipal notes by Moody's (MIG 1, MIG 2, and
MIG 3) or within the two highest ratings for municipal notes by S&P (SP-1+
and SP-1). The Fund may also invest up to 25% of its assets in other
Municipal Securities without any minimum credit quality requirement,
including Municipal Securities for which a limited market may exist. These
investments (which are medium- or lower-quality debt securities) normally
involve greater risk of loss of principal or income and higher yield.
<PAGE> 6
The Fund invests primarily in long-term Municipal Securities (generally
maturing in more than ten years) but may also invest in both short-term and
medium-term securities from time to time as a defensive move.
HIGH-YIELD MUNICIPALS
This Fund seeks a high current yield exempt from Federal income tax.
The Fund attempts to achieve this objective by investing primarily in a
diversified portfolio of long-term medium- or lower-quality Municipal
Securities (generally maturing in more than ten years) bearing a high rate
of interest income; possible capital appreciation is of secondary
importance. Of course, there is no guarantee that the payments of interest
and principal on securities held by the Fund will be made when due.
It is a fundamental policy that normally the Fund's assets will be
invested so that at least 80% of the gross income will be derived from
securities the interest on which is exempt from Federal income tax in the
opinion of counsel for the issuers of such securities, except during periods
in which the Adviser believes a temporary defensive position is advisable.
Although the Fund invests primarily in medium- and lower-quality
Municipal Securities, it may invest in Municipal Securities of higher
quality when the Adviser believes it is appropriate to do so.
PORTFOLIO INVESTMENTS AND STRATEGIES
In addition to the policies described above, the following investment
policies and techniques have been adopted by each Fund as indicated. For
purposes of discussion under Portfolio Investments and Strategies,
Investment Restrictions, and Investment Risks, the term "the Fund" refers to
Municipal Money Fund, the Portfolio, Intermediate Municipals, Managed
Municipals, and High-Yield Municipals.
TAXABLE SECURITIES
Assets of each Fund that are not invested in Municipal Securities may
be held in cash or invested in short-term taxable investments /3/ such as:
(1) U.S. Government bills, notes and bonds; (2) obligations of agencies and
instrumentalities of the U.S. Government (including obligations not backed
by the full faith and credit of the U.S. Government); (3) in the case of
Intermediate Municipals and High-Yield Municipals, other money market
instruments, and in the case of Municipal Money Fund, the Portfolio, and
Managed Municipals, other money market instruments such as certificates of
deposit and bankers' acceptances of domestic banks having total assets in
excess of $1 billion, and corporate commercial paper rated Prime-1 by
Moody's or A-1 by S&P at the time of purchase, or, if unrated, issued or
guaranteed by an issuer with outstanding debt rated Aa or better by Moody's
or AA or better by S&P; and (4) repurchase agreements (defined in the
Glossary) with banks and, for all Funds except
-----------------------
/3/ In the case of Municipal Money Fund, the Portfolio, and Managed
Municipals, the policies described in this paragraph are fundamental.
<PAGE> 7
Managed Municipals, securities dealers. Municipal Money Fund and the
Portfolio limit repurchase agreements to those that are short-term, subject
to item (h) under Investment Restrictions (although the underlying
securities may not be short-term). Managed Municipals limits repurchase
agreements to those in which the underlying collateral consists of
securities that the Fund may purchase directly.
AMT SECURITIES
Although the Funds currently limit their investments in Municipal
Securities to those the interest on which is exempt from the regular Federal
income tax, each Fund may invest 100% of its total assets in Municipal
Securities the interest on which is subject to the Federal alternative
minimum tax ("AMT").
STANDBY COMMITMENTS
Each Fund may obtain standby commitments when it purchases Municipal
Securities. A standby commitment gives the holder the right to sell the
underlying security to the seller at an agreed-upon price on certain dates
or within a specified period. A Fund will acquire standby commitments
solely to facilitate portfolio liquidity and not with a view to exercising
them at a time when the exercise price may exceed the current value of the
underlying securities. If the exercise price of a standby commitment held
by a Fund should exceed the current value of the underlying securities, a
Fund may refrain from exercising the standby commitment in order to avoid
causing the issuer of the standby commitment to sustain a loss and thereby
jeopardizing the Fund's business relationship with the issuer. A Fund will
enter into standby commitments only with banks and securities dealers that,
in the opinion of the Adviser, present minimal credit risks. However, if a
securities dealer or bank is unable to meet its obligation to repurchase the
security when a Fund exercises a standby commitment, the Fund might be
unable to recover all or a portion of any loss sustained from having to sell
the security elsewhere. Standby commitments will be valued at zero in
determining each Fund's net asset value. Municipal Trust has received an
opinion of Bell, Boyd & Lloyd, counsel to the Trust, that interest earned by
the Funds on Municipal Securities will continue to be exempt from the
regular Federal income tax regardless of the fact that the Fund holds
standby commitments with respect to such Municipal Securities.
PARTICIPATION INTERESTS
Each Fund may purchase participation interests or certificates of
participation in all or part of specific holdings of Municipal Securities,
but does not intend to do so unless the tax-exempt status of those
participation interests or certificates of participation is confirmed to the
satisfaction of the Board of Trustees, which may include consideration of an
opinion of counsel as to the tax-exempt status. Each participation interest
would meet the prescribed quality standards of the Fund or be backed by an
irrevocable letter of credit or guarantee of a bank that meets the
prescribed quality standards of the Fund. (See Investment Policies.) Some
participation interests are illiquid securities.
<PAGE> 8
Each Fund may also purchase participations in lease obligations or
installment purchase contract obligations (hereinafter collectively called
"lease obligations") of municipal authorities or entities. Although lease
obligations do not constitute general obligations of the municipality for
which the municipality's taxing power is pledged, a lease obligation is
ordinarily backed by the municipality's covenant to budget for, appropriate,
and make the payments due under the lease obligation. However, certain
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are secured by leased property,
disposition of the property in the event of foreclosure might prove
difficult. Each Fund will seek to minimize these risks by investing
primarily in those "non-appropriation" lease obligations where (1) the
nature of the leased equipment or property is such that its ownership or use
is essential to a governmental function of the municipality, (2) the lease
obligor has maintained good market acceptability in the past, (3) the
investment is of a size that will be attractive to institutional investors,
and (4) the underlying leased equipment has elements of portability and/or
use that enhance its marketability in the event foreclosure on the
underlying equipment were ever required.
The Board of Trustees has delegated to the Adviser the responsibility
to determine the credit quality of participation interests.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each Fund may purchase securities on a when-issued or delayed-delivery
basis, as described in the Prospectus. A Fund makes such commitments only
with the intention of actually acquiring the securities, but may sell the
securities before settlement date if it is deemed advisable for investment
reasons. Securities purchased in this manner involve a risk of loss if the
value of the security purchased declines before settlement date.
At the time a Fund enters into a binding obligation to purchase
securities on a when-issued basis, liquid assets (cash, U.S. Government or
other "high grade" debt obligations) of the Fund having a value of at least
as great as the purchase price of the securities to be purchased will be
segregated on the books of the Fund and held by the custodian throughout the
period of the obligation.
SHORT SALES
Each Fund may make short sales "against the box." In a short sale, the
Fund sells a borrowed security and is required to return the identical
security to the lender. A short sale "against the box" involves the sale of
a security with respect to which the Fund already owns an equivalent
security in kind and amount. A short sale "against the box" enables a Fund
to obtain the current market price of a security which it desires to sell
but is unavailable for settlement.
<PAGE> 9
BORROWINGS; REVERSE REPURCHASE AGREEMENTS
Subject to restriction (iv) under Investment Restrictions, each Fund
may establish and maintain a line of credit with a major bank in order to
permit borrowing on a temporary basis to meet share redemption requests in
circumstances in which temporary borrowing may be preferable to liquidation
of portfolio securities.
Each Fund may also enter into reverse repurchase agreements (defined in
the Glossary) with banks and securities dealers. Use of a reverse
repurchase agreement may be preferable to a regular sale and later
repurchase of the securities because it avoids certain market risks and
transaction costs. The Funds did not enter into reverse repurchase
agreements during the last year and have no present intention to do so.
A Fund's reverse repurchase agreements and any other borrowings may not
exceed 33 1/3% of its total assets, and the Fund may not purchase additional
securities when its borrowings, less proceeds receivable from the sale of
portfolio securities, exceed 5% of its total assets.
RATED SECURITIES
The rated securities described under Investment Policies above for each
Fund except for Municipal Money Fund and the Portfolio include obligations
given a rating conditionally by Moody's or provisionally by S&P.
Except with respect to Municipal Securities with a demand feature (see
the definition of "short-term" in the Glossary) acquired by Municipal Money
Fund or the Portfolio, the fact that the rating of a Municipal Security held
by a Fund may be lost or reduced below the minimum level applicable to its
original purchase by a Fund does not require that obligation to be sold, but
the Adviser will consider such fact in determining whether that Fund should
continue to hold the obligation. In the case of Municipal Securities with a
demand feature acquired by Municipal Money Fund or the Portfolio, if the
quality of such a security falls below the minimum level applicable at the
time of acquisition, the Fund must dispose of the security within a
reasonable period of time either by exercising the demand feature or by
selling the security in the secondary market, unless the Board of Trustees
determines that it is in the best interests of the Fund and its shareholders
to retain the security.
To the extent that the ratings accorded by Moody's or S&P for Municipal
Securities may change as a result of changes in such organizations, or
changes in their rating systems, each Fund will attempt to use comparable
ratings as standards for its investments in Municipal Securities in
accordance with its investment policies. The Board of Trustees is required
to review such ratings with respect to Municipal Money Fund and the
Portfolio.
<PAGE> 10
ZERO COUPON BONDS
Each Fund may invest in zero coupon bonds. A zero coupon bond is a
bond that does not pay interest for its entire life. The market prices of
zero coupon bonds are affected to a greater extent by changes in prevailing
levels of interest rates and thereby tend to be more volatile in price than
securities that pay interest periodically. In addition, because a Fund
accrues income with respect to these securities prior to the receipt of such
interest, it may have to dispose of portfolio securities under
disadvantageous circumstances in order to obtain cash needed to pay income
dividends in amounts necessary to avoid unfavorable tax consequences.
PORTFOLIO TURNOVER
Although the Funds do not purchase securities with a view toward rapid
turnover, there are no limitations on the length of time that portfolio
securities must be held. As a result, the turnover rate may vary from year
to year. Recent higher levels of portfolio turnover for Intermediate
Municipals and for High-Yield Municipals were due, in part, to recognition
of capital gains from favorable investments and from the Adviser's refining
of techniques for reacting to changes in the markets to shift exposures to
certain sectors. A high rate of portfolio turnover in a Fund, if it should
occur, may result in the realization of capital gains or losses, and, to the
extent net short-term capital gains are realized, any distributions
resulting from such gains will be considered ordinary income for Federal
income tax purposes.
For further information on the portfolio turnover rate of each Fund,
see Financial Highlights and Risks and Investment Considerations in the
Prospectus and Additional Tax Considerations herein.
OPTIONS
Each of Intermediate Municipals, Managed Municipals, and High-Yield
Municipals is permitted to purchase and to write both call options and put
options on debt or other securities or indexes in standardized contracts
traded on U.S. securities exchanges, boards of trade, or similar entities,
or quoted on NASDAQ, and agreements, sometimes called cash puts, that may
accompany the purchase of a new issue of bonds from a dealer.
Currently there are no publicly-traded options on individual tax-exempt
securities. However, it is anticipated that such instruments may become
available in the future.
An option is a contract that gives the purchaser (holder) of the
option, in return for a premium, the right to buy from (call) or sell to
(put) the seller (writer) of the option the security underlying the option
(or the cash value of an index) at a specified exercise price at any time
during the term of the option (normally not exceeding nine months). The
writer of the option has the obligation upon exercise of the option to
deliver the underlying security upon payment of the exercise price or to pay
the exercise price upon delivery of the underlying security. Upon exercise,
the writer of an
<PAGE> 11
option on an index is obligated to pay the difference between the cash value
of the index and the exercise price multiplied by the specified multiplier
for the index option. (An index is designed to reflect specified facets of
a particular financial or securities market, a specific group of financial
instruments or securities or certain economic indicators.)
A Fund is permitted to write call options and put options only if they
are "covered." In the case of a call option on a security, the option is
"covered" if the Fund owns the security underlying the call or has an
absolute and immediate right to acquire that security without additional
cash consideration (or if additional cash consideration is required, cash or
cash equivalents in such amount are held in a segregated account by its
custodian) upon conversion or exchange of other securities held in its
portfolio.
