Rule 497(e)
File No. 2-99356
<PAGE>
MUNICIPAL MONEY FUND seeks maximum current income exempt from
federal income tax. THE FUND SEEKS 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 POLICIES AS THE FUND. MUNICIPAL MONEY PORTFOLIO
ATTEMPTS 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 FUND 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 FUND 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 FUND 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 STEIN ROE MUNICIPAL TRUST and Municipal Money 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.
HIGH-YIELD MUNICIPALS MAY INVEST UP TO 100% OF ITS TOTAL NET
ASSETS IN LOWER-RATED MUNICIPAL BONDS, COMMONLY KNOWN AS "JUNK
BONDS." THESE BONDS ARE SUBJECT TO A GREATER RISK WITH REGARD TO
PAYMENT OF INTEREST AND RETURN OF PRINCIPAL THAN HIGHER-RATED
BONDS. INVESTORS SHOULD CAREFULLY CONSIDER THE RISKS ASSOCIATED
WITH JUNK BONDS BEFORE INVESTING. (SEE RISKS AND INVESTMENT
CONSIDERATIONS.)
A Statement of Additional Information dated November 1, 1996,
containing more detailed information, has been filed with the
Securities and Exchange Commission and (together with any
supplements thereto) is incorporated herein by reference. This
prospectus is available electronically by using Stein Roe's Internet
address: http://www.steinroe.com. You can get a free paper copy
of the prospectus, the Statement of Additional Information, and
the most recent financial statements by calling 800-338-2550 or by
writing to Stein Roe Funds, Suite 3200, One South Wacker Drive,
Chicago, Illinois 60606.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION 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 November 1, 1996.
<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.22
Risks and Investment Considerations ...23
How to Purchase Shares ................26
By Check ...........................26
By Wire ............................27
By Electronic Transfer .............27
By Exchange ........................27
Conditions of Purchase .............28
Purchases Through Third Parties.....28
Purchase Price and Effective Date...28
How to Redeem Shares...................29
By Written Request .................29
By Exchange ........................29
Special Redemption Privileges ......30
General Redemption Policies ........32
Shareholder Services ..................34
Net Asset Value .......................35
Distributions and Income Taxes.........36
Investment Return .....................39
Management of the Funds ...............42
Organization and Description of Shares.47
Certificate of Authorization ..........52
SUMMARY
Stein Roe Municipal Money Market Fund ("Municipal Money Fund"),
Stein Roe Intermediate Municipals Fund ("Intermediate
Municipals"), Stein Roe Managed Municipals Fund ("Managed
Municipals"), and Stein Roe High-Yield Municipals Fund ("High-
Yield Municipals") are series of Stein Roe 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.) This prospectus is not a
solicitation in any jurisdiction in which shares of the Funds are not
qualified for sale.
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 invests all of its net investable assets in
SR&F Municipal Money Market Portfolio ("Municipal Money
Portfolio"). Municipal Money Portfolio invests in a diversified
portfolio of securities in accordance with an investment objective
identical and investment policies substantially similar to those of
Municipal Money Fund.
Municipal Money Portfolio seeks current income exempt from federal
income tax by investing principally in "short-term" Municipal
Securities. In pursuing that objective, Municipal Money Portfolio
attempts to maintain relative stability of principal and
liquidity. Although there can be no assurance that either
Municipal Money Portfolio or Municipal Money 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. Municipal Money Portfolio invests
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. Municipal Money 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 Municipal
Money 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 Municipal Money 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 any Fund or Municipal Money
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 Stein Roe 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 in addtional Fund shares
unless you elect to have them paid in cash, deposited by
electronic transfer into your bank account, or invested in shares of
another Stein Roe Fund. (See Distributions and Income
Taxes and Shareholder Services.)
MANAGEMENT AND FEES. Stein Roe & Farnham Incorporated (the
"Adviser") provides administrative, management and investment
advisory services to Intermediate Municipals, Managed Municipals,
High-Yield Municipals, and Municipal Money Portfolio. In
addition, it provides administrative and bookkeeping and
accounting services to each Fund and Municipal Money 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 or Municipal
Money Portfolio, please feel free to discuss them with an account
representative by calling 800-338-2550.
FEE TABLE
Muni- Inter-
cipal mediate High-
Money Muni- Managed Yield
Fund cipals 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
(after fee waiver in the case
of Municipal Money Fund and
Intermediate Municipals; as
a percentage of average net
assets)
Management and Administrative
Fees (after fee waiver in the
case of Municipal Money Fund
and Intermediate Municipals) 0.36% 0.46% 0.52% 0.55%
12b-1 Fees None None None None
Other Expenses 0.34% 0.24% 0.20% 0.30%
----- ----- ----- -----
Total Fund Operating Expenses
(after fee waiver in the case
of Municipal Money Fund and
Intermediate Municipals) 0.70% 0.70% 0.72% 0.85%
====== ===== ===== =====
____________________
*There is a $3.50 charge for wiring redemption proceeds to your
bank. This fee will be changed to $7.00 effective February 1, 1997.
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 22 39 87
Managed Municipals 7 23 40 89
High-Yield Municipals 9 27 47 105
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 last fiscal year.
On September 28, 1995, Municipal Money Fund began investing all of
its net investable assets in Municipal Money Portfolio and its
management fee structure was changed. Since that date, the Fund
pays the Adviser an administrative fee based on the Fund's average
daily net assets and Municipal Money Portfolio pays the Adviser a
management fee based on Municipal Money Portfolio's average daily
net assets. The management and expenses of both Municipal Money
Fund and Municipal Money 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 Municipal Trust have considered whether the annual operating
expenses of Municipal Money Fund, including its proportionate
share of the expenses of Municipal Money Portfolio, would be more
or less than if the Fund invested directly in the securities held
by Municipal Money Portfolio, and concluded that the Fund's
expenses would not be greater in such case.
From time to time, the Adviser may voluntarily waive a portion of
its fees payable by a Fund. The Adviser has agreed to
voluntarily waive such fees for Municipal Money Fund and
Intermediate Municipals to the extent that either Fund's ordinary
operating expenses exceed .7 of 1% of its annual average net
assets through October 31, 1997, subject to earlier termination
by the Adviser on 30 days' notice to the Fund. Any such
reimbursement will lower a Fund's overall expense ratio and
increase its overall return to investors. Absent such expense
undertaking, Management and Administrative Fees and Total Fund
Operating Expenses would have been 0.50% and 0.84% for Municipal
Money Fund and 0.59% and 0.81% for Intermediate Municipals,
respectively.
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, 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 in the
Examples and Fee Table 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 and have been audited by
Ernst & Young LLP, independent auditors. 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 Municipal Trust without charge upon request,
contains additional performance information.
MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
Six
Months
Years Ended Ended
December 31, June 30, Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------- ------ ------ ------- ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Net investment income... .041 . 040 .021 .056 .054 .046 .032 .020 .019 .030 .031
Distributions from net
investment income ... (.041) (.040) (.021) (.056) (.054) (.046) (.032) (.020) (.019) (.030) (.031)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
NET ASSET VALUE, END
OF PERIOD............ $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of expenses to
average net assets (a). 0.60% 0.69% *0.67% 0.67% 0.67% 0.68% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net invest-
ment income to
average net assets (b). 4.05% 4.08% *4.25% 5.57% 5.40% 4.66% 3.19% 1.96% 1.88% 2.96% 3.09%
Total return (b)..........4.22% 4.11% *4.29% 5.74% 5.52% 4.74% 3.25% 1.97% 1.90% 3.02% 3.13%
Net assets, end of
period (000 omitted) $251,465 $306,971 $294,116 $254,261 $255,953 $237,403 $199,037 $195,887 $165,820 $146,704 $120,432
</TABLE>
INTERMEDIATE MUNICIPALS
<TABLE>
<CAPTION>
Six
Years Months
Ended Ended
December 31, June 30, Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------- ----- ------ ------ ------ ------ ------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.... $10.14 $10.76 $10.37 $10.43 $10.50 $10.54 $10.73 $11.06 $11.57 $11.00 $11.16
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income........ .58 .57 .29 .62 .63 .62 .57 .54 .53 .53 .55
Net realized and un-
realized gains (los-
ses) on investments....... .62 (.38) .06 .07 .07 .22 .50 .63 (.39) .16 .06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations................ 1.20 .19 .35 .69 .70 .84 1.07 1.17 .14 .69 .61
Distributions
Net investment income....... (.58) (.57) (.29) (.62) (.63) (.62) (.57) (.54) (.53) (.53) (.55)
Net realized capital
gains.................... -- (.01) -- -- (.03) (.03) (.17) (.12) (.17) -- --
In excess of realized
gains.................. -- -- -- -- -- -- -- -- (.01) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions...... (.58) (.58) (.29) (.62) (.66) (.65) (.74) (.66) (.71) (.53) (.55)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD........... $10.76 $10.37 $10.43 $10.50 $10.54 $10.73 $11.06 $11.57 $11.00 $11.16 $11.22
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of net expenses
to average net
assets(a)............... 0.80% 0.80% *0.80% 0.80% 0.80% 0.80% 0.79% 0.72% 0.71% 0.74% 0.70%
Ratio of net investment
income to average
net assets (b).......... 5.45% 5.47% *5.66% 5.96% 5.96% 5.79% 5.23% 4.79% 4.63% 4.94% 4.82%
Portfolio turnover
rate..................... 10% 49% **22% 83% 141% 96% 109% 96% 55% 67% 66%
Total return (b)...........12.09% 1.93% **3.45% 6.85% 6.85% 8.18% 10.31% 10.92% 1.16% 6.59% 5.47%
Net assets, end of
period (000s omitted)..$104,750 $96,143 $97,308 $91,304 $98,918 $118,651 $165,401 $245,441 $238,053 $212,489 $204,726
</TABLE>
MANAGED MUNICIPALS
<TABLE>
<CAPTION>
Six
Months
Years Ended Ended
December 31, June 30, Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $ 8.93 $ 9.22 $ 8.50 $ 8.61 $ 9.02 $ 8.71 $ 8.85 $ 9.11 $ 9.38 $ 8.70 $ 8.79
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income..... .67 .61 .30 .61 .59 .56 .55 .52 .50 .51 .48
Net realized and
unrealized gains
(losses) on investments 1.21 (.59) .11 .44 (.06) .19 .46 .42 (.51) .09 .06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............. 1.88 .02 .41 1.05 .53 .75 1.01 .94 (.01) .60 .54
Distributions
Net investment income.... (.67) (.61) (.30) (.61) (.59) (.56) (.55) (.52) (.50) (.51) (.48)
Net realized capital
gains................. (.92) (.13) -- (.03) (.25) (.05) (.20) (.15) (.11) -- --
In excess of realized
