1933 Act Registration No. 2-99356
1940 Act File No. 811-4367
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Post Effective Amendment No. 25 [X]
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 26 [X]
STEIN ROE MUNICIPAL TRUST
(Exact Name of Registrant as Specified in Charter)
One South Wacker Drive, Chicago, Illinois 60606
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code: 1-800-338-2550
Jilaine Hummel Bauer Cameron S. Avery
Executive Vice-President Bell, Boyd & Lloyd
& Secretary Three First National Plaza
Stein Roe Municipal Trust Suite 3300
One South Wacker Drive 70 W. Madison Street
Chicago, Illinois 60606 Chicago, Illinois 60602
(Name and Address of Agents for Service)
It is proposed that this filing will become effective (check
appropriate box):
[ ] immediately upon filing pursuant to paragraph (b)
[ ] on (date) pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[X] on February 2, 1998 pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
Registrant has elected to register pursuant to Rule 24f-2 an
indefinite number of shares of beneficial interest of the following
series: Stein Roe Intermediate Municipals Fund, Stein Roe
Municipal Money Market Fund, Stein Roe Managed Municipals Fund, and
Stein Roe High-Yield Municipals Fund. The Rule 24f-2 Notice for the
fiscal year ended June 30, 1997 was filed on August 27, 1997.
This amendment to the Registration Statement has also been
signed by SR&F Base Trust as it relates to Stein Roe Municipal
Money Market Fund and Stein Roe High-Yield Municipals Fund.
<PAGE>
STEIN ROE MUNICIPAL TRUST
CROSS REFERENCE SHEET
ITEM
NO. CAPTION
- ---- -------
PART A
1 Front cover
2 Fee Table; Summary
3 (a) Financial Highlights
(b) Inapplicable
(c) Investment Return
(d) Financial Highlights
4 Organization and Description of Shares; The Funds;
Investment Policies; Portfolio Investments and Strategies;
Investment Restrictions; Investment Considerations and
Risks; Summary--Investment Risks
5 (a) Management--Trustees and Investment Adviser
(b) Management--Trustees and Investment Adviser,
Fees and Expenses
(c) Management--Portfolio Managers
(d) Inapplicable
(e) Management--Transfer Agent
(f) Management--Fees and Expenses; Financial Highlights
(g) Inapplicable
5A Inapplicable
6 (a) Organization and Description of Shares; see statement of
additional information: General Information and History
(b) Inapplicable
(c) Organization and Description of Shares
(d) Organization and Description of Shares
(e) Summary
(f) Shareholder Services; Distributions and Income Taxes
(g) Distributions and Income Taxes
(h) Master Fund/Feeder Fund: Structure and Risk Factors
7 How to Purchase Shares
(a) Management of the Funds--Distributor
(b) How to Purchase Shares--Purchase Price and Effective Date;
Net Asset Value
(c) Inapplicable
(d) How to Purchase Shares
(e) Inapplicable
(f) Inapplicable
(g) Inapplicable
8 (a) How to Redeem Shares; Shareholder Services
(b) How to Purchase Shares--Purchases Through Third Parties
(c) How to Redeem Shares--General Redemption Policies
(d) How to Redeem Shares--General Redemption Policies
9 Inapplicable
PART B
10 Cover page
11 Table of Contents
12 General Information and History
13 Investment Policies; Portfolio Investments and Strategies;
Investment Restrictions
14 Management
15(a) Inapplicable
(b) Principal Shareholders
(c) Principal Shareholders
16(a) Investment Advisory Services; Management; see prospectus:
Management, Fee Table
(b) Investment Advisory Services
(c) Inapplicable
(d) Investment Advisory Services
(e) Inapplicable
(f) Inapplicable
(g) Inapplicable
(h) Custodian; Independent Auditors
(i) Transfer Agent
17(a) Portfolio Transactions
(b) Inapplicable
(c) Portfolio Transactions
(d) Portfolio Transactions
(e) Inapplicable
18 General Information and History
19(a) Purchases and Redemptions; see prospectus: How to Purchase
Shares, How to Redeem Shares, Shareholder Services
(b) Purchases and Redemptions; Additional Information on Net
Asset Value--Municipal Money Fund and Municipal Money
Portfolio; see prospectus: Net Asset Value
(c) Purchases and Redemptions
20 Additional Income Tax Considerations; Portfolio Investments
and Strategies--Taxation of Options and Futures
21(a) Distributor
(b) Inapplicable
(c) Inapplicable
22 Investment Performance
23 Financial Statements
PART C
24 Financial Statements and Exhibits
25 Persons Controlled By or Under Common Control with
Registrant
26 Number of Holders of Securities
27 Indemnification
28 Business and Other Connections of Investment Adviser
29 Principal Underwriters
30 Location of Accounts and Records
31 Management Services
32 Undertakings
<PAGE>
Prospectus Feb. 2, 1998
Stein Roe Mutual Funds
Stein Roe Municipal Money Market Fund
Stein Roe Intermediate Municipals Fund
Stein Roe Managed Municipals Fund
Stein Roe High-Yield Municipals Fund
Municipal Money Fund seeks maximum current income exempt
from federal income tax. It attempts to maintain relative
stability of principal and liquidity by investing principally
in a diversified portfolio of short-term Municipal
Securities.