If an option written by a Fund expires, the Fund realizes a capital
gain equal to the premium received at the time the option was written. If
an option purchased by a Fund expires, the Fund realizes a capital loss
equal to the premium paid.
Prior to the earlier of exercise or expiration, an option may be closed
out by an offsetting purchase or sale of an option of the same series (type,
exchange, underlying security or index, exercise price, and expiration).
There can be no assurance, however, that a closing purchase or sale
transaction can be effected when a Fund desires.
A Fund will realize a capital gain from a closing purchase transaction
if the cost of the closing option is less than the premium received from
writing the option, or, if it is more, the Fund will realize a capital loss.
If the premium received from a closing sale transaction is more than the
premium paid to purchase the option, the Fund will realize a capital gain
or, if it is less, the Fund will realize a capital loss. The principal
factors affecting the market value of a put or a call option include supply
and demand, interest rates, the current market price of the underlying
security or index in relation to the exercise price of the option, the
volatility of the underlying security or index and the time remaining until
the expiration date.
A put or call option purchased by a Fund is an asset of the Fund,
valued initially at the premium paid for the option. The premium received
for an option written by a Fund is recorded as a deferred credit. The value
of an option purchased or written is marked-to-market daily and is valued at
the closing price on the exchange on which it is traded or, if not traded on
an exchange or no closing price is available, at the mean between the last
bid and asked prices.
Risks Associated with Options. There are several risks associated with
transactions in options on securities and on indexes. For example, there
are significant differences between the securities markets and options
markets that could result in an imperfect correlation between these markets,
causing a given transaction not to achieve its objectives. A decision as to
whether, when and how to use options involves the exercise of skill and
judgment, and even a well-conceived transaction may be unsuccessful to some
degree because of market behavior or unexpected events.
<PAGE> 12
There can be no assurance that a liquid market will exist when a Fund
seeks to close out an option position. If a Fund were unable to close out
an option that it had purchased on a security, it would have to exercise the
option in order to realize any profit or the option would expire and become
worthless. If a Fund were unable to close out a covered call option that it
had written on a security, it would not be able to sell the underlying
security until the option expired. As the writer of a covered call option,
a Fund foregoes, during the option's life, the opportunity to profit from
increases in the market value of the security covering the call option above
the sum of the premium and the exercise price of the call.
If trading were suspended in an option purchased or written by a Fund,
the Fund would not be able to close out the option. If restrictions on
exercise were imposed, the Fund might be unable to exercise an option it had
purchased.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each of Intermediate Municipals, Managed Municipals, and High-Yield
Municipals may enter into interest rate futures contracts and index futures
contracts. An interest rate or index futures contract provides for the
future sale by one party and purchase by another party of a specified
quantity of a financial instrument or the cash value of an index (such as
The Bond Buyer Municipal Bond Index) /4/ at a specified price and time. A
public market exists in futures contracts covering a number of indexes as
well as the following financial instruments: U.S. Treasury bonds; U.S.
Treasury notes; Government National Mortgage Association certificates;
three-month U.S. Treasury bills; 90-day commercial paper; bank certificates
of deposit; and Eurodollar certificates of deposit. It is expected that
other futures contracts will be developed and traded. A Fund will engage in
transactions involving new futures contracts (or options thereon) if, in the
opinion of the Board of Trustees, they are appropriate instruments for the
Fund.
Each Fund may purchase and write call options and put options on
futures contracts (futures options). Futures options possess many of the
same characteristics as options on securities and indexes (discussed above).
A futures option gives the holder the right, in return for the premium paid,
to assume a long position (call) or a short position (put) in a futures
contract at a specified exercise price at any time during the period of the
option. Upon exercise of a call option, the holder acquires a long position
in the futures contract and the writer is assigned the opposite short
position. In the case of a put option, the opposite is true. For example,
a Fund might use futures contracts to hedge against anticipated changes in
interest rates which might adversely affect either the value of the Fund's
securities or the price of the securities that the Fund intends to purchase.
Although other techniques could be used to reduce that
----------------------------
/4/ A futures contract on an index is an agreement pursuant to which two
parties agree to take or make delivery of an amount of cash equal to the
difference between the value of the index at the close of the last trading
day of the contract and the price at which the index contract was originally
written. Although the value of a securities index is a function of the
value of certain specified securities, no physical delivery of those
securities is made. The Bond Buyer Municipal Bond Index is based on The
Bond Buyer index of 40 actively-traded long-term general obligation and
revenue bonds carrying at least an A rating by Moody's or S&P.
<PAGE> 13
Fund's exposure to interest rate fluctuations, the Fund may be able to hedge
its exposure more effectively and perhaps at a lower cost by using futures
contracts and futures options.
The success of any futures technique depends on the Adviser correctly
predicting changes in the level and direction of interest rates and other
factors. Should those predictions be incorrect, a Fund's return might have
been better had the transaction not been attempted; however, in the absence
of the ability to use futures contracts, the Adviser might have taken
portfolio actions in anticipation of the same market movements with similar
investment results but, presumably, at greater transaction costs.
Each Fund will only enter into futures contracts and futures options
that are standardized and traded on a U.S. exchange, board of trade or
similar entity, or quoted on an automated quotation system.
When a purchase or sale of a futures contract is made by a Fund, the
Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or U.S. Government securities or other
securities acceptable to the broker ("initial margin"). The margin required
for a futures contract is set by the exchange on which the contract is
traded and may be modified during the term of the contract. The initial
margin is in the nature of a performance bond or good faith deposit on the
futures contract that is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. Each
Fund expects to earn interest income on its initial margin deposits. A
futures contract held by a Fund is valued daily at the official settlement
price of the exchange on which it is traded. Each day the Fund pays or
receives cash, called "variation margin," equal to the daily change in value
of the futures contract. This process is known as "marking-to-market."
Variation margin paid or received by a Fund does not represent a borrowing
or loan by the Fund but is instead settlement between the Fund and the
broker of the amount one would owe the other if the futures contract had
expired at the close of the previous trading day. In computing daily net
asset value, each Fund will mark to market its open futures positions.
A Fund is also required to deposit and maintain margin with respect to
put and call options on futures contracts written by it. Such margin
deposits will vary depending on the nature of the underlying futures
contract (and the related initial margin requirements), the current market
value of the option and other futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of
the underlying securities, usually these obligations are closed out prior to
delivery by offsetting purchases or sales, as the case may be, of matching
futures contracts (same exchange, underlying security or index, and delivery
month). If an offsetting purchase price is less than the original sale
price, the Fund realizes a capital gain, or if it is more, the Fund realizes
a capital loss. Conversely, if an offsetting sale price is more than the
original purchase price, the Fund realizes a capital gain, or if it is less,
the Fund realizes a capital loss. The transaction costs must also be
included in these calculations.
<PAGE> 14
Risks Associated with Futures. There are several risks associated with
the use of futures contracts and futures options as hedging techniques. A
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the futures contract. In trying to increase or reduce
market exposure, there can be no guarantee that there will be a correlation
between price movements in the futures contract and in the portfolio
exposure sought. In addition, there are significant differences between the
securities and futures markets that could result in an imperfect correlation
between the markets, causing a given transaction not to achieve its
objectives. The degree of imperfection of correlation depends on
circumstances such as: variations in speculative market demand for futures,
futures options and debt securities, including technical influences in
futures and futures options trading and differences between the financial
instruments and the instruments underlying the standard contracts available
for trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. A decision as to whether, when and how to
hedge involves the exercise of skill and judgment, and even a well-conceived
transaction may be unsuccessful to some degree because of market behavior or
unexpected interest rate trends.
Futures exchanges may limit the amount of fluctuation permitted in
certain 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 current trading session. Once the daily limit has been reached
in a futures contract subject to the limit, no more trades may be made on
that day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and therefore does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved
to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of positions and subjecting
some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time
when a Fund seeks to close out a futures or futures option position. The
Fund would be exposed to possible loss on the position during the interval
of inability to close and would continue to be required to meet margin
requirements until the position is closed. In addition, many of the
contracts discussed above are relatively new instruments without a
significant trading history. As a result, there can be no assurance that an
active secondary market will develop or continue to exist.
LIMITATIONS ON OPTIONS AND FUTURES
If options, futures contracts, or futures options of types other than
those described herein or in the prospectus are traded in the future, each
of Intermediate Municipals, Managed Municipals, and High-Yield Municipals
may also use those investment vehicles, provided the Board of Trustees
determines that their use is consistent with the Fund's investment
objective.
A Fund will not enter into a futures contract or purchase an option
thereon if immediately thereafter the initial margin deposits for futures
contracts held by the
<PAGE> 15
Fund plus premiums paid by it for open futures option positions, less the
amount by which any such options are "in-the-money" (as defined in the
Glossary), would exceed 5% of the Fund's total assets.
When purchasing a futures contract or writing a put on a futures
contract, a Fund must maintain with its custodian (or broker, if legally
permitted) cash or cash equivalents (including any margin) equal to the
market value of such contracts. When writing a call option on a futures
contract, a Fund similarly will maintain cash or cash equivalents (including
any margin) equal to the amount by which such option is in-the-money until
the option expires or is closed out by the Fund.
A Fund may not maintain open short positions in futures contracts, call
options written on futures contracts or call options written on indexes if,
in the aggregate, the market value of all such open positions exceeds the
current value of the securities in its portfolio, plus or minus unrealized
gains and losses on the open positions, adjusted for the historical relative
volatility of the relationship between the portfolio and the positions. For
this purpose, to the extent a Fund has written call options on specific
securities in its portfolio, the value of those securities will be deducted
from the current market value of the securities portfolio.
In order to comply with Commodity Futures Trading Commission Regulation
4.5 and thereby avoid being deemed a "commodity pool operator," each Fund
will use commodity futures or commodity options contracts solely for bona
fide hedging purposes within the meaning and intent of Regulation 1.3(z),
or, with respect to positions in commodity futures and commodity options
contracts that do not come within the meaning and intent of 1.3(z), the
aggregate initial margin and premiums required to establish such positions
will not exceed 5% of the fair market value of the assets of a Fund, after
taking into account unrealized profits and unrealized losses on any such
contracts it has entered into [in the case of an option that is in-the-money
at the time of purchase, the in-the-money amount (as defined in Section
190.01(x) of the Commission Regulations) may be excluded in computing such
5%].
As long as it continues to sell its shares in certain states, each
Fund's futures and options transactions will also be subject to certain non-
fundamental investment restrictions set forth below under Investment
Restrictions.
TAXATION OF OPTIONS AND FUTURES
If a Fund exercises a call or put option that it holds, the premium
paid for the option is added to the cost basis of the security purchased
(call) or deducted from the proceeds of the security sold (put). For cash
settlement options and futures options exercised by a Fund, the difference
between the cash received at exercise and the premium paid is a capital gain
or loss.
If a call or put option written by a Fund is exercised, the premium is
included in the proceeds of the sale of the underlying security (call) or
reduces the cost basis of the security purchased (put). For cash settlement
options and futures options written
<PAGE> 16
by a Fund, the difference between the cash paid at exercise and the premium
received is a capital gain or loss.
Entry into a closing purchase transaction will result in capital gain
or loss. If an option written by a Fund was in-the-money at the time it was
written and the security covering the option was held for more than the
long-term holding period prior to the writing of the option, any loss
realized as a result of a closing purchase transaction will be long-term.
The holding period of the securities covering an in-the-money option will
not include the period of time the option is outstanding.
A futures contract held until delivery results in capital gain or loss
equal to the difference between the price at which the futures contract was
entered into and the settlement price on the earlier of delivery notice date
or expiration date. If a Fund delivers securities under a futures contract,
the Fund also realizes a capital gain or loss on those securities. For
Federal income tax purposes, a Fund generally is required to recognize as
income for each taxable year its net unrealized gains and losses as of the
end of the year on options, futures and futures options positions ("year-end
mark-to-market"). Generally, any gain or loss recognized with respect to
such positions (either by year-end mark-to-market or by actual closing of
the positions) is considered to be 60% long-term and 40% short-term, without
regard to the holding periods of the contracts. However, in the case of
positions classified as part of a "mixed straddle," the recognition of
losses on certain positions (including options, futures and futures options
positions, the related securities and certain successor positions thereto)
may be deferred to a later taxable year. Sale of futures contracts or
writing of call options (or futures call options) or buying put options (or
futures put options) that are intended to hedge against a change in the
value of securities held by a Fund: (1) will affect the holding period of
the hedged securities; and (2) may cause unrealized gain or loss on such
securities to be recognized upon entry into the hedge.