gains .............. -- -- -- -- -- -- -- -- (.06) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions... (1.59) (.74) (.30) (.64) (.84) (.61) (.75) (.67) (.67) (.51) (.48)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD........ $ 9.22 $ 8.50 $ 8.61 $ 9.02 $ 8.71 $ 8.85 $ 9.11 $ 9.38 $ 8.70 $ 8.79 $ 8.85
====== ====== ====== ====== ====== ====== ====== ====== ====== ======= ======
Ratio of expenses to
average net assets .... 0.65% 0.65% *0.65% 0.65% 0.66% 0.66% 0.64% 0.64% 0.65% 0.65% 0.72%
Ratio of net investment
income to average
net assets ............ 7.04% 6.99% *7.03% 7.00% 6.66% 6.39% 6.17% 5.65% 5.45% 5.85% 5.41%
Portfolio turnover
rate.................... 92% 113% **28% 102% 95% 203% 94% 63% 36% 33% 40%
Total return............ 21.70% 0.39% **4.90% 12.69% 6.15% 8.92% 11.95% 10.79% (0.29%) 7.12% 6.24%
Net assets, end of
period (000 omitted).$523,947 $458,170 $467,595 $514,898 $584,081 $655,930 $725,472 $776,694 $687,252 $629,730 $606,359
</TABLE>
HIGH-YIELD MUNICIPALS
<TABLE>
<CAPTION>
Six
Months
Years Ended Ended
December 31, June 30, Years Ended June 30,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $11.10 $12.06 $11.06 $11.37 $11.97 $11.78 $11.79 $11.83 $11.84 $11.06 $11.31
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income....... .90 .87 .44 .88 .85 .82 .80 .71 .67 .66 .67
Net realized and
unrealized gains
(losses) on invest-
ments .................. 1.11 (.89) .31 .63 .02 .17 .22 .18 (.54) .25 .09
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations.............. 2.01 (.02) .75 1.51 .87 .99 1.02 .89 .13 .91 .76
Distributions
Net investment income..... (.90) (.87) (.44) (.88) (.85) (.82) (.80) (.71) (.67) (.66) (.67)
Net realized capital
gains .................. (.15) (.11) -- (.03) (.21) (.16) (.18) (.17) (.17) -- --
In excess of realized
gains ................. -- -- -- -- -- -- -- -- (.07) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .... (1.05) (.98) (.44) (.91) (1.06) (.98) (.98) (.88) (.91) (.66) (.67)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD......... $12.06 $11.06 $11.37 $11.97 $11.78 $11.79 $11.83 $11.84 $11.06 $11.31 $11.40
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of net expenses
to average net assets.. 0.76% 0.73% *0.76% 0.73% 0.71% 0.71% 0.69% 0.73% 0.76% 0.86% 0.85%
Ratio of net investment
income to average
net assets............ 7.77% 8.20% *7.87% 7.54% 7.22% 7.00% 6.75% 6.04% 5.76% 5.98% 5.86%
Portfolio turnover
rate ..................... 34% 110% **53% 208% 261% 195% 88% 75% 36% 23% 34%
Total return............ 18.64% (0.16%) **6.89% 13.79% 7.59% 8.79% 9.01% 7.88% 0.95% 8.54% 6.83%
Net assets, end of
period (000 omitted). $225,883 $181,600 $201,274 $277,620 $310,582 $373,948 $410,613 $359,103 $308,181 $281,155 $282,956
</TABLE>
*Annualized.
**Not annualized.
(a) 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%, 0.78%, and
0.84% for the years ended December 31, 1986, and June 30,
1995 and 1996, respectively; and for Intermediate Municipals,
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, 0.82%, 0.81% and 0.81% for the years ended June 30, 1989
through 1991, respectively, and 0.76% and 0.81% for the years
ended June 30, 1995 and 1996.
(b) Computed giving effect to the Adviser's expense limitation
undertaking.
THE FUNDS
The mutual funds offered by this prospectus are Stein Roe
Municipal Money Market Fund ("Municipal Money Fund"), Stein Roe
Intermediate Municipals Fund ("Intermediate Municipals"), Stein
Roe Managed Municipals Fund ("Managed Municipals"), and Stein Roe
High-Yield Municipals Fund ("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 Stein Roe Municipal Trust ("Municipal
Trust"), an open-end management investment company, which is
authorized to issue shares of beneficial interest in separate
series. Each series, other than Municipal Money Fund, represents
interests in a separate portfolio of securities and other assets,
with its own investment objectives and policies. Municipal Money
Fund invests all of its assets in shares of SR&F Municipal Money
Portfolio ("Municipal Money Portfolio"), which is a series of SR&F
Base Trust ("Base Trust").
Stein Roe & Farnham Incorporated (the "Adviser") provides
investment advisory, administrative, and accounting and
recordkeeping services to the Funds and Municipal Money Portfolio.
The Adviser also manages several other 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 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 investment compaies and/or institutional investors 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.
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 operating
under the master fund/feeder fund structure is Municipal Money Fund,
which converted to the master fund/feeder fund structure on September
28, 1995. If another Fund were to convert to the master fund/feeder
fund structure, it would require the approval of the Board of Trustees
of Municipal Trust, and shareholders of that Fund would be given
at least 30 days' prior notice. 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 seeks to achieve its
objective by investing all of its assets in Municipal Money
Portfolio. The investment policies of Municipal Money Portfolio
and Municipal Money Fund are identical.
Municipal Money Portfolio seeks maximum current income exempt from
federal income tax by investing principally in a diversified
portfolio of "short-term" Municipal Securities. In pursuing that
objective, Municipal Money Portfolio attempts 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, Municipal Money Portfolio follows
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
Municipal Money 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.
Municipal Money 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/
Municipal Money 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. Municipal Money 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 Municipal Money 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 of Base Trust to be
of comparable quality, and (ii) determined by or under the
direction of the Board of Trustees of Base Trust to present
minimal credit risks.
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/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.
/3/ For a description of Moody's and S&P ratings, see the Appendix.
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, 1996, the Fund's portfolio was
invested, on average, as follows: high-quality short-term
instruments, 2.4%; AAA, 13.5%; AA, 11.7%; A, 22.7%; BBB, 24.8%;
BB, 4.5%; and unrated, 20.4%. 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
Municipal Money 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 Board is responsible
for determining the credit quality of unrated municipal leases on
an ongoing basis, including an assessment of the likelihood that
such leases will not be cancelled.
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 Municipal Money 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 Municipal Money 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, except High-Yield Municipals,
which is subject to a 15% limitation on investments in illiquid
securities.
SHORT SALES AGAINST THE BOX. Intermediate Municipals, Managed
Municipals, and High-Yield Municipals may sell short securities
the Fund owns or has the right to acquire without further
consideration, a technique called selling short "against the box."
Short sales against the box may protect the Fund against the risk
of losses in the value of its portfolio securities because any
unrealized losses with respect to such securities should be wholly
or partly offset by a corresponding gain in the short position.
However, any potential gains in such securities should be wholly
or partially offset by a corresponding loss in the short position.
Short sales against the box may be used to lock in a profit on a
security when, for tax reasons or otherwise, the Adviser does not
want to sell the security. For a more complete explanation,
please refer to the Statement of Additional Information.
FUTURES AND OPTIONS. Intermediate Municipals, Managed Municipals,
and High-Yield Municipals each 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.
TENDER OPTION BONDS. Each Fund may purchase tender
option bonds. A tender option bond is a Municipal Security
(generally held pursuant to a custodial arrangement) having
a relatively long maturity and bearing interest at a fixed rate
substantially higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party, such
as a bank, broker-dealer or other financial institution, pursuant
to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to
the institution and receive the face value thereof. As consideration
for providing the option, the financial institution receives periodic
fees equal to the difference between the Municipal
Security's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such
period, that would cause the securities, coupled with the tender
option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a
demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser will consider on an ongoing basis
the creditworthiness of the issuer of the underlying Municipal
Securities, of any custodian, and of the third-party provider of
the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a
default in payment of principal or interest on the underlying
Municipal Securities and for other reasons. Municipal Money Fund
and Municipal Money Portfolio may invest up to 10% of net assets in
tender option bonds.
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 Municipal Money
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 /4/; 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 Municipal
Money 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.
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/4/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Municipal
Money Fund and Municipal Money Portfolio will not, immediately
after the acquisition of any security (other than a Government
Security or certain other securities as permitted under the Rule),
invest more than 5% of its total assets in the securities of any
one issuer; provided, however, that each may invest up to 25% of
its total assets in First Tier Securities (as that term is defined
in the Rule) of a single issuer for a period of up to three
business days after the purchase thereof.
- -----------------
No Fund may make loans except that each Fund may (1) purchase
money market instruments and enter into repurchase agreements; (2)
acquire publicly-distributed or privately-placed debt securities;
and (3) participate in an interfund lending program with other
Stein Roe Funds. A Fund may not borrow money, except for non-
leveraging, temporary, or emergency purposes or in connection with
participation in the interfund lending program. Neither a Fund's
aggregate borrowings (including reverse repurchase agreements)
nor a Fund's aggregate loans at any one time may exceed 33 1/3%
of the value of its total assets. (See, however, Risks and
Investment Considerations.) Additional securities may not be
purchased when borrowings, less proceeds receivable from sales
of portfolio securities, exceed 5% of total assets.
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, through Municipal Money 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 that are not invested
in Municipal Securities may be held in cash or invested
in short-term taxable investments./5/ Because Municipal Money
Fund or the Municipal Money Portfolio invests in securities backed
by banks and other financial institutions, changes in the credit
quality of these institutions could cause losses to the Fund and
affect its net asset value.
- -------------
/5/ The policy expressed in this sentence is a fundamental policy
of Municipal Money Fund, Municipal Money Portfolio, and Managed
Municipals.