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
Investment Policies--High-Yield Municipals Fund.)
Each of Municipal Money Fund and High-Yield Municipals
Fund seeks to achieve its objective by investing all of its
net investable assets in a corresponding Portfolio of SR&F
Base Trust that has the identical investment objective and
substantially the same investment policies as the Fund.
(See Master Fund/Feeder Fund: Structure and Risk Factors.)
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 an 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 Fund 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 Feb. 2,
1998, containing more detailed information, has been filed
with the Securities and Exchange Commission and (together
with any supplements thereto) is incorporated herein by
reference. That information, material incorporated by
reference, and other information regarding registrants that
file electronically with the SEC is available at the SEC's
website, http://www.sec.gov. This prospectus is also
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, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
TABLE OF CONTENTS
Page
Summary.................................3
Fee Table.............................. 6
Financial Highlights................... 7
The Funds............................. 10
Investment Policies....................11
Municipal Money Fund................11
Intermediate Municipals.............12
Managed Municipals................. 13
High-Yield Municipals Fund..........13
Portfolio Investments and Strategies...14
Investment Restrictions................17
Risks and Investment Considerations... 18
How to Purchase Shares................ 20
By Check........................... 20
By Wire ............................20
By Electronic Transfer............. 21
By Exchange........................ 21
Conditions of Purchase............. 21
Purchases Through Third Parties.....22
Purchase Price and Effective Date...22
How to Redeem Shares...................22
By Written Request................. 22
By Exchange........................ 23
Special Redemption Privileges...... 23
General Redemption Policies........ 25
Shareholder Services.................. 26
Net Asset Value....................... 28
Distributions and Income Taxes.........29
Investment Return..................... 30
Management.............................31
Organization and Description of Shares.33
Master Fund/Feeder Fund: Structure
and Risk Factors....................34
Appendix--Ratings......................36
Certificate of Authorization.......... 43
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 Fund") are series of Stein Roe
Municipal Trust, an open-end 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"), which 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, S&P or
Fitch (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, S&P or Fitch (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 Fund invests all of its net investable
assets in SR&F High-Yield Municipals Portfolio, which 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 investment 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 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 Fund 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
the investment objectives and policies, please see Investment
Policies. 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). Lower
initial investment minimums apply to IRAs, UGMAs, and
automatic investment plans. 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 additional
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 investment advisory services to
Intermediate Municipals, Managed Municipals, High-Yield
Municipals Portfolio, and Municipal Money Portfolio. In
addition, it provides administrative and bookkeeping and
accounting services to each Fund and each Portfolio. For a
description of the Adviser and the fees it receives for these
services, see Management.
If you have any additional questions about the Funds,
please feel free to discuss them with a Stein Roe account
representative by calling 800-338-2550.
FEE TABLE
Muni- Inter- High-
cipal mediate Yield
Money Muni- Managed Municipals
Fund cipals Municipals Fund
----- ------ ---------- ----------
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 ...0.34% 0.46% 0.41% 0.43%
12b-1 Fees.......................None None None None
Other Expenses...................0.36% 0.24% 0.32% 0.34%
----- ----- ----- -----
Total Fund Operating Expenses....0.70% 0.70% 0.73% 0.77%
===== ===== ===== =====
____________________
*There is a $7.00 charge for wiring redemption proceeds to
your bank.
Examples. You would pay the following expenses on a $1,000
investment assuming (1) 5% annual return and (2) redemption
at the end of each time period:
1 year 3 years 5 years 10 years
------ ------- ------- --------
Municipal Money Fund $7 $22 $39 $87
Intermediate Municipals 7 22 39 87
Managed Municipals 7 23 41 91
High-Yield Municipals Fund 8 25 43 95
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.