In order for a Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross
income for a taxable year must be derived from qualifying income; i.e.,
dividends, interest, income derived from loans of securities, and gains from
the sale of securities or foreign currencies or other income (including but
not limited to gains from options, futures, or forward contracts). In
addition, gains realized on the sale or other disposition of securities held
for less than three months must be limited to less than 30% of the Fund's
annual gross income. Any net gain realized from futures (or futures
options) contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In
order to avoid realizing excessive gains on securities held less than three
months, the Fund may be required to defer the closing out of certain
positions beyond the time when it would otherwise be advantageous to do so.
Each Fund distributes to shareholders annually any net capital gains
that have been recognized for Federal income tax purposes (including year-
end mark-to-market gains) on options and futures transactions. Such
distributions are combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised of the nature
of the payments.
<PAGE> 17
INVESTMENT RESTRICTIONS
Each Fund operates under the following investment restrictions.
Restrictions that are fundamental policies, as indicated below, may not be
changed without the approval of a "majority of the outstanding voting
securities" (as defined in the Glossary). For purposes of discussion under
Investment Restrictions, the term "the Fund" also refers to the Portfolio.
A Fund may not:
(i) invest in a security if, with respect to 75% of the Fund's assets,
as a result of such investment, more than 5% of its total assets (taken at
market value at the time of investment) would be invested in the securities
of any one issuer (for this purpose, the issuer(s) of a security being
deemed to be only the entity or entities whose assets or revenues are
subject to the principal and interest obligations of the security), other
than obligations issued or guaranteed by the U.S. Government or by its
agencies or instrumentalities or repurchase agreements for such securities,
and [all Funds except the Portfolio] except that all or substantially all of
the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund [however, in the case of a guarantor of
securities (including an issuer of a letter of credit), the value of the
guarantee (or letter of credit) may be excluded from this computation if the
aggregate value of securities owned by the Fund and guaranteed by such
guarantor (plus any other investments of the Fund in securities issued by
the guarantor) does not exceed 10% of the Fund's total assets]; /5/
(ii) purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities (this restriction does not apply to securities purchased on a
when-issued or delayed-delivery basis or to reverse repurchase agreements),
[Intermediate Municipals, Managed Municipals, and High-Yield Municipals
only] but the Fund may make margin deposits in connection with futures and
options transactions;
(iii) make loans to other persons, except that the Fund may invest up
to 100% of its assets in debt obligations, including money market
instruments;
(iv) borrow, except that the Fund may (a) borrow up to 33 1/3% of its
total assets, taken at current value at the time of such borrowing, from
banks as a temporary measure for extraordinary or emergency purposes but not
to increase portfolio income (the total of reverse repurchase agreements and
such borrowings will not exceed 33 1/3% of the Fund's total assets and the
Fund will not purchase additional securities at a time when its borrowings,
less proceeds receivable from sales of portfolio securities, exceed 5% of
its total assets) [the Funds did not borrow for such purposes during the
last fiscal year], and [Intermediate Municipals, Managed Municipals, and
High-Yield Municipals only] (b) enter into futures and options transactions;
(v) mortgage, pledge, hypothecate or in any manner transfer, as
security for indebtedness, any securities owned or held by the Fund except
(a) as may be necessary in connection with borrowings mentioned in (iv)
above, and [Intermediate Municipals,
------------------------
/5/ In the case of a security that is insured as to payment of principal
and interest, the related insurance policy is not deemed a security, nor is
it subject to this investment restriction.
<PAGE> 18
Managed Municipals, and High-Yield Municipals only] (b) it may enter into
futures and options transactions;
(vi) invest more than 25% of its total assets (taken at market value at
the time of each investment) in securities of non-governmental issuers whose
principal business activities are in the same industry, [all Funds except
the Portfolio] except that all or substantially all of the assets of the
Fund may be invested in another registered investment company having the
same investment objective and substantially similar investment policies as
the Fund;
(vii) purchase portfolio securities for the Fund from, or sell
portfolio securities to, any of the officers, directors, or trustees of the
Trust or of its investment adviser;
(viii) purchase or sell commodities or commodities contracts or oil,
gas, or mineral programs, [Intermediate Municipals, Managed Municipals, and
High-Yield Municipals only] except that the Fund may enter into futures and
options transactions;
(ix) [Municipal Money Fund only] purchase any securities other than
those described under Investment Policies--Municipal Money Fund, and under
Portfolio Investments and Strategies; [Managed Municipals only] purchase any
securities other than those described under Investment Policies--Managed
Municipals and under Portfolio Investments and Strategies; or
(x) issue any senior security except to the extent permitted under the
Investment Company Act of 1940.
The above restrictions (other than material within brackets) are
fundamental policies. The Funds have also adopted the following
restrictions that may be required by various laws and administrative
positions. These restrictions are not fundamental. A Fund may not:
(a) own more than 10% of the outstanding voting securities of an
issuer, [all Funds except the Portfolio] except that all or substantially
all of the assets of the Fund may be invested in another registered
investment company having the same investment objective and substantially
similar investment policies as the Fund;
(b) invest in companies for the purpose of exercising control or
management, [all Funds except the Portfolio] except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund;
(c) make investments in the securities of other investment companies,
except in connection with a merger, consolidation, or reorganization;
(d) purchase or sell real estate (other than Municipal Securities or
money market securities secured by real estate or interests therein or such
securities issued by companies which invest in real estate or interests
therein);
(e) invest in securities of issuers (other than issuers of Federal
agency obligations or of Municipal Securities) having a record of less than
three years of continuous operation (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) if,
<PAGE> 19
regarding all such securities, more than 5% of the Fund's total assets
(taken at market value at the time of each investment) would be invested in
such securities, [all Funds except the Portfolio] except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund;
(f) act as an underwriter of securities, except that the Fund may
participate as part of a group in bidding, or bid alone, for the purchase of
Municipal Securities directly from an issuer for the Fund's own portfolio,
and [all Funds except the Portfolio] except that all or substantially all of
the assets of the Fund may be invested in another registered investment
company having the same investment objective and substantially similar
investment policies as the Fund;
(g) purchase or retain securities of an issuer if 5% of the securities
of such issuer are owned by those trustees and officers of the Fund who own
individually more than 1/2 of 1% of such securities;
(h) invest more than 10% of its net assets (taken at market value at
the time of each purchase) in restricted or illiquid securities, including
repurchase agreements maturing in more than seven days; or
(i) sell securities short unless (1) the Fund owns or has the right to
obtain securities equivalent in kind and amount to those sold short at no
added cost or (2) the securities sold are "when issued" or "when
distributed" securities which the Fund expects to receive in a
recapitalization, reorganization, or other exchange for securities the Fund
contemporaneously owns or has the right to obtain and provided that the Fund
may purchase standby commitments and securities subject to a demand feature
entitling the Fund to require sellers of securities to the Fund to
repurchase them upon demand by the Fund [Intermediate Municipals, Managed
Municipals, and High-Yield Municipals only] and that transactions in
options, futures, and options on futures are not treated as short sales.
In addition, as long as a Fund continues to sell its shares in certain
states, it may not: (i) purchase shares of other open-end investment
companies, except in connection with a merger, consolidation, acquisition,
or reorganization and [all Funds except the Portfolio] except that all or
substantially all of the assets of the Fund may be invested in another
registered investment company having the same investment objective and
substantially similar investment policies as the Fund; or (ii) invest more
than 5% of its net assets (valued at time of investment) in warrants, nor
more than 2% of its net assets in warrants that are not listed on the New
York or American stock exchange. Further, as long as a Fund (except
Municipal Money Fund and the Portfolio) continues to sell its shares in
certain states, it may not: (1) write an option on a security unless the
option is issued by the Options Clearing Corporation, an exchange, or
similar entity; (2) buy or sell an option on a security, a futures contract
or an option on a futures contract unless the option, the futures contract
or the option on the futures contract is offered through the facilities of a
national securities association or listed on a national exchange or similar
entity; or (3) purchase a put or call option if the aggregate premiums paid
for all put and call options exceed 20% of its net assets (less the amount
by which any such positions are in-the-money), excluding put and call
options purchased as closing transactions.
<PAGE> 20
INVESTMENT RISKS
Medium-quality Municipal Securities are obligations of municipal
issuers that, in the opinion of the Adviser, possess adequate, but not
outstanding, capacities to service the obligations. Lower-quality Municipal
Securities are obligations of issuers that are considered predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer default and
bankruptcy, and are commonly referred to as "junk bonds." The
characteristics attributed to medium- and lower-quality obligations by the
Adviser are much the same as those attributed to medium- and lower-quality
obligations by rating services (see the Appendix). Because many issuers of
medium- and lower-quality Municipal Securities choose not to have their
obligations rated by a rating agency, many of the obligations in the Fund's
portfolio may be unrated.
Investment in medium- or lower-quality debt securities involves greater
investment risk, including the possibility of issuer default or bankruptcy.
An economic downturn could severely disrupt this market and adversely affect
the value of outstanding bonds and the ability of the issuers to repay
principal and interest. During a period of adverse economic changes,
including a period of rising interest rates, issuers of such bonds may
experience difficulty in servicing their principal and interest payment
obligations.
Medium- and lower-quality debt securities tend to be less marketable
than higher-quality debt securities because the market for them is less
broad. The market for unrated debt securities is even narrower. During
periods of thin trading in these markets, the spread between bid and asked
prices is likely to increase significantly, and the Fund may have greater
difficulty selling its portfolio securities.
The Federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of
creditors, which proceedings could result in material and adverse changes in
the rights of holders of their obligations.
Lawsuits challenging the validity under state constitutions of present
systems of financing public education have been initiated or adjudicated in
a number of states, and legislation has been introduced to effect changes in
public school financing in some states. In other instances there have been
lawsuits challenging the issuance of pollution control revenue bonds or the
validity of their issuance under state or Federal law which could ultimately
affect the validity of those Municipal Securities or the tax-free nature of
the interest thereon. In addition, from time to time proposals have been
introduced in Congress to restrict or eliminate the Federal income tax
exemption for interest on Municipal Securities, and similar proposals may be
introduced in the future. Some of the past proposals would have applied to
interest on Municipal Securities issued before the date of enactment, which
would have adversely affected their value to a material degree. If such
proposals are enacted, the availability of Municipal
<PAGE> 21
Securities for investment by the Funds and the value of the Funds'
portfolios would be affected and, in such an event, the Funds would
reevaluate their investment objectives and policies.
Because the Funds may invest in industrial development bonds, the
Funds' shares may not be an appropriate investment for "substantial users"
of facilities financed by industrial development bonds or for "related
persons of substantial users."
In addition, the Funds invest in Municipal Securities issued after the
effective date of the Tax Reform Act of 1986 (the "1986 Act"), which may be
subject to retroactive taxation if they fail to continue to comply after
issuance with certain requirements imposed by the 1986 Act.
Although the banks and securities dealers from which a Fund may acquire
repurchase agreements and standby commitments, and the entities from which a
Fund may purchase participation interests in Municipal Securities, will be
those that the Funds' Adviser believes to be financially sound, there can be
no assurance that they will be able to honor their obligations to the Fund.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus under the
headings How to Purchase Shares, How to Redeem Shares, Net Asset Value, and
Shareholder Services, and that information is incorporated herein by
reference. The Prospectus discloses that you may purchase (or redeem)
shares through investment dealers, banks, or other institutions. It is the
responsibility of any such institution to establish procedures insuring the
prompt transmission to the Trust of any such purchase order. The state of
Texas has asked that the Trust disclose in its Statement of Additional
Information, as a reminder to any such bank or institution, that it must be
registered as a dealer in Texas.
Each Fund's net asset value is determined on days on which the New York
Stock Exchange (the "NYSE") is open for trading. The NYSE is regularly
closed on Saturdays and Sundays and on New Year's Day, the third Monday in
February, Good Friday, the last Monday in May, Independence Day, Labor Day,
Thanksgiving, and Christmas. If one of these holidays falls on a Saturday
or Sunday, the NYSE will be closed on the preceding Friday or the following
Monday, respectively. Net asset value will not be determined on days when
the NYSE is closed unless, in the judgment of the Board of Trustees, net
asset value of a Fund should be determined on any such day, in which case
the determination will be made at 3:00 p.m., Chicago time.