- -------------
HIGH-YIELD (HIGH-RISK) MUNICIPAL SECURITIES. High-Yield
Municipals may purchase high-yield Municipal Securities, commonly
referred to as "junk bonds," which are Municipal Securities rated
lower than investment grade. Although high-yield Municipal
Securities generally offer higher yields than investment grade
Municipal Securities with comparable maturities, high-yield
Municipal Securities involve greater risks and their total return
and yield can be expected to fluctuate more than those of
investment grade Municipal Securities. High-yield Municipal
Securities are regarded as predominantly speculative with respect
to the issuer's continuing ability to meet principal and interest
payments, and are also subject to the risks associated with
substantial market-price volatility resulting from changes in
interest rates and economic conditions, as well as the possibility
of default or bankruptcy. A real or perceived economic downturn
or higher interest rates could cause a decline in the price of
high-yield Municipal Securities. Some additional risks include
the possibility that the Fund's interest in a high-yield Municipal
Security could be subordinated to the prior claims of other
creditors, and the tax or other advantages of high-yield Municipal
Securities could be limited or restricted by Congress. High-yield
Municipal Securities are thinly traded and can be more difficult
to sell and value accurately than high-quality Municipal
Securities. Successful investment in high-yield Municipal
Securities involves greater investment risk and is highly
dependent on the Adviser's credit analysis. Because reliable
objective pricing data may not be readily available, the Adviser's
judgment may play a greater role in the valuation process.
Intermediate Municipals and Managed Municipals may also invest in
high-yield Municipal Securities, but at least 75% of the total
assets in each Fund must be invested in investment grade Municipal
Securities.
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
Stein Roe 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 Stein Roe Counselor [SERVICE MARK] or Personal
Counselor [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 by
check, please complete and sign the Application and mail it,
together with a check made payable to Stein Roe Mutual Funds, to
SteinRoe Services Inc. at P.O. Box 8900, Boston, Massachusetts
02205. Participants in the Stein Roe Counselor [SERVICE MARK] and
Personal Counselor [SERVICE MARK] Programs should send orders to
SteinRoe Services Inc. at P.O. Box 803938, Chicago, Illinois
60680.
You may make subsequent investments by submitting a check along
with either the stub from your 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
Municipal 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 also may pay for shares by instructing your bank to
wire federal funds (monies of member banks within the Federal
Reserve System) to First National Bank of Boston. Your bank may
charge you a fee for sending the wire. If you are opening a new
account by wire transfer, you must first call 800-338-2550 to
request an account number and furnish your social security or
other tax identification number. Neither the Funds nor Municipal
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:
First National Bank of Boston
Boston, Massachusetts
ABA Routing No. 011000390
Attention: SteinRoe Services Inc.
Fund No. ___; Stein Roe _____ Fund
Account of (exact name(s) in registration)
Shareholder Account No. ________
Fund Numbers:
37--Managed Municipals
30--Municipal Money Fund
28--High-Yield Municipals
08--Intermediate Municipals
Participants in the Stein Roe Counselor [SERVICE MARK] and
Personal Counselor [SERVICE MARK] Programs should address their
wires as follows:
First National Bank of Boston
Boston, Massachusetts
ABA Routing No. 011000390
Attention: SteinRoe Services Inc.
Fund No. ___; Stein Roe _____ Fund
Account of (exact name(s) in registration)
Counselor Account No. ________
BY ELECTRONIC TRANSFER. You may also make subsequent investments
by an electronic transfer of funds from your bank account.
Electronic transfer allows you to make purchases at your request
("Special Investments") by calling 800-338-2550 or at pre-
scheduled intervals ("Regular Investments") elected on your
application. (See Shareholder Services.) Electronic transfer
purchases are subject to a $50 minimum and a $100,000 maximum.
You may not open a new account through electronic transfer.
Should an order to purchase shares 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 Stein Roe Fund account either by phone (if the Telephone
Exchange Privilege has been established on the account from which
the exchange is being made), by mail, in person, or automatically
at regular intervals (if you have elected the Automatic Exchange
Privilege). Restrictions apply; please review the information
under How to Redeem Shares--By Exchange.
CONDITIONS OF PURCHASE. Each purchase order for a Fund must be
accepted by an authorized officer of Municipal Trust or its
authorized agent 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; you may, however,
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. Municipal Trust does not issue
certificates for shares.
PURCHASES THROUGH THIRD PARTIES. You may purchase (or redeem)
shares through broker-dealers, banks, or other intermediaries
("Intermediaries"). These Intermediaries may charge for their
services or place limitations on the extent to which you may use
the services offered by Municipal Trust. There are no charges or
limitations imposed by Municipal Trust (other than those described
in this prospectus) if shares are purchased (or redeemed) directly from
the Trust.
Some Intermediaries that maintain nominee accounts with the Funds
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. The Adviser and
the Funds' transfer agent share in the expense of these
annual fees, and the Adviser pays all sales and promotional
expenses.
PURCHASE PRICE AND EFFECTIVE DATE. Each purchase of a Fund's
shares made directly with the Fund is made at that Fund's net
asset value (see Net Asset Value) next determined after
receipt of an order in good form, including receipt of
payment as follows:
A purchase by check or wire transfer is made at the net asset
value next determined after the Fund receives 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 instruction received by telephone on a business
day before 3:00 p.m., central time, is effective on the next
business day. Shares begin earning dividends on the day
following the day on which they are purchased.
Each purchase of Fund shares through an Intermediary that is
an authorized agent of the Trust for the receipt of orders is
made at the net asset value next determined after the receipt
of the order by the Intermediary.
HOW TO REDEEM SHARES
BY WRITTEN REQUEST. You may redeem all or a portion of your
shares of a Fund by submitting a written request in "good order"
to SteinRoe Services Inc. at P.O. Box 8900, Boston, Massachusetts
02205. Participants in the Stein Roe Counselor [SERVICE MARK] and
Personal Counselor [SERVICE MARK] Programs should send redemption
requests to SteinRoe Services Inc. at P.O. Box 803938, Chicago,
Illinois 60680. A redemption request will be considered to have
been received in good order if the following conditions are
satisfied:
(1) The request must be in writing and must 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 Municipal
Trust); and
(6) The request must include other supporting legal documents as
required from organizations, executors, administrators,
trustees, or others acting on accounts not registered in their
names.
BY EXCHANGE. You may redeem all or any portion of your Fund
shares and use the proceeds to purchase shares of any other Stein
Roe Fund offered for sale in your state if your signed, properly
completed Application is on file. An exchange transaction is a
sale and purchase of shares for federal income tax purposes and
may result in capital gain or loss. Before exercising the
Exchange Privilege, you should obtain the prospectus for the Stein
Roe Fund in which you wish to invest and read it carefully. The
registration of the account to which you are making an exchange
must be exactly the same as that of the Fund account from which
the exchange is made and the amount you exchange must meet any
applicable minimum investment of the Stein Roe Fund being
purchased. Unless you have elected to receive your dividends in
cash, on an exchange of all shares, any accrued unpaid dividends
will be invested in the Stein Roe 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 Stein Roe Fund to be purchased--a signature
guarantee normally is not required. (See also the discussion
below of the Telephone Exchange Privilege and Automatic
Exchanges.)
SPECIAL REDEMPTION PRIVILEGES. The Telephone Exchange Privilege
and the Telephone Redemption by Check Privilege will be
established automatically for you when you open your account
unless you decline these Privileges on your Application. Other
Privileges must be specifically elected. If you do not want the Telephone
Exchange and Redemption Privileges, check the box(es) under the
section "Telephone Redemption Options" when completing your
Application. In addition, a signature guarantee may be required
to establish a Privilege after you open your account. If you
establish both the Telephone Redemption by Wire Privilege and the
Electronic Transfer Privilege, the bank account that you designate
for both Privileges must be the same.
You may not use any of the Special Redemption Privileges if you
hold certificates for any of your Fund shares. (See also General
Redemption Policies.)
Telephone Exchange Privilege. You may use the Telephone Exchange
Privilege to exchange an amount of $50 or more from your account
by calling 800-338-2550 or by sending a telegram; new accounts
opened by exchange are subject to the $2,500 initial purchase
minimum. Generally, you will be limited to four Telephone
Exchange round-trips per year and 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 Stein Roe Fund,
and then back to that Fund). In addition, Municipal Trust's
general redemption policies apply to redemptions of shares by
Telephone Exchange. (See General Redemption Policies.)
Municipal Trust reserves the right to suspend or terminate at any
time and without prior notice the use of the Telephone Exchange
Privilege by any person or class of persons. Municipal Trust
believes that use of the Telephone Exchange Privilege by investors
utilizing market-timing strategies adversely affects the Funds.
Therefore, Municipal Trust generally will not honor requests for
Telephone Exchanges by shareholders identified by the Trust as
"market-timers." Moreover, Municipal Trust reserves the right to
suspend, limit, modify, or terminate at any time and without prior
notice the Telephone Exchange Privilege in its entirety. Because
such a step would be taken only if the Board of Trustees believes
it would be in the best interests of the Funds, Municipal 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 Municipal 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 Stein Roe Fund account on a regular basis.
Telephone Redemption by Check Privilege. You may use the
Telephone Redemption by Check Privilege to redeem an amount of
$1,000 or more from your account by calling 800-338-2550. The
proceeds will be sent by check to your registered address.
Telephone Redemption by Wire Privilege. You may use this
Privilege to redeem shares from your account by calling 800-338-
2550. The proceeds will be transmitted by wire to
your account at a commercial bank previously designated by you
that is a member of the Federal Reserve System. The fee for
wiring proceeds (currently $3.50 per transaction; $7.00 after
January 31, 1997) will be deducted from the amount wired.
There is a $1,000 minimum on each Telephone Redemption by Wire;
in addition, shareholders of Intermediate Municipals, High-Yield
Municipals, and Managed Municipals are subject to a maximum amount
of $100,000.
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
800-338-2550 and requesting an electronic transfer ("Special
Redemption") of the proceeds to an account previously designated
by you at a bank that is a member of the Automated Clearing House
or at scheduled intervals ("Automatic Redemptions"--see
Shareholder Services). Electronic transfers are subject to a $50
minimum and a $100,000 maximum. A Special Redemption request
received by telephone after 3:00 p.m., central time, is deemed
received on the next business day.
GENERAL REDEMPTION POLICIES. You may not cancel or revoke your
redemption order once instructions have been received and
accepted. Municipal Trust cannot accept a redemption request that
specifies a particular date or price for redemption or any special
conditions. Please call 800-338-2550 if you have any questions
about requirements for a redemption before submitting your
request. Municipal 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.
Municipal 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 the Trust
intends to pay proceeds of a Telephone Redemption paid by wire on
the next business day. Municipal 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, Municipal Trust recommends that your purchase
be made by federal funds wire through your bank. Generally, you
may not use any Special Redemption Privilege to redeem shares
purchased by check (other than certified or cashiers' checks) or
electronic transfer until 15 days after their date of purchase.
Municipal 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 Municipal 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 that the shareholder 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.
Municipal 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. A shareholder would be
notified that his account is below the minimum and would be
allowed 30 days to increase the account before the redemption is
processed.
Shares in any account you maintain with a Fund or any of the other
Stein Roe Funds may be redeemed to the extent necessary to
reimburse any Stein Roe Fund for any loss it sustains that is
caused by you (such as losses from uncollected checks and
electronic transfers or any Stein Roe 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 through an automatic investment plan will be confirmed to
you quarterly. In addition, Municipal Trust will send you
semiannual and annual reports showing Fund portfolio holdings and
will provide you annually with tax information.
FUNDS-ON-CALL [REGISTERED TRADEMARK] AUTOMATED TELEPHONE SERVICE.
To access Stein Roe Funds-on-Call [registered trademark], just
call 800-338-2550 on any touch-tone telephone and follow the
recorded instructions. Funds-on-Call [registered trademark]
provides yields, prices, latest dividends, account balances, last
transaction, and other information 24 hours a day, seven days a
week. You also may use Funds-on-Call [registered trademark] to
make Special Investments and Redemptions, Telephone Exchanges, and
Telephone Redemptions by Check. These transactions are subject to
the terms and conditions of the individual privileges. (See How
to Purchase Shares and How to Redeem Shares.)
STEIN ROE COUNSELOR [SERVICE MARK] PROGRAM. The Adviser offers a
Stein Roe Counselor [SERVICE MARK] and a Stein Roe Personal
Counselor [SERVICE MARK] program. The programs are designed to
provide investment guidance in helping investors to select a
portfolio of Stein Roe Mutual Funds. The Stein Roe Personal
Counselor [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 800-338-2550 or write Municipal 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 Stein Roe Fund account. Before establishing this
option, you should obtain and read carefully the prospectus of the
Stein Roe Fund into which you wish to have your distributions
invested. The account from which distributions are made must be
of sufficient size to allow each distribution to usually be at
least $25. The account into which distributions are to be
invested may be opened with an initial investment of only $1,000.
Automatic Dividend Deposit (electronic transfer)--to have income
dividends and capital gain distributions deposited directly into
your bank account.
Telephone Redemption by Check Privilege ($1,000 minimum) and
Telephone Exchange Privilege ($50 minimum)--established
automatically when you open your account unless you decline them
on your Application. (See How to Redeem Shares--Special
Redemption Privileges.)
Telephone Redemption by Wire Privilege--to redeem shares from your
account by phone and have the proceeds transmitted by wire to your
bank account ($1,000 minimum; $100,000 maximum for shareholders of
Intermediate Municipals, High-Yield Municipals, and Managed
Municipals).
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
account ($50 minimum; $100,000 maximum).
Regular Investments (electronic transfer)--to purchase Fund shares
at regular intervals directly from your bank 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 bank 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 Stein Roe
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 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 Municipal Money 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.,
central time) by dividing the difference between the values of its
assets and liabilities by the number of its shares outstanding.
Municipal Money Portfolio allocates net asset value, income and
expenses to Municipal Money Fund based on its respective
percentage of ownership.
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., central
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 Municipal Money 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 Municipal Money 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 Base 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 Municipal Money 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 account; (3) applied to
purchase shares in your account with another Stein Roe Fund; or
(4) applied to purchase shares in a Stein Roe Fund account of
another person. (See Shareholder Services.) Reinvestment
normally occurs on the payable date. Municipal 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 Municipal Money 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
Municipal Money 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 Municipal
Money 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
Municipal 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. Municipal Trust may be required to withhold
federal income tax ("backup withholding") from certain payments to
you, generally redemption proceeds. Backup withholding may be
required if:
* You fail to furnish your properly certified social security or
other tax identification number;
* You fail to certify that your tax identification number is
correct or that you are not subject to backup withholding due to
the underreporting of certain income;
* The Internal Revenue Service informs Municipal Trust that your
tax identification number is incorrect.
These certifications are contained in the Application that you
should complete and return when you open an account. 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. You may, however, 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
September 30, 1996, were 3.16% and 3.21%, respectively. To obtain
current yield information, you may call 800-338-2550.
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
Municipal Money 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 Municipal Money
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 Municipal Money Portfolio
and the business affairs of the Funds, Municipal Money 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 subsidiary of Liberty
Financial Companies, Inc. ("Liberty Financial"), which in turn is
a majority owned indirect subsidiary of Liberty Mutual Insurance
Company.
In approving the use of a single combined prospectus, the Boards
considered the possibility that one Fund (or Municipal Money
Portfolio) might be liable for misstatements in the prospectus
regarding information concerning another Fund (or Municipal Money
Portfolio).
PORTFOLIO MANAGERS. Veronica M. Wallace has been portfolio
manager of Municipal Money Portfolio since September 1995. Ms.
Wallace was formerly a trader in taxable money market instruments
for the Adviser. As of June 30, 1996, she was responsible for
managing $143 million in mutual fund net assets. She is assisted
in managing Municipal Money Portfolio by Joanne Costopoulos.
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, 1996, was responsible for
managing $889 million in mutual fund net assets. Ms. McCart is
assisted in managing the Funds by Joanne Costopoulos.
Joanne T. Costopoulos has been portfolio manager of Intermediate
Municipals since August 1991 and is a vice-president of the Trust
and a senior vice president of the Adviser. Responsible for
managing $205 million in mutual fund net assets as of June 30,
1996, 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.
FEES AND EXPENSES. Through June 30, 1996, the Adviser provided
investment advisory and administrative services to Intermediate
Municipals, Managed Municipals, and High-Yield Municipals under
investment advisory agreements with Municipal Trust relating to
each Fund. On July 1, 1996, each investment advisory agreement
was replaced with separate management and administrative
agreements; the aggregate rates of fees under the new agreements
are equal to those charged under the old advisory
agreements. The Adviser also receives a portfolio management fee
from Municipal Money Portfolio and an administrative fee from
Municipal Money Fund. In return for its services, the Adviser
is entitled to receive the following monthly management and
administrative fees, computed and accrued daily, based on average
net assets at the following annual rates (dollar amounts are show
in millions):
MANAGEMENT ADMINISTRATIVE TOTAL
FUND FEE FEE FEES
- ------------- --------------- --------------- ----------------
Intermediate .450% up to $100, .150% up to $100, .600% up to $100,
Municipals .425% next $100, .125% next $100, .550% next $100,
Fund .400% thereafter .100% thereafter .500% thereafter
High-Yield .450% up to $100, .150% up to $100, .600% up to $100,
Municipals .425% next $100, .125% next $100, .550% next $100,
Fund .400% thereafter .100% thereafter .500% thereafter
Managed .450% up to $100, .150% up to $100, .600% up to $100,
Municipals .425% next $100, .125% next $100, .550% next $100,
Fund .400% next $800, .100% next $800, .500% next $800,
.375% thereafter .075% thereafter .450% thereafter
Municipal -- .250% up to $500, .250% up to $500,
Money .200% next $500, .200% next $500,
Fund .150% thereafter .150% thereafter
Municipal .250% -- .250%
Money
Portfolio
For the fiscal year ended June 30, 1996, the annualized advisory
fees for Intermediate Municipals, Managed Municipals and High-
Yield Municipals, after the fee waivers described under
Fee Table, were 0.46%, 0.52%, and 0.55% of average net assets,
respectively. Municipal Money Fund's administrative fee in
addition to the pro rata portion of Municipal Money Portfolio's
management fees was 0.36% of average net assets, after the fee
waiver.
Under a separate agreement with each Trust, the Adviser provides
certain accounting and bookkeeping services to the Funds and the
Municipal Money Portfolio, including computation of net asset
value and calculation of its net income and capital gains and
losses on disposition of assets.
PORTFOLIO TRANSACTIONS. The Adviser places the orders for the
purchase and sale of portfolio securities for each Fund and
Municipal Money Portfolio. In doing so, the Adviser seeks to
obtain the best combination of price and execution, which involves
a number of judgmental factors.
TRANSFER AGENT. SteinRoe Services Inc., One South Wacker Drive,
Chicago, Illinois 60606, a wholly owned subsidiary of Liberty
Financial, is the agent of Municipal 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
Financial. 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 SteinRoe Services Inc. at P.O. Box 8900, Boston,
Massachusetts 02205, except for participants in the Stein Roe
Counselor [SERVICE MARK] and Personal Counselor [SERVICE MARK]
Programs, who should send orders to SteinRoe Services Inc. at P.O.
Box 803938, 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. Municipal 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 Municipal
Trust. The Declaration of Trust provides that persons extending
credit to, contracting with, or having any claim against,
Municipal Trust or any particular Fund shall look only to the
assets of Municipal Trust or of the respective Fund for payment
under such credit, contract or claim, and that the shareholders,
trustees and officers of Municipal 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 Municipal
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 Municipal 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 Municipal 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.
Municipal Money Fund, an open-end management investment company,
seeks to achieve its objective by investing all of its assets in
shares of another mutual fund having an identical investment
objective to Municipal Money Fund. This policy permitting
Municipal Money Fund to act as a feeder fund by investing in
Municipal Money Portfolio, acting as a master fund, was approved
by Municipal Money Fund's shareholders. Please refer to
, How the Funds Invest--Municipal Money Fund, Portfolio Investments
and Strategies and Restrictions on the Funds' Investments for a
description of the investment objectives, policies, and
restrictions of Municipal Money Fund and Municipal Money Portfolio.
The management and expenses of both Municipal Money Fund and Municipal
Money Portfolio are described under the Fee Table and Management
of the Funds. Municipal Money Fund bears its proportionate share of
Portfolio expenses.
The Adviser has provided investment management services in
connection with other mutual funds employing the master fund/feeder fund
structure since 1991.SR&F Municipal Money Market Portfolio is a
separate series of SR&F Base Trust ("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 Base Trust provides that
Municipal Money Fund and other investors in Municipal Money
Portfolio will be liable for all obligations
of Municipal Money Portfolio that are not satisfied by Municipal
Money Portfolio. However, the risk of Municipal Money Fund
incurring financial loss on account of such liability is limited
to circumstances in which liability was inadequately insured and
Municipal Money Portfolio was unable to meet its obligations. A
ccordingly, the Trustees of Municipal Trust believe that
neither Municipal Money Fund nor its shareholders will be
adversely affected by reason of Municipal Money Fund's investing
in Municipal Money Portfolio.