Municipal Trust intends to pay all redemptions in cash and is obligated
to redeem shares of a Fund solely in cash up to the lesser of $250,000 or
one percent of the net assets of that Fund during any 90-day period for any
one shareholder. However, redemptions in excess of such limit may be paid
wholly or partly by a distribution in kind of securities. If redemptions
were made in kind, the redeeming shareholders might incur transaction costs
in selling the securities received in the redemptions.
<PAGE> 22
Although Municipal Money Fund does not currently charge a fee to its
shareholders for the use of the special Check-Writing Redemption Privilege
offered by that Fund, described under How to Redeem Shares in the
Prospectus, the Fund pays for the cost of printing and mailing checks to its
shareholders and pays charges of the custodian for payment of each check.
Municipal Trust reserves the right to establish a direct charge to
shareholders for use of the Privilege and both the Trust and the custodian
reserve the right to terminate this service.
Municipal Trust reserves the right to suspend or postpone redemptions
of shares of any Fund during any period when: (a) trading on the NYSE is
restricted, as determined by the Securities and Exchange Commission, or the
NYSE is closed for other than customary weekend and holiday closings; (b)
the Securities and Exchange Commission has by order permitted such
suspension; or (c) an emergency, as determined by the Securities and
Exchange Commission, exists, making disposal of portfolio securities or
valuation of net assets of such Fund not reasonably practicable.
Due to the relatively high cost of maintaining smaller accounts,
Municipal Trust reserves the right to redeem shares in any account for their
then-current value (which will be promptly paid to the investor) if at any
time the shares in the account do not have a value of at least $1,000. An
investor will be notified that the value of his account is less than that
minimum and allowed at least 30 days to bring the value of the account up to
at least $1,000 before the redemption is processed. The Agreement and
Declaration of Trust also authorizes the Trust to redeem shares under
certain other circumstances as may be specified by the Board of Trustees.
MANAGEMENT
The following table sets forth certain information with respect to the
trustees and officers of Municipal Trust:
<TABLE>
<CAPTION>
POSITION(S) HELD WITH
NAME AGE THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
------ --- -------------------------- -----------------------------------------------
<S> <C> <C> <C>
Gary A. Anetsberger (5) 39 Senior Vice-President; Vice-President of Stein Roe & Farnham Incorporated (the
"Adviser") since January, 1991; associate of the Adviser prior
thereto
Timothy K. Armour 46 President; Trustee President of the Mutual Funds division of the Adviser and
(1)(2)(4)(5) Director of the Adviser since June, 1992; senior vice president
and director of marketing of Citibank Illinois prior thereto
Jilaine Hummel Bauer (5) 39 Executive Vice-President Senior Vice President (since April, 1992) and Assistant Secretary
Secretary (since May, 1990) of the Adviser; vice president of the Adviser
prior thereto
Kenneth L. Block (3)(5) 75 Trustee Chairman Emeritus of A. T. Kearney, Inc. (international
management consultants)
William W. Boyd (3)(4)(5) 69 Trustee Chairman and Director of Sterling Plumbing Group, Inc.
(manufacturer of plumbing products) since 1992; chairman,
president, and chief executive officer of Sterling Plumbing
Group, Inc. prior thereto
<PAGE> 23
Thomas W. Butch 38 Vice-President Senior Vice President of the Adviser since September, 1994; first
vice president, corporate communications, of Mellon Bank
Corporation prior thereto
N. Bruce Callow(5) 49 Executive Vice-President President of the Investment Counsel division of the Adviser since
June, 1994; senior vice president of trust and financial services
for The Northern Trust prior thereto
Lindsay Cook (1)(5) 43 Trustee Senior Vice President of Liberty Financial Companies, Inc. (the
indirect parent of the Adviser)
Joanne T. Costopoulos 48 Vice-President Vice President of the Adviser since January, 1994; associate of
the Adviser prior thereto
Philip D. Hausken (5) 37 Vice-President Corporate Counsel for the Adviser since July, 1994; assistant
regional director, midwest regional office of the Securities and
Exchange Commission prior thereto
Stephen P. Lautz (5) 38 Vice-President Vice President of the Adviser since May, 1994; associate of the
Adviser prior thereto
Lynn C. Maddox 54 Vice-President Senior Vice President of the Adviser
Anne E. Marcel 38 Vice-President Manager, Mutual Fund Sales & Services of the Adviser since
October, 1994; supervisor of the Counselor Department of the
Adviser from October, 1992 to October, 1994; vice president of
Selected Financial Services from May, 1990 to March, 1992
M. Jane McCart 39 Vice-President Senior Vice President of the Adviser since January, 1991; vice
president of the Adviser prior thereto
Francis W. Morley 75 Trustee Chairman of Employer Plan Administrators and Consultants Co.
(2)(3)(5) (designer, administrator, and communicator of employee benefit
plans)
Charles R. Nelson (3)(4) 52 Trustee Van Voorhis Professor of Political Economy of the University of
(5) Washington
Jill K. Netzel 36 Vice-President Associate of the Adviser
Nicolette D. Parrish (5) 45 Vice-President; Assistant Associate of the Adviser
Secretary
Sharon R. Robertson (5) 33 Controller Accounting Manager for the Adviser's Mutual Funds division
Janet B. Rysz (5) 39 Assistant Secretary Assistant Secretary of the Adviser
Thomas P. Sorbo 34 Vice-President Senior Vice President of the Adviser since January, 1994; vice
president of the Adviser from September, 1992 to December, 1993;
associate of Travelers Insurance Company prior thereto
Gordon R. Worley (3)(5) 75 Trustee Private investor
<PAGE> 24
Hans P. Ziegler (5) 54 Executive Vice-President Chief Executive Officer of the Adviser since May, 1994; president
of the Investment Counsel division of the Adviser from July, 1993
to July, 1994; president and chief executive officer, Pitcairn
Financial Management Group prior thereto
Margaret O. Zwick 28 Treasurer Compliance Manager for the Adviser's Mutual Funds division since
August, 1995; prior thereto held positions of Compliance Accountant,
Section Manager, Supervisor, and Fund Accountant with the division
<FN>
_______________________
(1) Trustee who is an "interested person" of the Trust and of the
Adviser, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees, which
is authorized to exercise all powers of the Board with certain
statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of auditors
and confers with the auditors regarding the scope and results of
the audit.
(4) Member of the Nominating Committee.
(5) This person also holds the corresponding officer or trustee
position with SR&F Base Trust.
</TABLE>
Certain of the trustees and officers of Municipal Trust and of Base
Trust are trustees or officers of other investment companies managed by the
Adviser. Ms. Bauer and Mr. Cook are also vice presidents of the Funds'
distributor, Liberty Securities Corporation. The address of Mr. Block is 11
Woodley Road, Winnetka, Illinois 60093; that of Mr. Boyd is 2900 Golf Road,
Rolling Meadows, Illinois 60008; that of Mr. Cook is 600 Atlantic Avenue,
Boston, MA 02210; that of Mr. Morley is 20 North Wacker Drive, Suite 2275,
Chicago, Illinois 60606; that of Mr. Nelson is Department of Economics,
University of Washington, Seattle, Washington 98195; that of Mr. Worley is
1407 Clinton Place, River Forest, Illinois 60305; and that of the officers
is One South Wacker Drive, Chicago, Illinois 60606.
The only compensation paid to the trustees and officers of Municipal
Trust for their services as such consists of attendance fees paid to
trustees who are not "interested persons" of the Trust or the Adviser. The
fee schedule provides for an annual retainer of $8,000 (divided equally
among the Funds of the Trust) plus an attendance fee from each Fund for each
meeting of the Board or committee thereof attended at which business for
that Fund is conducted. The attendance fees (other than for a Nominating
Committee meeting) are based on each Fund's net assets as of the preceding
December 31. For a Fund with net assets of less than $251 million, the fee
is $200 per meeting; with $251 million to $500 million, $350; with $501
million to $750 million, $500; with $750 million to $1 billion, $650; and
with over $1 billion in net assets, $800. Each non-interested trustee also
receives an aggregate of $500 for attending each meeting of the Nominating
Committee. The trustees received an aggregate of $71,000 in attendance fees
for the fiscal year ended June 30, 1994.
FINANCIAL STATEMENTS
Please refer to the Funds' Financial Statements (balance sheets and
schedules of investments as of June 30, 1994 and the statements of
operations, changes in net assets, and notes thereto) and the report of
independent auditors contained in the Funds'
<PAGE> 25
June 30, 1994 Annual Report and to the Funds' December 31, 1994 Financial
Statements (unaudited balance sheets and schedules of investments as of
December 31, 1994 and the statements of operations, changes in net assets,
and notes thereto) contained in the December 31, 1994 semiannual report of
the Funds. The Financial Statements and the report (but no other material
from the Annual Report and the Semiannual Report) are incorporated herein by
reference. The Annual Report and the Semiannual Report may be obtained at no
charge by telephoning 1-800-338-2550.
PRINCIPAL SHAREHOLDERS
As of August 1, 1994, the only person known by Municipal Trust to own
of record or "beneficially" 5% or more of the outstanding shares of any Fund
within the definition of that term as contained in Rule 13d-3 under the
Securities Exchange Act of 1934, was Charles Schwab & Co., Inc., 101
Montgomery Street, San Francisco, California 94104, which owned of record
but not beneficially approximately 11.4% of the outstanding shares of
Intermediate Municipals.
The following table shows shares of the Funds held by the categories of
persons indicated and in each case the approximate percentage of outstanding
shares represented:
CLIENTS OF THE ADVISER TRUSTEES AND
IN THEIR CLIENT ACCOUNTS OFFICERS AS OF
AS OF 7/31/94* 8/1/94
Shares Held Percent Shares Held Percent
Municipal Money Fund 72,410,753 44.1% 2,571,403 **
Intermediate Municipals 9,871,301 45.8% 362,112 **
Managed Municipals 25,295,293 32.2% 497,216 **
High-Yield Municipals 9,886,118 35.8% 137,296 **
_________________
*The Adviser may have discretionary authority over such shares and,
accordingly, they could be deemed to be owned "beneficially" by the Adviser
under Rule 13d-3. However, the Adviser disclaims actual beneficial
ownership of such shares.
**Represents less than 1% of the outstanding shares.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated (the "Adviser") serves as investment
adviser to Intermediate Municipals, Managed Municipals, High-Yield
Municipals, the Portfolio, and, through September 27, 1995, Municipal Money
Fund. On September 28, 1995, Municipal Money Fund will begin investing in
the Portfolio and thereafter the Adviser no longer provided investment
advisory services directly to that Fund. The Adviser is a wholly-owned
subsidiary of SteinRoe Services Inc. ("SSI"), the Funds' transfer agent,
which is a wholly-owned indirect subsidiary of Liberty Financial Companies,
Inc., which is a majority-owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly-owned subsidiary of Liberty Mutual Insurance
Company ("Liberty Mutual"). Liberty Mutual is a mutual insurance company,
principally in the property/casualty insurance field, organized under the
laws of Massachusetts in 1912.
The directors of the Adviser are Gary L. Countryman, Kenneth R.
Leibler, Timothy K. Armour, N. Bruce Callow, and Hans P. Ziegler. Mr.
Countryman is Chairman
<PAGE> 26
and Chief Executive Officerof Liberty Mutual Insurance Company; Mr. Leibler
is President and Chief Executive Officer of Liberty Financial Companies; Mr.
Armour is President of the Adviser's Mutual Funds division; Mr. Callow is
President of the Adviser's Investment Counsel Division; and Mr. Ziegler is
Chief Executive Officer of the Adviser. The business address of Mr.
Countryman is 175 Berkeley Street, Boston, Massachusetts 02117; that of Mr.
Leibler is Federal Reserve Plaza, Boston, Massachusetts 02210; that of
Messrs. Armour, Callow, and Ziegler is One South Wacker Drive, Chicago,
Illinois 60606.
The Adviser and its predecessor have been providing investment advisory
services since 1932. The Adviser acts as investment adviser to wealthy
individuals, trustees, pension and profit sharing plans, charitable
organizations, and other institutional investors. As of December 31, 1994,
the Adviser managed over $22.8 billion in assets: over $5.4 billion in
equities and over $17.4 billion in fixed-income securities (including $2.3
billion in municipal securities). The $22.8 billion in managed assets
included over $6.4 billion held by open-end mutual funds managed by the
Adviser (approximately 25% of the mutual fund assets were held by clients of
the Adviser). These mutual funds were owned by over 149,000 shareholders.
The $6.4 billion in mutual fund assets included over $504 million in over
33,000 IRA accounts. In managing those assets, the Adviser utilizes a
proprietary computer-based information system that maintains and regularly
updates information for approximately 6,500 companies. The Adviser also
monitors over 1,400 issues via a proprietary credit analysis system. At
December 31, 1994, the Adviser employed 20 research analysts and 42 account
managers. The average investment-related experience of these individuals
was 19 years.
SteinRoe Counselor [service mark] and SteinRoe Counselor Preferred
[service mark] are professional investment advisory services offered by the
Adviser to Fund shareholders. Each is designed to help shareholders
construct Fund investment portfolios to suit their individual needs. Based
on information shareholders provide about their financial goals and
objectives in response to a questionnaire, the Adviser's investment
professionals create customized portfolio recommendations. Shareholders
participating in SteinRoe Counselor [service mark] are free to self direct
their investments while considering the Adviser's recommendations;
shareholders participating in SteinRoe Counselor Preferred [service mark]
enjoy the added benefit of having the Adviser implement portfolio
recommendations automatically for a fee of 1% or less, depending on the size
of their portfolios. In addition to reviewing shareholders' goals and
objectives periodically and updating portfolio recommendations to reflect
any changes, the Adviser provides shareholders participating in these
programs with a dedicated Counselor [service mark] representative. Other
distinctive services include specially designed account statements with
portfolio performance and transaction data, newsletters, and regular
investment, economic, and market updates. A $50,000 minimum investment is
required to participate in either program.
Please refer to the description of the Adviser, advisory agreements,
advisory fees, expense limitations, and transfer agency services under
Management of the Funds in the Prospectus, which is incorporated herein by
reference. The table below shows gross advisory fees paid by the Funds and
any expense reimbursements by the
<PAGE> 27
Adviser to them. The Portfolio is not listed because it commenced operations
after the most recent period shown. The fees and expense reimbursements of
the Funds and the Portfolio are described in the Prospectus.
YEAR ENDED YEAR ENDED YEAR ENDED
FUND TYPE OF PAYMENT 6/30/94 6/30/93 6/30/92
--------------- --------------- ---------- ---------- ---------
Municipal Money
Fund Advisory fee $ 998,500 $1,072,504 $1,155,334
Intermediate
Municipals Advisory fee 1,415,654 1,174,359 827,337
Managed
Municipals Advisory fee 3,936,931 3,908,586 3,643,225
High-Yield
Municipals Advisory fee 1,846,679 2,034,606 2,132,505
The Adviser provides office space and executive and other personnel to
the Funds and the Portfolio and bears any sales or promotional expenses.
Each Fund and the Portfolio pays all expenses other than those paid by the
Adviser, including but not limited to printing and postage charges and
securities registration and custodian fees and expenses incidental to its
organization.
Each advisory agreement (other than the agreement relating to the
Portfolio) provides that the Adviser shall reimburse the Fund to the extent
that total annual expenses of the Fund (including fees paid to the Adviser,
but excluding taxes, interest, brokers' commissions and other normal charges
incident to the purchase and sale of portfolio securities, and expenses of
litigation to the extent permitted under applicable state law) exceed the
applicable limits prescribed by any state in which the shares of such Fund
are being offered for sale to the public; however, such reimbursement for
any fiscal year will not exceed the amount of the fees paid by the Fund
under that agreement for such year. The administrative agreement relating
to Municipal Money Fund contains a similar provision. The administrative
agreement is described in the Prospectus.
Municipal Trust believes that currently the most restrictive state
limit on expenses is that of California, which limit currently is 2 1/2% of
the first $30 million of average net assets, 2% of the next $70 million, and
1 1/2% thereafter. In addition, in the interest of further limiting
expenses, from time to time, the Funds' Adviser may voluntarily waive its
management fee and/or absorb certain expenses for a Fund.
Each advisory agreement also provides that neither the Adviser nor any
of its directors, officers, stockholders (or partners of stockholders),
agents, or employees shall have any liability to the Trust or any
shareholder of the Fund (or the Portfolio) for any error of judgment,
mistake of law or any loss arising out of any investment, or for any other
act or omission in the performance by the Adviser of its duties under the
advisory agreement, except for liability resulting from willful misfeasance,
bad faith or gross negligence on the Adviser's part in the performance of
its duties or from reckless disregard by the Adviser of the Adviser's
obligations and duties under the advisory agreement.
Any expenses that are attributable solely to the organization,
operation, or business of a Fund (or the Portfolio) shall be paid solely out
of that Fund's (or the Portfolio's) assets. Any expenses incurred by the
Trust that are not solely attributable to a particular Fund (or the
Portfolio) are apportioned in such a manner as the Adviser
<PAGE> 28
determines is fair and appropriate, unless otherwise specified by the Board
of Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with the Trust, the Adviser receives a
fee for performing certain bookkeeping and accounting services for the Funds
and the Portfolio. For these services, the Adviser receives an annual fee of
$25,000 per Fund plus .0025 of 1% of average net assets over $50 million.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Securities Corporation
("LSC") under a Distribution Agreement as described under Management of the
Funds in the Prospectus, which is incorporated herein by reference. The
Distribution Agreement continues in effect from year to year, provided such
continuance is approved annually (i) by a majority of the trustees or by a
majority of the outstanding voting securities of Municipal Trust, and (ii)
by a majority of the trustees who are not parties to the Agreement or
interested persons of any such party. Municipal Trust has agreed to pay all
expenses in connection with registration of its shares with the Securities
and Exchange Commission and auditing and filing fees in connection with
registration of its shares under the various state blue sky laws and assumes
the cost of preparation of prospectuses and other expenses. The Adviser
bears all sales and promotional expenses, including payments to LSC for the
sales of Fund shares. The Adviser also makes payments to other broker-
dealers, banks, and institutions for the sales of Fund shares of 0.25% of
the annual average value of accounts of such shares.
As agent, LSC offers shares of the Funds to investors in states where
the shares are qualified for sale, at net asset value, without sales
commissions or other sales load to the investor. No sales commission or
"12b-1" payment is paid by any Fund. LSC offers the Funds' shares only on a
best-efforts basis.
TRANSFER AGENT
SSI performs certain transfer agency services for Municipal Trust, as
described under Management of the Funds in the Prospectus. For performing
these services, SSI receives payments from Municipal Money Fund of 0.150% of
average daily net assets and payments from Intermediate Municipals, Managed
Municipals, and High-Yield Municipals of 0.150% of average daily net assets.
Through April 30, 1995, the schedule of fees paid to SSI by each Fund was a
follows: (1) a fee of $4.00 for each new account opened; (2) monthly
payments of $1.466 per open shareholder account; (3) payments of $0.611 per
closed shareholder account for each month through June of the calendar year
following the year in which the account is closed; (4) $0.3025 per
shareholder account for each dividend paid; and (5) $1.415 for each
shareholder-initiated transaction. The Board of Trustees believes the
charges by SSI are comparable to those of other companies performing similar
services. (See Investment Advisory Services.) Under a separate agreement,
SSI also provides certain investor accounting services to the Portfolio.
<PAGE> 29
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02101, is the custodian for the Trusts. It is responsible for
holding all securities and cash of the Funds, receiving and paying for
securities purchased, delivering against payment securities sold, receiving
and collecting income from investments, making all payments covering expenses
of the Funds, and performing other administrative duties, all as directed by
authorized persons. The custodian does not exercise any supervisory function
in such matters as purchase and sale of portfolio securities, payment of
dividends, or payment of expenses of the Funds. The Trusts have authorized
the custodian to deposit certain portfolio securities in central depository
systems as permitted under Federal law. The Funds may invest in obligations
of the custodian and may purchase or sell securities from or to the
custodian.
INDEPENDENT AUDITORS
The independent auditors for the Trusts are Ernst & Young LLP, 233
South Wacker Drive, Chicago, Illinois 60606. The independent auditors audit
and report on the Funds' annual financial statements, review certain
regulatory reports and the Funds' Federal income tax returns, and perform
other professional accounting, auditing, tax and advisory services when
engaged to do so by the Trusts.
PORTFOLIO TRANSACTIONS
The Adviser places the orders for the purchase and sale of portfolio
securities for each Fund and the Portfolio and options and futures contracts
entered into by Intermediate Municipals, Managed Municipals, and High-Yield
Municipals. Portfolio securities are purchased both in underwritings and in
the over-the-counter market. The following table shows any commissions paid
by the Funds on futures transactions during the past three fiscal years.
The Funds did not pay commissions on any other transactions.
High-Yield Managed Intermediate
Municipals Municipals Municipals
---------- --------- -----------
Total brokerage commissions
paid during year ended
6/30/94 $110,292 $38,028 -0-
Number of futures contracts 7,250 2,500 -0-
Total brokerage commissions
paid during year ended
6/30/93 $48,564 $29,904 -0-
Total brokerage commissions
paid during year ended
6/30/92 $8,390 -0- -0-
Included in the price paid to an underwriter of a portfolio security is
the spread between the price paid by the underwriter to the issuer and the
price paid by the purchaser. Purchases and sales of portfolio securities in
the over-the-counter market usually are transacted with a broker or dealer
on a net basis, without any brokerage commission being paid by a Fund or
Portfolio, but do reflect the spread between the bid and asked prices. The
Adviser may also transact purchases of portfolio securities directly with
the issuers.
<PAGE> 30
The Adviser's overriding objective in effecting portfolio transactions
is to seek to obtain the best combination of price and execution. The best
net price, giving effect to transaction charges and other costs, is normally
an important factor in this decision, but a number of other judgmental
factors may also enter into the decision. These include: the Adviser's
knowledge of current transaction costs; the nature of the security
being traded; the size of the transaction; the desired timing of the trade;
the activity existing and expected in the market for the particular
security; confidentiality; the execution, clearance and settlement
capabilities of the broker or dealer selected and others which are
considered; the Adviser's knowledge of the financial stability of the broker
or dealer selected and such other brokers or dealers; and the Adviser's
knowledge of actual or apparent operational problems of any broker or
dealer. Recognizing the value of these factors, a Fund or the Portfolio may
pay a price in excess of that which another broker or dealer may have
charged for effecting the same transaction or receive a price lower than
that which another broker-dealer may have paid. Evaluations of the
reasonableness of the costs of portfolio transactions, based on the
foregoing factors, are made on an ongoing basis by the Adviser's staff while
effecting portfolio transactions and reports are made annually to the Board
of Trustees.
With respect to issues of securities involving brokerage commissions,
when more than one broker or dealer is believed to be capable of providing
the best combination of price and execution with respect to a particular
portfolio transaction for a Fund or the Portfolio, the Adviser often selects
a broker or dealer that has furnished it with research products or services
such as research reports, subscriptions to financial publications and
research compilations, compilations of securities prices, earnings,
dividends and similar data, and computer databases, quotation equipment and
services, research-oriented computer software and services, and services of
economic and other consultants. Selection of brokers or dealers is not made
pursuant to an agreement or understanding with any of the brokers or
dealers; however, the Adviser uses an internal allocation procedure to
identify those brokers or dealers who provide it with research products or
services and the amount of research products or services they provide, and
endeavors to direct sufficient commissions generated by its clients'
accounts in the aggregate, including the Funds and the Portfolio, to such
brokers or dealers to ensure the continued receipt of research products or
services the Adviser feels are useful. In certain instances, the Adviser
receives from brokers and dealers products or services which are used both
as investment research and for administrative, marketing, or other non-
research purposes. In such instances, the Adviser makes a good faith effort
to determine the relative proportions of such products or services which may
be considered as investment research. The portion of the costs of such
products or services attributable to research usage may be defrayed by the
Adviser (without prior agreement or understanding, as noted above) through
brokerage commissions generated by transactions of clients (including the
Funds and the Portfolio), while the portion of the costs attributable to
non-research usage of such products or services is paid by the Adviser in
cash. No person acting on behalf of a Fund or the Portfolio is authorized,
in recognition of the value of research products or services, to pay a price
in excess of that which another broker or dealer might have charged for
effecting the same transaction. Research products or services furnished by
brokers and dealers through whom a Fund or the Portfolio effects
transactions may be used in
<PAGE> 31
servicing any or all of the clients of the Adviser and not all such research
products or services are used in connection with the management of such Fund
or Portfolio.