The Declaration of Trust of Base Trust provides that Municipal
Money Portfolio will terminate 120 days after the withdrawal of
Municipal Money Fund or any other investor in Municipal Money
Portfolio, unless the remaining investors vote to agree to
continue the business of Municipal Money Portfolio. The Trustees
of Municipal Trust may vote Municipal Money Fund's interests in
Municipal Money Portfolio for such continuation without approval
of Municipal Money Fund's shareholders.
The common investment objective of Municipal Money Fund and
Municipal Money Portfolio is non-fundamental and may be changed
without shareholder approval, subject, however, to at least 30
days' advance written notice to Municipal Money Fund's
shareholders.The fundamental policies of Municipal Money Fund and
the corresponding fundamental policies of Municipal Money Portfolio
can be changed only with shareholder approval.
If Municipal Money Fund, as an investor in Municipal Money
Portfolio, is requested to vote on a proposed change in a fundamental
policy of Municipal Money Portfolio or any other matter pertaining
to Municipal Money Portfolio (other than continuation of the
business of Municipal Money Portfolio after withdrawal of another
investor), Municipal Money Fund will solicit proxies from its
shareholders and vote its interest in Municipal Money Portfolio
for and against such matters proportionately to the instructions
to vote for and against such matters received from Fund
shareholders. Municipal Money 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 Municipal Money 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 investors hold a majority interest
in Municipal Money Portfolio, they could have voting control over
Municipal Money Portfolio.
In the event that Municipal Money Portfolio's fundamental policies
were changed so as to be inconsistent with those of Municipal
Money Fund, the Board of Trustees of Municipal Trust would
consider what action might be taken, including changes to
Municipal Money Fund's fundamental policies, withdrawal of its
assets from Municipal Money 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 Municipal Money Fund's shareholders. Municipal Money
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 Municipal Money
Fund's assets could result in a distribution in kind of portfolio
securities (as opposed to a cash distribution) to Municipal Money
Fund. Should such a distribution occur, Municipal Money 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 Municipal Money Fund and could affect the
liquidity of Municipal Money Fund.
Each investor in Municipal Money Portfolio, including Municipal
Money Fund, may add to or reduce its investment in Municipal Money
Portfolio on each day the New York Stock Exchange is open for
business. The investor's percentage of the aggregate interests in
Municipal Money Portfolio will be computed as the percentage equal
to the fraction (i) the numerator of which is the beginning of the
day value of such investor's investment in Municipal Money
Portfolio on such day plus or minus, as the case may be, the
amount of any additions to or withdrawals from the investor's
investment in Municipal Money Portfolio effected on such day; and
(ii) the denominator of which is the aggregate beginning of the
day net asset value of Municipal Money Portfolio on such day plus
or minus, as the case may be, the amount of the net additions to
or withdrawals from the aggregate investment in Municipal Money
Portfolio by all investors in Municipal Money Portfolio. The
percentage so determined will then be applied to determine the
value of the investor's interest in Municipal Money Portfolio as
of the close of business.
Base Trust may permit other investment companies and/or other
institutional investors to invest in Municipal Money Portfolio,
but members of the general public may not invest directly in
Municipal Money Portfolio. Other investors in Municipal Money
Portfolio are not required to sell their shares at the same
public offering price as the Fund, could incur different
administrative fees and expenses than Municipal Money Fund,
and their shares might be sold with a sales commission.
Therefore, Municipal Money Fund shareholders might have different
investment returns than shareholders in another investment
company that invests exclusively in Municipal Money Portfolio.
Investment by such other investors in Municipal Money Portfolio
would provide funds for the purchase of additional portfolio
securities and would tend to reduce Municipal Money Portfolio's
operating expenses as a percentage of its net assets. Conversely,
large-scale redemptions by any such other investors in Municipal
Money Portfolio could result in untimely liquidations of Municipal
Money Portfolio's security holdings, loss of investment flexibility,
and increases in the operating expenses of Municipal Money Portfolio
as a percentage of its net assets. As a result, Municipal Money
Portfolio's security holdings may become less diverse, resulting
in increased risk.
Currently one other investment company invests in Municipal Money
Portfolio, and that is Colonial Municipal Money Market Fund, a
series of Colonial Trust IV. Information regarding any investment
company that may invest in Municipal Money Portfolio in the future
may be obtained by writing to Base Trust at Suite 3200, One South
Wacker Drive, Chicago, IL 60606, or by calling 800-338-2550. The Adviser
may provide administrative or other services to one or more of
such investors.
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.
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.
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.
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:
* 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>
Stein Roe Mutual Funds
Certificate of Authorization
for use by corporations and associations only
Corporations or associations must complete this Certificate and
submit it with the Fund Application, each written redemption,
transfer or exchange request, and each request to terminate or
change any of the Privileges or special service elections.
If the entity submitting the Certificate is an association, the
word "association" shall be deemed to appear each place the word
"corporation" appears. If the officer signing this Certificate is
named as an authorized person, another officer must countersign
the Certificate. If there is no other officer, the person signing
the Certificate must have his signature guaranteed. If you are
not sure whether you are required to complete this Certificate,
call a Stein Roe account representative at 800-338-2550 .
The undersigned hereby certifies that he is the duly elected
Secretary of ____________________________
(name of Corporation/Association)
(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 By-laws provide that he is the only
person authorized to so act.
Unless expressly declined on the Application (or other form
acceptable to the Funds), the undersigned further certifies that
the Corporation has authorized by resolution or otherwise the
establishment of the Telephone Exchange and Telephone Redemption
by Check Privileges for the Corporation's account with any Fund
offering any such Privilege. If elected on the Application (or
other form acceptable to the Funds), the undersigned also
certifies that the Corporation has similarly authorized
establishment of the Electronic Transfer, Telephone Redemption by
Wire, and Check-Writing Privileges for the Corporation's account
with any Fund offering said Privileges. The undersigned has
further authorized each Fund and its transfer agent to honor any
written, telephonic, or telegraphic instructions furnished
pursuant to any such Privilege by any person believed by the Fund
or its transfer agent or their agents, officers, directors,
trustees, or employees to be authorized to act on behalf of the
Corporation and agrees that neither the Fund nor its transfer
agent, their agents, officers, directors, trustees, or employees
will be liable for any loss, liability, cost, or expense for
acting upon any such instructions.
These authorizations shall continue in effect until five business
days after the Fund and its transfer agent receive written notice
from the Corporation of any change.
IN WITNESS WHEREOF, I have hereunto subscribed my name as
Secretary and affixed the seal of this Corporation this ____ day
of ________________, 19____.
______________________________
Secretary
______________________________
Signature Guarantee*
*Only required if the person signing the Certificate is the only
person named as "Authorized Person."
Corporate
Seal
Here
<PAGE>
[STEIN ROE FUNDS LOGO]
THE STEIN ROE FUNDS
Stein Roe Government Reserves Fund
Stein Roe Cash Reserves Fund
Stein Roe Limited Maturity Income Fund
Stein Roe Government Income Fund
Stein Roe Intermediate Bond Fund
Stein Roe Income Fund
Stein Roe High Yield Fund
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Stein Roe Balanced Fund
Stein Roe Growth & Income Fund
Stein Roe Growth Stock Fund
Stein Roe Young Investor Fund
Stein Roe Capital Opportunities Fund
Stein Roe Special Fund
Stein Roe International Fund
Stein Roe Special Venture Fund
In Chicago, visit our Fund Center
at One South Wacker Drive
Liberty Securities Corporation, Distributor
<PAGE>
Statement of Additional Information Dated November 1, 1996
STEIN ROE MUNICIPAL TRUST
STEIN ROE MUNICIPAL MONEY MARKET FUND
STEIN ROE INTERMEDIATE MUNICIPALS FUND
STEIN ROE MANAGED MUNICIPALS FUND
STEIN ROE HIGH-YIELD MUNICIPALS FUND
Suite 3200, One South Wacker Drive, Chicago, Illinois 60606
800-338-2550
This Statement of Additional Information is not a prospectus
but provides additional information that should be read in
conjunction with the Prospectus dated November 1, 1996, and any
supplements thereto. The Prospectus may be obtained at no charge
by telephoning 800-338-2550.
TABLE OF CONTENTS
Page
General Information and History.........................2
Investment Policies.....................................3
Municipal Money Fund...............................3
Intermediate Municipals............................5
Managed Municipals.................................5
High-Yield Municipals..............................6
Portfolio Investments and Strategies....................6
Investment Restrictions................................18
Additional Investment Considerations...................21
Purchases and Redemptions..............................24
Management.............................................25
Financial Statements...................................28
Principal Shareholders.................................28
Investment Advisory Services...........................29
Distributor............................................31
Transfer Agent.........................................32
Custodian..............................................32
Independent Auditors...................................32
Portfolio Transactions.................................32
Additional Income Tax Considerations...................34
Investment Performance.................................36
Additional Information on Net Asset Value--Municipal
Money Fund and Municipal Money Portfolio............43
Glossary...............................................44
<PAGE>
GENERAL INFORMATION AND HISTORY
Stein Roe Municipal Money Market Fund, Stein Roe Intermediate
Municipals Fund, Stein Roe Managed Municipals Fund, and Stein Roe
High-Yield Municipals Fund are series of shares of beneficial
interest of the Stein Roe Municipal Trust ("Municipal Trust").
Each series of Municipal Trust other than Stein Roe Municipal
Money Market Fund ("Municipal Money Fund") invests in a separate
portfolio of securities and other assets, with its own objectives
and policies. Municipal Money Fund invests all of its assets in
shares of SR&F Municipal Money Market Portfolio ("Municipal Money
Portfolio"), which is a series of SR&F Base Trust ("Base Trust").
As used herein, "Intermediate Municipals," "Managed
Municipals," and "High-Yield Municipals" refer to the series of
Municipal Trust designated Stein Roe Intermediate Municipals Fund,
Stein Roe Managed Municipals Fund, and Stein Roe High-Yield
Municipals Fund, respectively.
The name of Municipal Trust was changed on August 1, 1991
from SteinRoe Tax-Exempt Income Trust to SteinRoe Municipal Trust
and was changed on November 1, 1995 to Stein Roe Municipal Trust.
Prior to November 1, 1995, Municipal Money Fund, Intermediate
Municipals, Managed Municipals, and High-Yield Municipals were
named SteinRoe Municipal Money Market Fund, SteinRoe Intermediate
Municipals, SteinRoe Managed Municipals, and SteinRoe High-Yield
Municipals, respectively. SteinRoe Municipal Money Market Fund
was named SteinRoe Tax-Exempt Money Fund prior to November 1,
1992.
Currently, four series of Municipal Trust are authorized and
outstanding. 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.
Stein Roe & Farnham Incorporated (the "Adviser") is
responsible for the business affairs of the Trusts and serves as
investment adviser to the Funds (other than Municipal Money Fund)
and Municipal Money Portfolio. It also provides administrative
and bookkeeping and accounting services to the Funds and Municipal
Money Portfolio.
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 investment companies and/or institutional investors for investment
in another mutual fund 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. 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 currently operating under the master
fund/feeder fund structure is Municipal Money Fund, which
converted 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. The Fund seeks to achieve its objective by investing
all of its net investable assets in shares of Municipal Money
Portfolio, another mutual fund that has an identical investment
objective and identical investment policies to the Fund. In
pursuing its objective, Municipal Money Portfolio attempts to
maintain relative stability of principal and liquidity. Municipal
Money Portfolio invests 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
Municipal Money 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, Municipal Money Portfolio invests 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 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 Municipal Money
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.
- ------------
/1/ The Boards 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, Municipal Money 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 Board 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.
/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.
- -------------
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.
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.
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, Municipal Money 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,
Municipal Money 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
Managed Municipals, securities dealers. Municipal Money Fund and
Municipal Money 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.
- ---------
/3/ In the case of Municipal Money Fund, Municipal Money
Portfolio, and Managed Municipals, the policies described in this
paragraph are fundamental.
- --------
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.
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. The determinations concerning the liquidity and
appropriate valuation of a municipal lease obligation, as with any
other municipal security, are made based on all relevant factors.
These factors may include, among others: (1) the frequency of
trades and quotes for the obligation; (2) the number of dealers
willing to purchase or sell the security and the number of other
potential buyers; (3) the willingness of dealers to undertake to
make a market in the security; and (4) the nature of the
marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of
transfer.
Tender option bonds are not included in the calculation of
the 5% total net asset limitation for 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 sell securities short against the box; that is,
enter into short sales of securities that it currently owns or has
the right to acquire through the conversion or exchange of other
securities that it owns at no additional cost. A Fund may make
short sales of securities only if at all times when a short
position is open the Fund owns at least an equal amount of such
securities or securities convertible into or exchangeable for
securities of the same issue as, and equal in amount to, the
securities sold short, at no additional cost.
In a short sale against the box, a Fund does not deliver from
its portfolio the securities sold. Instead, the Fund borrows the
securities sold short from a broker-dealer through which the short
sale is executed, and the broker-dealer delivers such securities,
on behalf of the Fund, to the purchaser of such securities. The
Fund is required to pay to the broker-dealer the amount of any
dividends paid on shares sold short. Finally, to secure its
obligation to deliver to such broker-dealer the securities sold
short, the Fund must deposit and continuously maintain in a
separate account with the Fund's custodian an equivalent amount of
the securities sold short or securities convertible into or
exchangeable for such securities at no additional cost. A Fund is
said to have a short position in the securities sold until it
delivers to the broker-dealer the securities sold. A Fund may
close out a short position by purchasing on the open market and
delivering to the broker-dealer an equal amount of the securities
sold short, rather than by delivering portfolio securities.
Short sales may protect a Fund against the risk of losses in
the value of its portfolio securities because any unrealized
losses with respect to such portfolio securities should be wholly
or partially offset by a corresponding gain in the short position.
However, any potential gains in such portfolio securities should
be wholly or partially offset by a corresponding loss in the short
position. The extent to which such gains or losses are offset
will depend upon the amount of securities sold short relative to
the amount the Fund owns, either directly or indirectly, and, in
the case where the Fund owns convertible securities, changes in
the conversion premium.
Short sale transactions involve certain risks. If the price
of the security sold short increases between the time of the short
sale and the time a Fund replaces the borrowed security, the Fund
will incur a loss and if the price declines during this period,
the Fund will realize a short-term capital gain. Any realized
short-term capital gain will be decreased, and any incurred loss
increased, by the amount of transaction costs and any premium,
dividend or interest which the Fund may have to pay in connection
with such short sale. Certain provisions of the Internal Revenue
Code may limit the degree to which a Fund is able to enter into
short sales. There is no limitation on the amount of each Fund's
assets that, in the aggregate, may be deposited as collateral for
the obligation to replace securities borrowed to effect short
sales and allocated to segregated accounts in connection with
short sales. No Fund currently expects that more than 5% of its
total assets would be involved in short sales against the box.
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 Municipal
Money 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 Municipal Money 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 Municipal Money 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 Municipal Money
Portfolio.
ZERO COUPON BONDS
Each of Intermediate Municipals, Managed Municipals, and
High-Yield Municipals 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.
TENDER OPTION BONDS
Each Fund may purchase tender option bonds. A tender
option bond is a Municipal Security (generally held pursuant
to a custodial arrangement) having a relatively long
maturity and bearing interest at a fixed rate substantially
higher than prevailing short-term tax-exempt rates,
that has been coupled with the agreement of a third party,
such as a bank, broker-dealer or other financial institution,
pursuant to which such institution grants the security holders the
option, at periodic intervals, to tender their securities to the
institution and receive the face value thereof. As consideration
for providing the option, the financial institution receives
periodic fees equal to the difference between the Municipal
Security's fixed coupon rate and the rate, as determined by a
remarketing or similar agent at or near the commencement of such
period, that would cause the securities, coupled with the tender
option, to trade at par on the date of such determination. Thus,
after payment of this fee, the security holder effectively holds a
demand obligation that bears interest at the prevailing short-term
tax-exempt rate. The Adviser will consider on an ongoing basis
the creditworthiness of the issuer of the underlying Municipal
Securities, of any custodian, and of the third-party provider of
the tender option. In certain instances and for certain tender
option bonds, the option may be terminable in the event of a
default in payment of principal or interest on the underlying
Municipal Securities and for other reasons. Municipal Money Fund
and Municipal Money Portfolio may invest up to 10% of net assets
in tender option bonds.
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 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.
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 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.
- -------------
/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.
- -------------
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.
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 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 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.
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 Municipal Money
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 Municipal Money 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/ /6/
- -----------
/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.
/6/ Notwithstanding the foregoing, and in accordance with Rule 2a-
7 of the Investment Company Act of 1940 (the "Rule"), Municipal
Money Fund and Municipal Money Portfolio will not, immediately
after the acquisition of any security (other than a Government
Security or certain other securities as permitted under the Rule),
invest more than 5% of its total assets in the securities of any
one issuer; provided, however, that each may invest up to 25% of
its total assets in First Tier Securities (as that term is defined
in the Rule) of a single issuer for a period of up to three
business days after the purchase thereof.
- -----------
(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, although it may (a) participate in an
interfund lending program with other Stein Roe Funds provided that
no such loan may be made if, as a result, the aggregate of such
loans would exceed 33 1/3% of the value of its total assets; (b)
purchase money market instruments and enter into repurchase
agreements; and (c) acquire publicly-distributed or privately-
placed debt securities;
(iv) borrow except that it may (a) borrow for non-leveraging,
temporary or emergency purposes and (b) engage in reverse
repurchase agreements and make other borrowings, provided that the
combination of (a) and (b) shall not exceed 33 1/3% of the value
of its total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage
permitted by law; it may borrow from banks, other Stein Roe Funds,
and other persons to the extent permitted by applicable law;
(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, 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 Municipal Money 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 of the Funds. The Funds have also
adopted the following restrictions that may be required by various
laws and administrative positions. These restrictions are not
fundamental. None of the following restrictions shall prevent a
Fund from investing all or substantially all of its assets in
another investment company having the same investment objective
and substantially similar investment policies as the Fund. A Fund
may not:
(a) own more than 10% of the outstanding voting securities of
an issuer;
(b) invest in companies for the purpose of exercising control
or management;
(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) 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;
(f) 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;
(g) sell securities short unless (1) it 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 it expects to
receive in a recapitalization, reorganization, or other exchange
for securities it contemporaneously owns or has the right to
obtain and provided that it 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;
(h) invest more than 5% of its total assets (taken at market
value at the time of a particular investment) in securities of
issuers (other than issuers of federal agency obligations or
securities issued or guaranteed by any foreign country or asset-
backed securities) that, together with any predecessors or
unconditional guarantors, have been in continuous operation for
less than three years ("unseasoned issuers");
(i) invest more than 15% of its total assets (taken at market
value at the time of a particular investment) in restricted
securities and securities of unseasoned issuers;
(j) [Municipal Money Fund, Municipal Money Portfolio,
Intermediate Municipals, and Managed Municipals only] invest more
than 10% of its net assets (taken at market value at the time of a
particular investment) in illiquid securities, including
repurchase agreements maturing in more than seven days; [High-
Yield Municipals only] invest more than 15% of its net assets
(taken at market value at the time of a particular investment) in
illiquid securities, including repurchase agreements maturing in
more than seven days.
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; 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 Municipal Money
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.
ADDITIONAL INVESTMENT CONSIDERATIONS
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 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.
* * * * *
The Adviser seeks to provide superior long-term
investment results through a disciplined, research-intensive
approach to investment selection and prudent risk management. I
n working to build wealth for generations, it has been guided
by three primary objectives which it believes are the foundation
of a successful investment program. These objectives are
preservation of capital, limited volatility through managed
risk, and consistent above-average returns, as appropriate
for the particular client or managed account.
Because every investor's needs are different, Stein Roe
mutual funds are designed to accommodate different investment
objectives, risk tolerance levels, and time horizons. In
selecting a mutual fund, investors should ask the following
questions:
What are my investment goals?
It is important to a choose a fund that has investment objectives
compatible with your investment goals.
What is my investment time frame?
If you have a short investment time frame (e.g., less than three
years), a mutual fund that seeks to provide a stable share price,
such as a money market fund, or one that seeks capital
preservation as one of its objectives may be appropriate. If you
have a longer investment time frame, you may seek to maximize your
investment returns by investing in a mutual fund that offers
greater yield or appreciation potential in exchange for greater
investment risk.
What is my tolerance for risk?
All investments, including those in mutual funds, have risks which
will vary depending on investment objective and security type.
However, mutual funds seek to reduce risk through professional
investment management and portfolio diversification.
In general, equity mutual funds emphasize long-term capital
appreciation and tend to have more volatile net asset values than
bond or money market mutual funds. Although there is no guarantee
that they will be able to maintain a stable net asset value of
$1.00 per share, money market funds emphasize safety of principal
and liquidity, but tend to offer lower income potential than bond
funds. Bond funds tend to offer higher income potential than
money market funds but tend to have greater risk of principal and
yield volatility.