The Board of Trustees of each Trust has reviewed the legal aspects and
the practicability of attempting to recapture underwriting discounts or
selling concessions included in prices paid by the Funds and the Portfolio
for purchases of Municipal Securities in underwritten offerings. Each Fund
and the Portfolio attempts to recapture selling concessions on purchases
during underwritten offerings; however, the Adviser will not be able to
negotiate discounts from the fixed offering price for those issues for which
there is a strong demand, and will not allow the failure to obtain a discount
to prejudice its ability to purchase an issue. Each Board periodically
reviews efforts to recapture concessions and whether it is in the best
interests of the Funds and the Portfolio to continue to attempt to recapture
underwriting discounts or selling concessions.
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund and the Portfolio intends to comply with the special
provisions of the Internal Revenue Code that relieve it of Federal income
tax to the extent of its net investment income and capital gains currently
distributed to shareholders. Throughout this section, the term "Fund" also
refers to the Portfolio.
Each Fund intends to distribute substantially all of its income, tax-
exempt and taxable, including any net realized capital gains, and thereby be
relieved of any Federal income tax liability to the extent of such
distributions. Each Fund intends to retain for its shareholders the tax-
exempt status with respect to tax-exempt income received by the Fund. The
distributions will be designated as "exempt-interest dividends," taxable
ordinary income, and capital gains. The Funds may also invest in Municipal
Securities the interest on which is subject to the Federal alternative
minimum tax. The source of exempt-interest dividends on a state-by-state
basis and the Federal income tax status of all distributions will be
reported to shareholders annually. Such report will allocate income
dividends between tax-exempt, taxable income, and alternative minimum
taxable income in approximately the same proportions as that Fund's total
income during the year. Accordingly, income derived from each of these
sources by a Fund may vary substantially in any particular distribution
period from the allocation reported to shareholders annually. The
proportion of such dividends that constitutes taxable income will depend on
the relative amounts of assets invested in taxable securities, the yield
relationships between taxable and tax-exempt securities, and the period of
time for which such securities are held. Each Fund may, under certain
circumstances, temporarily invest its assets so that less than 80% of gross
income during such temporary period will be exempt from Federal income
taxes. (See Investment Policies above and How the Funds Invest in the
Prospectus.)
Because capital gain distributions reduce net asset value, if a
shareholder purchases shares shortly before a record date he will, in
effect, receive a return of a portion of his investment in such
distribution. The distribution would nonetheless be taxable to him, even if
the net asset value of shares were reduced below his cost.
<PAGE> 32
However, for Federal income tax purposes the shareholder's original cost
would continue as his tax basis.
Because the taxable portion of each Fund's investment income consists
primarily of interest, none of its dividends, whether or not treated as
"exempt-interest dividends," will qualify under the Internal Revenue Code
for the dividends received deduction available to corporations.
Interest on indebtedness incurred or continued by shareholders to
purchase or carry shares of a Fund is not deductible for Federal income tax
purposes. Under rules applied by the Internal Revenue Service to determine
whether borrowed funds are used for the purpose of purchasing or carrying
particular assets, the purchase of shares may, depending upon the
circumstances, be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the purchase of
shares.
If you redeem at a loss shares of a Fund held for six months or less,
that loss will not be recognized for Federal income tax purposes to the
extent of exempt-interest dividends you have received with respect to those
shares. If any such loss exceeds the amount of the exempt-interest
dividends you received, that excess loss will be treated as a long-term
capital loss to the extent you receive any long-term capital gain
distribution with respect to those shares.
Persons who are "substantial users" (or persons related thereto) of
facilities financed by industrial development bonds should consult their own
tax advisors before purchasing shares. Such persons may find investment in
the Funds unsuitable for tax reasons. Corporate investors may also wish to
consult their own tax advisers before purchasing shares. In addition,
certain property and casualty insurance companies, financial institutions,
and United States branches of foreign corporations may be adversely affected
by the tax treatment of the interest on Municipal Securities.
INVESTMENT PERFORMANCE
MUNICIPAL MONEY FUND
Municipal Money Fund may quote a "Current Yield" or "Effective Yield"
or both from time to time. The Current Yield is an annualized yield based
on the actual total return for a seven-day period. The Effective Yield is
an annualized yield based on a daily compounding of the Current Yield.
These yields are each computed by first determining the "Net Change in
Account Value" for a hypothetical account having a share balance of one
share at the beginning of a seven-day period ("Beginning Account Value"),
excluding capital changes. The Net Change in Account Value will always
equal the total dividends declared with respect to the account, assuming a
constant net asset value of $1.00. A "Tax-Equivalent Yield" is computed by
dividing the portion of the "Yield" that is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield
that is not tax-exempt.
The yields are then computed as follows:
<PAGE> 33
Net Change in Account Value 365
--------------------------- ----
Current Yield = Beginning Account Value x 7
[1 + Net Change in Account Value]365/7
--------------------------------------
Effective Yield = Beginning Account Value - 1
For example, the yields of Municipal Money Fund for the seven-day
period ended June 30, 1994 were:
0.000392458 365
----------- ---
Current Yield = $1.00 x 7 = 2.05%
[1+$0.000392458]365/7
---------------------
Effective Yield = $1.00 - 1 = 2.07%
Tax-Equivalent Current Yield = 3.39% (assuming 39.6% tax rate)
Tax-Equivalent Effective Yield = 3.42% (assuming 39.6% tax rate)
The average dollar-weighted portfolio maturity for the seven days ended
June 30, 1994 was 45 days.
In addition to fluctuations reflecting changes in net income of the
Fund, resulting from changes in its proportionate share of the Portfolio's
investment income and expenses, the Fund's yield also would be affected if
the Fund or the Portfolio were to restrict or supplement their respective
dividends in order to maintain a net asset value at $1.00 per share. (See
Net Asset Value in the Prospectus.) Asset changes resulting from net
purchases or net redemptions of Fund or Portfolio shares may affect yield.
Accordingly, the Fund's yield may vary from day to day and the yield stated
for a particular past period is not a representation as to its future yield.
The Fund's yield is not assured and its principal is not insured; however,
the Fund will attempt to maintain its net asset value per share at $1.00.
Comparison of the Fund's yield with those of alternative investments
(such as savings accounts, various types of bank deposits, and other money
market funds) should be made with consideration of differences between the
Fund and the alternative investments, differences in the periods and methods
used in the calculation of the yields being compared, and the impact of
income taxes on alternative investments.
INTERMEDIATE MUNICIPALS, MANAGED MUNICIPALS, AND HIGH-YIELD MUNICIPALS
Intermediate Municipals, Managed Municipals, and High-Yield Municipals
may quote yield figures from time to time. The "Yield" of a Fund is
computed by dividing the net investment income per share earned during a 30-
day period (using the average number of shares entitled to receive
dividends) by the net asset value per share on the last day of the period.
The Yield formula provides for semiannual compounding which assumes that net
investment income is earned and reinvested at a constant rate and annualized
at the end of a six-month period. A "Tax-Equivalent Yield" is computed by
dividing the portion of the Yield that is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the Yield
that is not tax-exempt.
<PAGE> 34
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1)6 - 1].
Where: a = dividends and interest earned during the period.
(For this purpose, the Fund will recalculate the
yield to maturity based on market value of each
portfolio security on each business day on which net
asset value is calculated.)
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.
d = the net asset value of the Fund.
For example, the Yields of the Funds for the 30-day period ended June
30, 1994 were:
Intermediate Municipals
Yield = 4.60%
Tax-Equivalent Yield = 7.61%
(assuming 39.6% tax rate)
Managed Municipals
Yield = 5.30%
Tax-Equivalent Yield = 8.78%
(assuming 39.6% tax rate)
High-Yield Municipals
Yield = 5.42%
Tax-Equivalent Yield = 8.97%
(assuming 39.6% tax rate)
ALL FUNDS
Each Fund may quote total return figures from time to time. A "Total
Return" on a per share basis is the amount of dividends distributed per
share plus or minus the change in the net asset value per share for a
period. A "Total Return Percentage" may be calculated by dividing the value
of a share at the end of a period (including reinvestment of distributions)
by the value of the share at the beginning of the period and subtracting
one. For a given period, an "Average Annual Total Return" may be computed
by finding the average annual compounded rate that would equate a
hypothetical initial amount invested of $1,000 to the ending redeemable
value. A Fund may also quote tax-equivalent total return figures or other
tax-equivalent measures of performance.
Average Annual Total Return is computed as follows: ERV = P(1+T)n
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).
For example, for a $1,000 investment in a Fund, the "Total Return," the
"Total Return Percentage," and the "Average Annual Total Return" at June 30,
1994 were:
<PAGE> 35
TOTAL TOTAL RETURN AVERAGE ANNUAL
FUND RETURN PERCENTAGE TOTAL RETURN
-------------------- ------ ------------ --------------
Municipal Money Fund
1 year $1,019 1.90% 1.90%
5 years 1,186 18.57 3.47
10 years 1,499 49.91 4.13
Intermediate Municipals
1 year 1,012 1.16 1.16
5 years 1,431 43.07 7.43
<PAGE> 35
*Life of Fund 1,854 85.40 7.33
Managed Municipals
1 year 997 (0.29) (0.29)
5 years 1,430 43.00 7.42
10 years 2,849 184.85 11.04
High-Yield Municipals
1 year 1,010 0.95 0.95
5 years 1,390 38.96 6.80
10 years 2,705 170.54 10.46
_____________________
*Life of Fund is from commencement of operations on 10/9/85.
Investment performance figures assume reinvestment of all dividends and
distributions, and do not take into account any Federal, state, or local
income taxes which shareholders must pay on a current basis. They are not
necessarily indicative of future results. The performance of a Fund is a
result of conditions in the securities markets, portfolio management, and
operating expenses. Although investment performance information is useful
in reviewing a Fund's performance and in providing some basis for comparison
with other investment alternatives, it should not be used for comparison
with other investments using different reinvestment assumptions or time
periods.
In advertising and sales literature, a Fund may compare its yield and
performance with that of other mutual funds, indexes or averages of other
mutual funds, indexes of related financial assets or data, and other
competing investment and deposit products available from or through other
financial institutions. The composition of these indexes or averages
differs from that of the Funds. Comparison of a Fund to an alternative
investment should be made with consideration of differences in features and
expected performance.
All of the indexes and averages noted below will be obtained from the
indicated sources or reporting services, which the Funds believe to be
generally accurate. A Fund may also note its mention in newspapers,
magazines, or other media from time to time. However, the Funds assume no
responsibility for the accuracy of such data. Newspapers and magazines that
might mention the Funds include, but are not limited to, the following:
Architectural Digest
Arizona Republic
Atlanta Constitution
Barron's
<PAGE> 36
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
Crain's Chicago Business
Consumer Reports
Consumer Digest
Financial World
Forbes
Fortune
Fund Action
Gourmet
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Los Angeles Times
Money
Mutual Fund Letter
Mutual Fund News Service
Mutual Fund Values (Morningstar)
Newsweek
The New York Times
No-Load Fund Investor
Pension World
Pensions and Investment
Personal Investor
Physicians Financial News
Jane Bryant Quinn (syndicated column)
The San Francisco Chronicle
Smart Money
Smithsonian
Stanger's Investment Adviser
Time
Travel & Leisure
United Mutual Fund Selector
USA Today
U.S. News and World Report
The Wall Street Journal
Working Women
Worth
Your Money
All of the Funds may compare their performance to the Consumer Price
Index (All Urban), a widely-recognized measure of inflation.
MUNICIPAL MONEY FUND
Municipal Money Fund may compare its yield to the average yield of the
following: Donoghue's Money Fund Averages [trademark]--Stockbroker and
General Purpose and All Tax-Free [trademark] categories; ICD Money Market
Tax Free Funds category; the Lipper General S-T Tax-Exempt Funds category;
and the Lipper All Short-Term Tax-Free Categories [trademark].
Municipal Money Fund may also compare its tax-equivalent yield to the
average rate for the taxable fund category for the aforementioned services.
Should these services reclassify the Fund into a different category or
develop (and place the Fund into) a new category, the Fund may compare its
performance, rank, or yield with those of other funds in the newly-assigned
category as published by the service.
Investors may desire to compare Municipal Money Fund's performance and
features to that of various bank products. The Fund may compare its tax-
equivalent yield to the average rates of bank and thrift institution money
market deposit accounts, Super N.O.W. accounts, and certificates of deposit.
The rates published weekly by the BANK RATE MONITOR [copyright], a North
Palm Beach (Florida) financial reporting service, in its BANK RATE MONITOR
[copyright] National Index are averages of the personal account rates
offered on the Wednesday prior to the date of publication by one hundred
leading banks and thrift institutions in the top ten Consolidated Standard
Metropolitan Statistical Areas. Account minimums range upward from $2,500
in each institution and compounding methods vary. Super N.O.W. accounts
generally
<PAGE> 37
offer unlimited checking, while money market deposit accounts
generally restrict the number of checks that may be written. If more than
one rate is offered, the lowest rate is used. Rates are subject to change
at any time specified by the institution. Bank account deposits may be
insured. Shareholder accounts in the Fund are not insured. Bank passbook
savings accounts compete with money market mutual fund products with respect
to certain liquidity features but may not offer all of the features
available from a money market mutual fund, such as check writing. Bank
passbook savings accounts normally offer a fixed rate of interest while the
yield of the Fund fluctuates. Bank checking accounts normally do not pay
interest but compete with money market mutual funds with respect to certain
liquidity features (e.g., the ability to write checks against the account).
Bank certificates of deposit may offer fixed or variable rates for a set
term. (Normally, a variety of terms are available.) Withdrawal of these
deposits prior to maturity will normally be subject to a penalty. In
contrast, shares of the Fund are redeemable at the next determined net asset
value (normally, $1.00 per share) after a request is received, without
charge.
INTERMEDIATE MUNICIPALS, MANAGED MUNICIPALS, AND HIGH-YIELD MUNICIPALS
Intermediate Municipals, Managed Municipals, and High-Yield Municipals
may compare performance to the following as indicated below:
<TABLE>
<CAPTION>
BENCHMARK FUND(S)
--------- -------
<S> <C>
Lipper Intermediate (5-10 year) Municipal
Bond Funds Average Intermediate Municipals
Lipper General Municipal Bond Funds Average Managed Municipals
Lipper High-Yield Municipal Bond Funds Average High-Yield Municipals
Lipper Municipal Bond Fund Average Intermediate Municipals, Managed Municipals,
High-Yield Municipals
ICD High-Quality Municipal Bond Funds Average Intermediate Municipals, Managed Municipals
ICD High-Yield Municipals Bond Funds Average High-Yield Municipals
ICD Tax-Free Fund Average High-Yield Municipals, Intermediate
Municipals, Managed Municipals
Morningstar Municipal Bond (General) Funds
Average Managed Municipals, Intermediate Municipals
Morningstar Municipal Bond (High-Yield) Funds
Average High-Yield Municipals
Morningstar Long-Term Tax-Exempt Fund Average High-Yield Municipals, Intermediate
Municipals, Managed Municipals
</TABLE>
The Lipper, ICD, and Morningstar averages are unweighted averages of
total return performance of mutual funds as classified, calculated, and
published by these independent services that monitor the performance of
mutual funds. The Funds may also use comparative performance as computed in
a ranking by those services or category averages and rankings provided by
another independent service. Should these services reclassify a Fund to a
different category or develop (and place a Fund into) a
<PAGE> 38
new category, that Fund may compare its performance or rank with those of
other funds in the newly-assigned category (or the average of such category)
as published by the service.
In advertising and sales literature, a Fund may also cite its rating,
recognition, or other mention by Morningstar or any other entity.
Morningstar's rating system is based on risk-adjusted total return
performance and is expressed in a star-rating format. The risk-adjusted
number is computed by subtracting a Fund's risk score (which is a function
of the Fund's monthly returns less the 3-month T-bill return) from the
Fund's load-adjusted total return score. This numerical score is then
translated into rating categories, with the top 10% labeled five star, the
next 22.5% labeled four star, the next 35% labeled three star, the next 22.5%
labeled two star, and the bottom 10% one star. A high rating reflects either
above-average returns or below-average risk, or both.
Investors may desire to compare a Fund's performance to that of various
bank products. A Fund may compare its tax-equivalent yield to the average
rates of bank and thrift institution certificates of deposit. The rates
published weekly by the BANK RATE MONITOR [copyright], a North Palm Beach
(Florida) financial reporting service, in its BANK RATE MONITOR [copyright]
National Index are averages of the personal account rates offered on the
Wednesday prior to the date of publication by one hundred leading banks and
thrift institutions in the top ten Consolidated Standard Metropolitan
Statistical Areas. Bank account minimums range upward from $2,500 in each
institution and compounding methods vary. Rates are subject to change at
any time specified by the institution. A Fund's net asset value and
investment return will vary. Bank account deposits may be insured; Fund
accounts are not insured. Bank certificates of deposit may offer fixed or
variable rates for a set term. Withdrawal of these deposits prior to
maturity will normally be subject to a penalty. In contrast, shares of the
Fund are redeemable at the next determined net asset value after a request
is received, without charge.
Intermediate Municipals, Managed Municipals, and High-Yield Municipals
may also compare their respective tax-equivalent yields to the average rate
for the taxable fund category of the aforementioned services.
Of course, past performance is not indicative of future results.
________________
To illustrate the historical returns on various types of financial
assets, the Funds may use historical data provided by Ibbotson Associates,
Inc. ("Ibbotson"), a Chicago-based investment firm. Ibbotson constructs (or
obtains) very long-term (since 1926) total return data (including, for
example, total return indexes, total return percentages, average annual
total returns and standard deviations of such returns) for the following
asset types:
Common stocks
Small company stock
Long-term corporate bonds
Long-term government bonds
<PAGE> 39
Intermediate-term government bonds
U.S. Treasury bills
Consumer Price Index
A Fund may also use hypothetical returns to be used as an example in a
mix of asset allocation strategies. One such example is reflected in the
chart below, which shows the effect of tax-exempt investing on a
hypothetical investment. Tax-exempt income, however, may be subject to
state and local taxes and the Federal alternative minimum tax. Marginal tax
brackets are based on 1993 Federal tax rates and are subject to change.
"Joint Return" is based on two exemptions and "Single return" is based on one
exemption. The results would differ for different numbers of exemptions.
TAX-EQUIVALENT YIELDS
A taxable
investment must yield the following
Taxable Income (thousands) Marginal to equal a tax-exempt yield of:
----------------------------- Tax ----------------------------------
Joint Return Single Return Bracket 4% 5% 6% 7% 8%
-------------- ------------- -------- ---- ---- ---- ----- -----
$0.0 - 36.9 $0.0 - 22.1 15% 4.71 5.88 7.06 8.24 9.41
$36.9 - 89.2 $22.1 - 53.5 28% 5.56 6.94 8.33 9.72 11.11
$89.2 - 140.0 $53.5 - 115.0 31% 5.80 7.25 8.70 10.14 11.59
$140.0 - 250.0 $115.0 - 250.0 36% 6.25 7.81 9.38 10.94 12.50
$250.0+ $250.0+ 39.6% 6.62 8.28 9.93 11.59 13.25
Dollar Cost Averaging. Dollar cost averaging is an investment strategy
that requires investing a fixed amount of money in Fund shares at set
intervals. This allows you to purchase more shares when prices are low and
fewer shares when prices are high. Over time, this tends to lower your
average cost per share.
Like any investment strategy, dollar cost averaging can't guarantee a
profit or protect against losses in a steadily declining market. Dollar
cost averaging involves uninterrupted investing regardless of share price
and therefore may not be appropriate for every investor.
From time to time, a Fund may offer in its advertising and sales
literature to send an investment strategy guide, a tax guide, or other
supplemental information to investors and shareholders. It may also mention
the SteinRoe Counselor [service mark] and the SteinRoe Counselor Preferred
[service mark] programs and asset allocation and other investment
strategies.
ADDITIONAL INFORMATION ON NET ASSET VALUE--MUNICIPAL MONEY FUND
AND THE PORTFOLIO
Please refer to Net Asset Value in the Prospectus, which is
incorporated herein by reference. The Portfolio values its portfolio by the
"amortized cost method" by which it attempts to maintain its net asset value
at $1.00 per share. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium, regardless of the impact of fluctuating interest rates on the
market value of the instrument. Although this method provides certainty
<PAGE> 40
in valuation, it may result in periods during which value as determined by
amortized cost is higher or lower than the price the Portfolio would receive
if it sold the instrument. Other assets are valued at a fair value
determined in good faith by the Board of Trustees.
In connection with the Portfolio's use of amortized cost and the
maintenance of its per share net asset value of $1.00, Base Trust has
agreed, with respect to the Portfolio: (i) to seek to maintain a dollar-
weighted average portfolio maturity appropriate to its objective of
maintaining relative stability of principal and not in excess of 90 days;
(ii) not to purchase a portfolio instrument with a remaining maturity of
greater than thirteen months (for this purpose the Portfolio considers that
an instrument has a maturity of thirteen months or less if it is a "short-
term" obligation as defined in the Glossary); and (iii) to limit its purchase
of portfolio instruments to those instruments that are denominated in U.S.
dollars which the Board of Trustees determines present minimal credit risks
and that are of eligible quality as determined by any major rating service as
defined under SEC Rule 2a-7 or, in the case of any instrument that is not
rated, of comparable quality as determined by the Board.
The Portfolio has also agreed to establish procedures reasonably
designed to stabilize its price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures include review of the
Portfolio's portfolio holdings by the Board of Trustees, at such intervals
as it deems appropriate, to determine whether the Portfolio's net asset
value calculated by using available market quotations or market equivalents
deviates from $1.00 per share based on amortized cost. Calculations are
made to compare the value of its investments valued at amortized cost with
market value. Market values are obtained by using actual quotations
provided by market makers, estimates of market value, values from yield data
obtained from reputable sources for the instruments, values obtained from
the Adviser's matrix, or values obtained from an independent pricing
service. Any such service might value the Portfolio's investments based on
methods which include consideration of: yields or prices of Municipal
Securities of comparable quality, coupon, maturity and type; indications as
to values from dealers; and general market conditions. The service may also
employ electronic data processing techniques, a matrix system, or both to
determine valuations.
In connection with the Portfolio's use of the amortized cost method of
portfolio valuation to maintain its net asset value at $1.00 per share, the
Portfolio might incur or anticipate an unusual expense, loss, depreciation,
gain or appreciation that would affect its net asset value per share or
income for a particular period. The extent of any deviation between the
Portfolio's net asset value based upon available market quotations or market
equivalents and $1.00 per share based on amortized cost will be examined by
the Board of Trustees of Base Trust as it deems appropriate. If such
deviation exceeds 1/2 of 1%, the Board of Trustees will promptly consider
what action, if any, should be initiated. In the event the Board of
Trustees determines that a deviation exists that may result in material
dilution or other unfair results to investors or existing shareholders, it
will take such action as it considers appropriate to eliminate or reduce to
the extent reasonably practicable such dilution or unfair results. Actions
which the Board might take include: selling portfolio instruments prior to
maturity to realize
<PAGE> 41
capital gains or losses or to shorten average portfolio maturity; increasing,
reducing, or suspending dividends or distributions from capital or capital
gains; or redeeming shares in kind. The Board might also establish a net
asset value per share by using market values, as a result of which the net
asset value might deviate from $1.00 per share.
GLOSSARY
IN-THE-MONEY. A call option on a futures contract is "in-the-money" if the
value of the futures contract that is the subject of the option exceeds the
exercise price. A put option on a futures contract is "in-the-money" if the
exercise price exceeds the value of the futures contract that is the subject
of the option.
ISSUER. For purposes of diversification under the Investment Company Act of
1940, identification of the issuer (or issuers) of a Municipal Security
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political
subdivision are separate from those of the government creating the
subdivision and the obligation is backed only by the assets and revenues of
the subdivision, such subdivision would be regarded as the sole issuer.
Similarly, if the obligation is backed only by the assets and revenues of
the non-governmental user, the non-governmental user would be deemed to be
the sole issuer. In addition, if the bond is backed by the full faith and
credit of the U.S. Government, agencies or instrumentalities of the U.S.
Government or U.S. Government Securities, the U.S. Government or the
appropriate agency or instrumentality would be deemed to be the sole issuer,
and would not be subject to the 5% limitation applicable to investments in a
single issuer as described under Restrictions on the Funds' Investments in
the Prospectus and restriction number (i) under Investment Restrictions.
If, in any case, the creating municipal government or another entity
guarantees an obligation or issues a letter of credit to secure the
obligation, the guarantee (or letter of credit) would be considered a
separate security issued by such government or entity and would be
separately valued and included in the issuer limitation. In the case of
Municipal Money Fund, the Portfolio and Intermediate Municipals, guarantees
and letters of credit described in this paragraph from banks whose credit is
acceptable to these Funds are not restricted in amount by the restriction
against investing more than 25% of their total assets in securities of non-
governmental issuers whose principal business activities are in the same
industry.