In addition, the Adviser believes that investment in a high
yield fund provides an opportunity to diversify an investment
portfolio because the economic factors that affect the performance
of high-yield, high-risk debt securities differ from those that
affect the performance of government securities or equity securities.
PURCHASES AND REDEMPTIONS
Purchases and redemptions are discussed in the Prospectus
under the headings How to Purchase Shares, How to Redeem Shares,
Net Asset Value, and Shareholder Services, and that information is
incorporated herein by reference. The Prospectus discloses that
you may purchase (or redeem) shares through investment dealers,
banks, or other institutions. It is the responsibility of any
such institution to establish procedures insuring the prompt
transmission to Municipal Trust of any such purchase order. The
state of Texas has asked that mutual funds disclose in their
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.
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 Municipal 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
NAME AGE WITH THE TRUST PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ----------------------- --- ---------------------- ----------------------------------------------------
<S> <C> <C> <C>
Gary A. Anetsberger (4) 40 Senior Vice-President Chief Financial Officer of the Mutual Funds
division of Stein Roe & Farnham Incorporated
(the "Adviser"); senior vice president of the
Adviser since April, 1996; vice president of
the Adviser prior thereto
Timothy K. Armour (1)(2) 48 President; Trustee President of the Mutual Funds division of the
(4) Adviser and director of the Adviser since June,
1992; senior vice president and director of
marketing of Citibank Illinois prior thereto
Jilaine Hummel Bauer (4) 41 Executive Vice-President; General counsel and secretary of the Adviser
Secretary since November 1995; senior vice president of
the Adviser since April, 1992; vice president
of the Adviser prior thereto
Kenneth L. Block (3)(4) 76 Trustee Chairman Emeritus of A. T. Kearney, Inc.
(international management consultants)
William W. Boyd (3) (4) 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
Thomas W. Butch 39 Vice-President Senior vice president of the Adviser since
September, 1994; first vice president,
corporate communications, of Mellon Bank
Corporation prior thereto
Lindsay Cook (1)(4) 44 Trustee Senior vice president of Liberty Financial
Companies, Inc. (the indirect parent of the
Adviser)
Joanne T. Costopoulos 49 Vice-President Senior portfolio manager of the Adviser; senior
vice president of the Adviser since November,
1995; vice president of the Adviser from
January, 1994 to November, 1995; associate of
the Adviser prior thereto
Philip J. Crosley 50 Vice-President Senior Vice President of the Adviser since
February, 1996; Vice President, Institutional
Sales - Advisor Sales, Invesco Funds Group prior
thereto
Douglas A. Hacker (3)(4) 41 Trustee Senior vice president and chief financial
officer, United Airlines, since July, 1994;
senior vice president--Finance, United
Airlines, February, 1993 to July, 1994; vice
president, American Airlines prior thereto
Lynn C. Maddox 55 Vice-President Senior vice president of the Adviser
Anne E. Marcel 38 Vice-President Vice president of the Adviser since April,
1996; 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 prior thereto
M. Jane McCart 41 Vice-President Senior vice president of the Adviser since
January, 1991; vice president of the Adviser
prior thereto
Francis W. Morley (2)(3) 76 Trustee Chairman of Employer Plan Administrators and
(4) Consultants Co. (designer, administrator, and
communicator of employee benefit plans)
Charles R. Nelson (3) 54 Trustee Van Voorhis Professor of Political Economy of
(4) the University of Washington
Nicolette D. Parrish (4) 46 Vice-President; Senior compliance administrator and assistant
Assistant Secretary secretary of the Adviser since November 1995;
senior legal assistant for the Adviser prior
thereto
Cynthia A. Prah (4) 34 Vice-President Manager of Shareholder Transaction Processing
for the Adviser
Sharon R. Robertson (4) 34 Controller Accounting manager for the Adviser's Mutual
Funds division
Janet B. Rysz (4) 41 Assistant Secretary Senior compliance administrator and 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
Thomas C. Theobald(3)(4) 59 Trustee Managing partner, William Blair Capital
Partners (private equity fund) since 1994;
chief executive officer and chairman of the
Board of Directors of Continental Bank
Corporation, 1987-1994
Heidi J. Walter (4) 29 Vice-President Legal counsel for the Adviser since March, 1995;
associate with Beeler Schad & Diamond, P.C., prior
thereto
Veronica M. Wallace 50 Vice-President Portfolio manager for the Adviser since
September, 1995; trader in taxable short-term
instruments for the Adviser prior thereto
Gordon R. Worley (3)(4) 77 Trustee Private investor
Hans P. Ziegler (4) 55 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 (4) 30 Treasurer Compliance manager for the Adviser's Mutual
Funds division since August 1995; compliance
accountant, January 1995 to July 1995; section
manager, January 1994 to January 1995;
supervisor prior thereto
<FN>
____________________________
(1) Trustee who is an "interested person" of the Trust and of the
Adviser, as defined in the Investment Company Act of 1940.
(2) Member of the Executive Committee of the Board of Trustees,
which is authorized to exercise all powers of the Board with
certain statutory exceptions.
(3) Member of the Audit Committee of the Board, which makes
recommendations to the Board regarding the selection of
auditors and confers with the auditors regarding the scope and
results of the audit.
(4) This person 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. Mr. Armour, 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. Hacker is P.O. Box
66100, Chicago, IL 60666; 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. Theobald is Suite 3300, 222 West
Adams Street, Chicago, IL 60606; 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.
Officers and trustees affiliated with the Adviser serve
without any compensation from Municipal Trust. In compensation
for their services to Municipal Trust, trustees who are not
"interested persons" of Municipal Trust or the Adviser are paid an
annual retainer of $8,000 (divided equally among the Funds of
Municipal Trust) plus an attendance fee from each Fund for each
meeting of the Board or standing committee thereof attended at which
business for that Fund is conducted. The attendance fees (other
than for a Nominating Committee or Compensation 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 $50 million, the fee is $50
per meeting; with $51 to $250 million, the fee is $200 per meeting;
with $251 million to $500 million, $350; with $501 million to $750
million, $500; with $751 million to $1 billion, $650; and with over
$1 billion in net assets, $800. For a Fund participating in the
master fund/feeder fund structure, the trustees' attendance fee
is paid solely by the master portfolio. Each non-interested
trustee also receives $500 from the Trust for attending each
meeting of the Nominating Committee and Compensation Committee.
Municipal Trust has no retirement or pension plan. The following
table sets forth compensation paid by Municipal Trust during
the fiscal year ended June 30, 1996 to each of the trustees:
Aggregate Compensation Total Compensation from the
Name of Trustee from Municipal Trust Stein Roe Fund Complex*
- --------------- ---------------------- -----------------------
Timothy K. Armour -0- -0-
Lindsay Cook -0- -0-
Douglas A. Hacker -0- -0-
Thomas C. Theobald -0- -0-
Kenneth L. Block $21,250 $82,417
William W. Boyd 22,720 86,317
Francis W. Morley 21,250 82,017
Charles R. Nelson 22,750 86,317
Gordon R. Worley 21,250 82,817
_______________
* During this period, the Stein Roe Fund Complex consisted of the
six series of Stein Roe Income Trust, four series of Municipal
Trust, eight series of Stein Roe Investment Trust, and one series
of Base Trust. Messrs. Hacker and Theobald were elected trustees
on June 18, 1996, and, therefore, did not receive any compensation
for the year ended June 30, 1996.
FINANCIAL STATEMENTS
Please refer to the Funds' June 30, 1996 Financial Statements
(balance sheets and schedules of investments as of June 30, 1996
and the statements of operations, changes in net assets, and notes
thereto) and the report of independent auditors contained in the
June 30, 1996 Annual Report of the Funds. The Financial
Statements and the report of independent auditors (but no other
material from the Annual Report) are incorporated herein by
reference. The Annual Report may be obtained at no charge by
telephoning 800-338-2550.
PRINCIPAL SHAREHOLDERS
As of August 28, 1996, 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 10.2% of the outstanding shares of
Intermediate Municipals.
The following table shows shares of the Funds as of August
28, 1996, held by the categories of persons indicated and in each
case the approximate percentage of outstanding shares represented:
Clients of the Adviser
in their Client Accounts* Trustees and Officers
------------------------- ---------------------
Shares Held Percent Shares Held Percent
----------- ------- ----------- -------
Municipal Money Fund 37,881,540 31% 611,719 **
Intermediate Municipals 7,137,428 40% 126,504 **
Managed Municipals 18,441,534 27% 82,127 **
High-Yield Municipals 7,067,093 28% 42,290 **
_________________
*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, and Municipal Money Portfolio. Prior to
September 28, 1995, the Adviser also served as investment adviser
to Municipal Money Fund. On that date, Municipal Money Fund began
investing in Municipal Money Portfolio and the Adviser no longer
provides 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
subsidiary of Liberty Financial Companies, Inc. ("Liberty
Financial"), which is a majority owned subsidiary of LFC Holdings,
Inc., which is a wholly owned subsidiary of Liberty Mutual Equity
Corporation, which is a wholly owned subsidiary of Liberty Mutual
Insurance Company. Liberty Mutual Insurance Company is a mutual
insurance company, principally in the property/casualty insurance
field, organized under the laws of Massachusetts in 1912.
The directors of the Adviser are Kenneth R. Leibler, C. Allen
Merritt, Jr., Timothy K. Armour, and Hans P. Ziegler. Mr. Leibler
is President and Chief Executive Officer of Liberty Financial;
Mr. Merritt is Senior Vice President and Treasurer of Liberty
Financial; Mr. Armour is President of the Adviser's Mutual
Funds division; and Mr. Ziegler is Chief Executive Officer of
the Adviser. The business address of Messrs. Leibler and
Merritt is Federal Reserve Plaza, Boston, Massachusetts 02210;
and that of Messrs. Armour, and Ziegler is One South Wacker Drive,
Chicago, Illinois 60606.
The Adviser and its predecessor have been providing
investment advisory services since 1932. The Adviser acts as
investment adviser to wealthy individuals, trustees, pension and
profit sharing plans, charitable organizations, and other
institutional investors. As of June 30, 1996, the Adviser managed
over $24.7 billion in assets: over $7.4 billion in equities and
over $17.3 billion in fixed-income securities (including $1.2
billion in municipal securities). The $24.7 billion in managed
assets included over $7 billion held by open-end mutual funds
managed by the Adviser (approximately 16% of the mutual fund
assets were held by clients of the Adviser). These mutual funds
were owned by over 189,000 shareholders. The $7 billion in mutual
fund assets included over $660 million in over 38,000 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 June 30, 1996, the Adviser employed
approximately 16 research analysts and 32 account managers. The
average investment-related experience of these individuals was 20
years.