MAJORITY OF THE OUTSTANDING VOTING SECURITIES. As used in the Prospectus
and this Statement of Additional Information, this term means the lesser of
(i) 67% or more of the shares at a meeting if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy or
(ii) more than 50% of the outstanding shares of the Fund.
MUNICIPAL SECURITIES. Municipal Securities are debt obligations issued by
or on behalf of the governments of states, territories or possessions of the
United States, the District of Columbia and their political subdivisions,
agencies and instrumentalities, the interest on which is generally exempt
from the regular Federal income tax.
<PAGE> 42
The two principal classifications of Municipal Securities are "general
obligation" and "revenue" bonds. "General obligation" bonds are secured by
the issuer's pledge of its faith, credit, and taxing power for the payment
of principal and interest. "Revenue" bonds are usually payable only from
the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a special excise tax or other specific
revenue source. Industrial development bonds are usually revenue bonds, the
credit quality of which is normally directly related to the credit standing
of the industrial user involved. Municipal Securities may bear either fixed
or variable rates of interest. Variable rate securities bear rates of
interest that are adjusted periodically according to formulae intended to
minimize fluctuation in values of the instruments.
Within the principal classifications of Municipal Securities, there are
various types of instruments, including municipal bonds, municipal notes,
municipal leases, custodial receipts, and participation certificates.
Municipal notes include tax, revenue, and bond anticipation notes of short
maturity, generally less than three years, which are issued to obtain
temporary funds for various public purposes. Municipal lease securities,
and participation certificates therein, evidence certain types of interests
in lease or installment purchases contract obligations of a municipal
authority or other entity. Custodial receipts represent ownership in future
interest or principal payments (or both) on certain Municipal Securities and
are underwritten by securities dealers or banks. Some Municipal Securities
may not be backed by the faith, credit, and taxing power of the issuer and
may involve "non-appropriation" clauses which provide that the municipal
authority is not obligated to make lease or other contractual payments,
unless specific annual appropriations are made by the municipality. Each
Fund may invest more than 5% of its net assets in municipal bonds and notes,
but does not expect to invest more than 5% of its net assets in the other
Municipal Securities described in this paragraph.
Some Municipal Securities are backed by (i) the full faith and credit
of the U.S. Government, (ii) agencies or instrumentalities of the U.S.
Government, or (iii) U.S. Government Securities.
REPURCHASE AGREEMENT. A repurchase agreement involves the sale of
securities to the Fund, with the concurrent agreement of the seller to
repurchase the securities at the same price plus an amount equal to an
agreed-upon interest rate, within a specified time, usually less than one
week, but, on occasion, at a later time. In the event of a bankruptcy or
other default of a seller of a repurchase agreement, the Fund could
experience both delays in liquidating the underlying securities and losses,
including: (a) possible decline in the value of the collateral during the
period while the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during this period;
and (c) expenses of enforcing its rights.
REVERSE REPURCHASE AGREEMENT. A reverse repurchase agreement is a
repurchase agreement in which the Fund is the seller of, rather than the
investor in, securities and agrees to repurchase them at an agreed-upon time
and price.
<PAGE> 43
SHORT-TERM. This term, as used with respect to Municipal Money Fund and the
Portfolio, refers to an obligation of one of the following types, measured
from the date of an investment by the Fund in the obligation (regardless of
the duration of the obligation from the date of original issuance):
1. An obligation of the issuer to pay the entire principal and accrued
interest in no more than thirteen months;
2. An obligation (regardless of the duration before its maturity) issued or
guaranteed by the U.S. Government or by its agencies or
instrumentalities, bearing a variable rate of interest providing for
automatic establishment, no less frequently than annually, of a new rate or
successive new rates of interest by a formula, that can reasonably be
expected to have a market value approximating its principal amount (a)
whenever a new interest rate is established, in the case of an obligation
having a variable rate of interest, or (b) at any time, in the case of an
obligation having a "floating rate of interest" that changes concurrently
with any change in an identified market interest rate to which it is pegged;
3. Any other obligation (regardless of the duration before its maturity)
that: (a) has a demand feature entitling the holder to receive from an
issuer the entire principal [or, under the circumstances described under
Investment Policies--Municipal Money Fund above, the issuer of a
guarantee or a letter of credit with respect to a participation interest
in the obligation (acquired from such issuer)], (i) at any time upon no
more than thirty days' notice or (ii) at specified intervals not
exceeding thirteen months and upon no more than thirty days' notice,
(b)(i) has a variable rate of interest that changes on set dates or (ii)
has a floating rate of interest (as defined in 2 above), and (c) can
reasonably be expected to have a market value approximating its principal
amount (i) whenever a new rate of interest is established, in the case of
an obligation having a variable rate of interest, or (ii) at any time, in
the case of an obligation having a floating rate of interest; provided
that, with respect to each such obligation that is not rated eligible
quality by Moody's or S&P, the Board of Trustees has determined that the
obligation is of eligible quality; or
4. A repurchase agreement that is to be fully performed (or that the Fund
may require be performed) in not more than thirteen months (regardless of
the maturity of the obligation to which the repurchase agreement
relates).
VARIABLE RATE DEMAND SECURITY. This type of security is a Variable Rate
Security (as defined in the Prospectus under Municipal Securities) which has
a demand feature entitling the purchaser to resell the security to the
issuer of the demand feature at an amount approximately equal to amortized
cost or the principal amount thereof, which may be more or less than the
price the Fund paid for it. The interest rate on a Variable Rate Demand
Security also varies either according to some objective standard, such as an
index of short-term tax-exempt rates, or according to rates set by or on
behalf of the issuer.
<PAGE> 44
APPENDIX--RATINGS OF MUNICIPAL SECURITIES
RATINGS IN GENERAL
A rating of a rating service represents the service's opinion as to the
credit quality of the security being rated. However, the ratings are
general and are not absolute standards of quality or guarantees as to the
creditworthiness of an issuer. Consequently, the Adviser believes that the
quality of Municipal Securities should be continuously reviewed and that
individual analysts give different weightings to the various factors
involved in credit analysis. A rating is not a recommendation to purchase,
sell or hold a security, because it does not take into account market value
or suitability for a particular investor. When a security has received a
rating from more than one service, each rating should be evaluated
independently. Ratings are based on current information furnished by the
issuer or obtained by the rating services from other sources that they
consider reliable. Ratings may be changed, suspended or withdrawn as a
result of changes in or unavailability of such information, or for other
reasons. The Adviser, through independent analysis, attempts to discern
variations in credit ratings of the published services, and to anticipate
changes in credit ratings. The following is a description of the
characteristics of certain ratings used by Moody's Investors Service, Inc.
("Moody's") and Standard & Poor's Corporation ("S&P").
RATINGS BY MOODY'S
MUNICIPAL BONDS:
Aaa. Bonds 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 by an
exceptionally stable margin and principal is secure. Although 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 bonds.
Aa. Bonds rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa bonds or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa bonds.
A. Bonds rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
Baa. Bonds rated Baa are considered 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.
<PAGE> 45
Ba. Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may
be small.
Caa. Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca. Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
CONDITIONAL RATINGS. Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operating experience,
(c) rentals which begin when facilities are completed, or (d) payments to
which some other limiting condition attaches. Parenthetical rating denotes
probable credit stature upon completion of construction or elimination of
basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa 1, A 1, Baa 1, Ba 1, and B 1.
MUNICIPAL NOTES:
MIG 1. This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
<PAGE> 46
DEMAND FEATURE OF VARIABLE RATE DEMAND SECURITIES:
Moody's may assign a separate rating to the demand feature of a
variable rate demand security. Such a rating may include:
VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
VMIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
COMMERCIAL PAPER:
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated
issuers:
Prime-1 Highest Quality
Prime-2 Higher Quality
Prime-3 High Quality
If an issuer represents to Moody's that its Commercial Paper
obligations are supported by the credit of another entity or entities,
Moody's, in assigning ratings to such issuers, evaluates the financial
strength of the indicated affiliated corporations, commercial banks,
insurance companies, foreign governments, or other entities, but only as one
factor in the total rating assessment.
CORPORATE BONDS:
The description of the applicable rating symbols (Aaa, Aa, A) and their
meanings is identical to that of its Municipal Bond ratings as set forth
above, except for the numerical modifiers. Moody's applies numerical
modifiers 1, 2, and 3 in the Aa and A classifications of its corporate bond
rating system. The modifier 1 indicates that the security ranks in the
higher end of its generic rating category; the modifier 2 indicates a mid-
range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
RATINGS BY S&P:
MUNICIPAL BONDS:
AAA. Bonds rated AAA have the highest rating. Capacity to pay
interest and repay principal is extremely strong.
<PAGE> 47
AA. Bonds rated AA have a very strong capacity to pay interest and
repay principal and differ from the higher rated issues only in small
degree.
A. Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher-
rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity to pay principal and interest
for bonds in this category than for bonds in higher-rated categories.
BB, B, CCC, CC, and C. Debt rated BB, B, CCC, CC, or C is regarded, on
balance, as predominantly speculative with respect to capacity to pay
interest and repay principal in accordance with the terms of the obligation.
BB indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is
being paid.
D. Debt rated D is in default, and payment of interest and/or
repayment of principal is in arrears. The D rating also is issued upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
NOTE: 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
ratings categories.
PROVISIONAL RATINGS. The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the
successful and timely completion of the project. This rating, however,
although addressing credit quality subsequent to completion of the project,
makes no comment on the likelihood of, or the risk of default upon failure
of, such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
MUNICIPAL NOTES:
SP-1. Notes rated SP-1 have very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming
safety characteristics are designated as SP-1+.
SP-2. Notes rated SP-2 have satisfactory capacity to pay principal and
interest.
Notes due in three years or less normally receive a note rating. Notes
maturing beyond three years normally receive a bond rating, although the
following criteria are used in making that assessment:
<PAGE> 48
- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue will be rated as a note).
- Source of payment (the more dependent the issue is on the market for
its refinancing, the more likely it will be rated as a note).
DEMAND FEATURE OF VARIABLE RATE DEMAND SECURITIES:
S&P assigns dual ratings to all long-term debt issues that have as part
of their provisions a demand feature. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second
rating addresses only the demand feature. The long-term debt rating symbols
are used for bonds to denote the long-term maturity and the commercial paper
rating symbols are usually used to denote the put (demand) option (for
example, AAA/A-1+). Normally, demand notes receive note rating symbols
combined with commercial paper symbols (for example, SP-1+/A-1+).
COMMERCIAL PAPER:
A. Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designations 1, 2, and 3 to indicate the relative degree to
safety.
A-1. This designation indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are designed A-1+.
CORPORATE BONDS:
The description of the applicable rating symbols and their meanings is
substantially the same as its Municipal Bond ratings set forth above.
<PAGE>
STEINROE MUNICIPAL TRUST
SteinRoe High-Yield Municipals
Arizona and Texas Supplement to Prospectus Dated August 7, 1995
______________________
High-Yield Municipals invests principally in long-term medium- or
lower-quality securities. Lower-quality securities are generally
considered to be obligations that are rated below Baa by Moody's or below
BBB by S&P and unrated obligations. Such high-yield, high-risk
obligations are commonly referred to as "junk bonds." If the Fund were
to invest a significant portion of its assets in such obligations, the
Fund could be considered speculative and, therefore, might not be
suitable for all investors. As of the date of this supplement, however,
less than 35% of the Fund's total assets are invested in such
obligations, but no assurance can be given that the Fund will continue to
do so.
The Date of this Supplement is August 7, 1994
AZ/TX
<PAGE>
STEINROE MUNICIPAL TRUST
SteinRoe High-Yield Municipals
Washington State Supplement to Prospectus Dated August 7, 1995
______________________
High-Yield Municipals may invest more than 35% of its assets in
obligations rated below Baa by Moody's or below BBB by S&P and in unrated
obligations. Such lower-rated bonds are commonly known as "junk bonds."
Investments of this type are subject to a greater risk of loss of
principal and interest. As of the date of this supplement, less than 35%
of the Fund's total assets are invested in such obligations, but no
assurance can be given that the Fund will continue to do so. Purchasers
should carefully assess the risks associated with an investment in this
Fund.
The Date of this Supplement is August 7, 1994
WA28