Stein Roe Counselor [SERVICE MARK] and Stein Roe Personal
Counselor [SERVICE MARK] are professional investment advisory
services offered by the Adviser to Fund shareholders. Each is
designed to help shareholders construct Fund investment portfolios
to suit their individual needs. Based on information shareholders
provide about their financial goals and objectives in response
to a questionnaire, the Adviser's investment professionals
create customized portfolio recommendations. Shareholders
participating in Stein Roe Counselor [SERVICE MARK] are free
to self direct their investments while considering the
Adviser's recommendations; shareholders participating in
Stein Roe Personal Counselor [SERVICE MARK] enjoy
the added benefit of having the Adviser implement portfolio
recommendations automatically for a fee of 1% or less, depending
on the size of their portfolios. In addition to reviewing
shareholders' goals and objectives periodically and updating
portfolio recommendations to reflect any changes, the Adviser
provides shareholders participating in these programs with a
dedicated Counselor [SERVICE MARK] representative. Other
distinctive services include specially designed account statements
with portfolio performance and transaction data, newsletters, and
regular investment, economic, and market updates. A $50,000
minimum investment is required to participate in either program.
Please refer to the description of the Adviser, each Fund's
administrative agreement, the management agreements, fees, expense
limitations, and transfer agency services under Management of the
Funds and Fee Table in the Prospectus, which is incorporated
herein by reference. The advisory agreements relating to
Intermediate Municipals, Managed Municipals, and High-Yield
Municipals were replaced with administrative and management
agreements on July 1, 1996. The table below shows gross advisory
fees paid by the Funds and any expense reimbursements by the
Adviser to them. The fees and expense reimbursements of the Funds
and Municipal Money Portfolio are described in the Prospectus.
YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
FUND PAYMENT 6/30/96 6/30/96 6/30/94
- ----------------- ---------------- --------- --------- ----------
Municipal Money Advisory fee $ 169,982 $ 786,956 $ 998,500
Fund Reimbursement 194,035 120,433 -0-
Administrative fee 248,793 -- --
Municipal Money
Portfolio Management fee 289,880 -- --
Intermediate Advisory fee 1,220,311 1,248,808 1,415,654
Municipals Reimbursement 227,352 36,038 -0-
Managed Municipals Advisory fee 3,261,714 3,392,060 3,936,931
High-Yield
Municipals Advisory fee 1,549,376 1,587,995 1,846,679
The Adviser provides office space and executive and other
personnel to the Funds and Municipal Money Portfolio and bears any
sales or promotional expenses. Each Fund and Municipal Money
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 Fund's administrative agreement 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. 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, as described in the Prospectus under Fee
Table. Any such reimbursements will enhance the yield of such
Fund.
Each management 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
Municipal Money Portfolio) for any error of judgment, mistake of
law or any loss arising out of any investment, or for any other
act or omission in the performance by the Adviser of its duties
under the agreement, except for liability resulting from willful
misfeasance, bad faith or gross negligence on the Adviser's part
in the performance of its duties or from reckless disregard by the
Adviser of the Adviser's obligations and duties under that
agreement.
Any expenses that are attributable solely to the
organization, operation, or business of a Fund (or Municipal Money
Portfolio) shall be paid solely out of that Fund's (or Municipal
Money Portfolio's) assets. Any expenses incurred by a Trust that
are not solely attributable to a particular Fund (or Municipal
Money Portfolio) are apportioned in such a manner as the Adviser
determines is fair and appropriate, unless otherwise specified by
the Board of Trustees.
BOOKKEEPING AND ACCOUNTING AGREEMENT
Pursuant to a separate agreement with Municipal Trust, the
Adviser receives a fee for performing certain bookkeeping and
accounting services for the Funds. 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. During the fiscal
years ended June 30, 1995 and 1996, the Adviser received aggregate
fees of $74,069 and $147,330 from Municipal Trust for services
performed under this agreement.
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.
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 0.140% of average daily net assets. 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 Municipal
Money Portfolio.
CUSTODIAN
State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, is the custodian for the Municipal
Trust and Base Trust. 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 Municipal Trust and Municipal
Money Portfolio 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
For the purposes of discussion under Portfolio Transactions,
the term "Fund" refers to Municipal Money Fund, Municipal Money
Portfolio, Intermediate Municipals, Managed Municipals, and High-
Yield Municipals.
The Adviser places the orders for the purchase and sale of
portfolio securities for each Fund 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
6/30/96 -0- -0- -0-
Number of futures contracts -0- -0- -0-
Total brokerage commissions
paid during year ended
6/30/95 $58,366 $58,366 $14,023
Total brokerage commissions
paid during year ended
6/30/94 $110,292 $38,028 -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, but do
reflect the spread between the bid and asked prices. The Adviser
may also transact purchases of portfolio securities directly with
the issuers.
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 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, 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, 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), 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 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 effects transactions may be used in servicing
any or all of the clients of the Adviser and not all such research
products or services are used in connection with the management of
such Fund.
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 for purchases of Municipal Securities in
underwritten offerings. Each Fund 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 to continue to attempt to
recapture underwriting discounts or selling concessions.
ADDITIONAL INCOME TAX CONSIDERATIONS
Each Fund and Municipal Money Portfolio intend to comply with
the special provisions of the Internal Revenue Code that relieve
it of federal income tax to the extent of its net investment
income and capital gains currently distributed to shareholders.
Throughout this section, the term "Fund" also refers to Municipal
Money 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. 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:
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, 1996 were:
$0.0.000551637 365
-------------- ---
Current Yield = $1.00 x 7 = 2.88%
[1+$0.0.000551637]365/7
---------------------
Effective Yield = $1.00 - 1 = 2.92%
Tax-Equivalent Current Yield = 4.76% (assuming 39.6% tax rate)
Tax-Equivalent Effective Yield = 4.83% (assuming 39.6% tax rate)
The average dollar-weighted portfolio maturity for the seven
days ended June 30, 1996 was 53 days.
In addition to fluctuations reflecting changes in net income
of the Fund, resulting from changes in its proportionate share of
Municipal Money Portfolio's investment income and expenses, the
Fund's yield also would be affected if the Fund or Municipal Money
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.
The Yield formula is as follows: YIELD = 2[((a-b/cd) +1) - 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 ending net asset value of the Fund for the period.
For example, the Yields of the Funds for the 30-day period ended
June 30, 1996 were:
Intermediate Municipals
Yield = 4.68%
Tax-Equivalent Yield = 7.74%
(assuming 39.6% tax rate)
Managed Municipals
Yield = 5.24%
Tax-Equivalent Yield = 8.68%
(assuming 39.6% tax rate)
High-Yield Municipals
Yield = 5.77%
Tax-Equivalent Yield = 9.56%
(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.
n
Average Annual Total Return is computed as follows: ERV = P(1+T)
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the period at the
end of the period (or fractional portion thereof).
For example, for a $1,000 investment in a Fund, the "Total
Return," the "Total Return Percentage," and the "Average Annual
Total Return" at June 30, 1996 were:
TOTAL RETURN AVERAGE ANNUAL
FUND TOTAL RETURN PERCENTAGE TOTAL RETURN
- --------------------- ------------ ------------ -------------
Municipal Money Fund
1 year $1,031 3.13% 3.13%
5 years 1,140 13.98 2.65
10 years 1,443 44.26 3.73
Intermediate Municipals
1 year 1,055 5.47 5.47
5 years 1,392 39.15 6.83
10 years 1,932 93.20 6.81
Managed Municipals
1 year 1,062 6.24 6.24
5 years 1,408 40.75 7.08
10 years 2,123 112.31 7.82
High-Yield Municipals
1 year 1,068 6.83 6.83
5 years 1,377 37.69 6.61
10 years 2,133 113.32 7.87
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
Associated Press
Barron's
Bloomberg
Boston Herald
Business Week
Chicago Tribune
Chicago Sun-Times
Cleveland Plain Dealer
CNBC
CNN
Crain's Chicago Business
Consumer Reports
Consumer Digest
Dow Jones Newswire
Fee Advisor
Financial Planning
Financial World
Forbes
Fortune
Fund Action
Fund Decoder
Gourmet
Individual Investor
Investment Adviser
Investment Dealers' Digest
Investor's Business Daily
Kiplinger's Personal Finance Magazine
Knight-Ridder
Lipper Analytical Services
Los Angeles Times
Louis Rukeyser's Wall Street
Money
Morningstar
Mutual Fund Market News
Mutual Fund News Service
Mutual Funds Magazine
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
Securities Industry Daily
Smart Money
Smithsonian
Strategic Insight
Time
Travel & Leisure
USA Today
U.S. News & World Report
Value Line
The Wall Street Journal
The Washington Post
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 categories; 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 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:
BENCHMARK FUND(S)
- ----------------------------------- ----------------------
Lehman Brothers Municipal Bond Index High-Yield Municipals,
Managed Municipals
Lehman Brothers 10-Year Municipal
Bond Index Intermediate Municipals
Lehman Brothers 7-Year Municipal
Bond Index Intermediate Municipals
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
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
The Lipper 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 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
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 Stein Roe Counselor
[SERVICE MARK] and the
Stein Roe Personal Counselor [SERVICE MARK] programs and asset
allocation and other investment strategies.
ADDITIONAL INFORMATION ON NET ASSET VALUE--MUNICIPAL
MONEY FUND AND MUNICIPAL MONEY PORTFOLIO
Please refer to Net Asset Value in the Prospectus, which is
incorporated herein by reference. Municipal Money 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 in valuation, it may result in periods during which
value as determined by amortized cost is higher or lower than the
price Municipal Money 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 Municipal Money 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 Municipal
Money 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 Municipal Money
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.
Municipal Money 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 Municipal Money Portfolio's portfolio
holdings by the Board of Trustees, at such intervals as it deems
appropriate, to determine whether Municipal Money 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 Municipal Money
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 Municipal Money Portfolio's use of the
amortized cost method of portfolio valuation to maintain its net
asset value at $1.00 per share, Municipal Money 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 Municipal Money 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 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, Municipal Money
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.
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.
SHORT-TERM. This term, as used with respect to Municipal Money
Fund and Municipal Money 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.