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 Oct. 31, 1998, subject to
earlier review and possible 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 0.86% for Municipal Money
Fund and 0.58% and 0.82% for Intermediate Municipals,
respectively.
Each participating in the master fund/feeder fund
structure ("feeder Funds") pays the Adviser an administrative
fee based on the Fund's average daily net assets and each
Portfolio pays the Adviser a management fee based on its
average daily net assets. The expenses of both the feeder
Funds and the Portfolios are summarized in the Fee Table and
are described under Management. Each feeder Fund will bear
its proportionate share of the fees and expenses of the
corresponding Portfolio. The trustees of Municipal Trust
have considered whether the annual operating expenses of each
feeder Fund, including its proportionate share of the
expenses of the Portfolio, would be more or less than if the
feeder Fund invested directly in the securities held by the
Portfolio, and concluded that the feeder Fund's expenses
would not be greater in such case.
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
gains distributions are reinvested in additional Fund shares;
and that, for purposes of 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 following tables 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
Year Months
Ended Ended
Dec.31, June 30, Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------- ------ ------ ------- ------ ------ ------ ------ ------ -------
<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. .040 .021 .056 .054 .046 .032 .020 .019 .030 .031 .030
Distributions from net
investment income ... (.040) (.021) (.056) (.054) (.046) (.032) (.020) (.019) (.030) (.031) (.030)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------- -----
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) 0.69% *0.67% 0.67% 0.67% 0.68% 0.70% 0.70% 0.70% 0.70% 0.70% 0.70%
Ratio of net invest-
ment income to
average net assets (b) 4.08% *4.25% 5.57% 5.40% 4.66% 3.19% 1.96% 1.88% 2.96% 3.09% 2.98%
Total return (b)........ 4.11% **2.13% 5.74% 5.52% 4.74% 3.25% 1.97% 1.90% 3.02% 3.13% 3.04%
Net assets, end of
period (000 omitted) $306,971 $294,116 $254,261 $255,953 $237,403 $199,037 $195,887 $165,820 $146,704 $120,432 $118,424
</TABLE>
INTERMEDIATE MUNICIPALS
<TABLE>
<CAPTION>
Six
Year Months
Ended Ended
Dec. 31, June 30, Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
----- ------ ------ ------ ------ ------- ------ ------ ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $10.76 $10.37 $10.43 $10.50 $10.54 $10.73 $11.06 $11.57 $11.00 $11.16 $11.22
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income... .57 .29 .62 .63 .62 .57 .54 .53 .53 .55 .55
Net realized and un-
realized gains (los-
ses) on investments... (.38) .06 .07 .07 .22 .50 .63 (.39) .16 .06 .22
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............ .19 .35 .69 .70 .84 1.07 1.17 .14 .69 .61 .77
DISTRIBUTIONS
Net investment income... (.57) (.29) (.62) (.63) (.62) (.57) (.54) (.53) (.53) (.55) (.55)
Net realized gains...... (.01) -- -- (.03) (.03) (.17) (.12) (.17) -- -- (.06)
In excess of realized
gains................. -- -- -- -- -- -- -- (.01) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total distributions..... (.58) (.29) (.62) (.66) (.65) (.74) (.66) (.71) (.53) (.55) (.61)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
NET ASSET VALUE,
END OF PERIOD......... $10.37 $10.43 $10.50 $10.54 $10.73 $11.06 $11.57 $11.00 $11.16 $11.22 $11.38
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of net expenses
to average net
assets(a)............. 0.80% *0.80% 0.80% 0.80% 0.80% 0.79% 0.72% 0.71% 0.74% 0.70% 0.70%
Ratio of net investment
income to average
net assets (b)........ 5.47% *5.66% 5.96% 5.96% 5.79% 5.23% 4.79% 4.63% 4.94% 4.82% 4.84%
Portfolio turnover
rate.................. 49% **22% 83% 141% 96% 109% 96% 55% 67% 66% 44%
Total return (b)........ 1.93% **3.45% 6.85% 6.85% 8.18% 10.31% 10.92% 1.16% 6.59% 5.47% 7.07%
Net assets, end of
period (000s omitted). $96,143 $97,308 $91,304 $98,918 $118,651 $165,401 $245,441 $238,053 $212,489 $204,726 $196,006
</TABLE>
MANAGED MUNICIPALS
<TABLE>
<CAPTION>
Six
Year Months
Ended Ended
Dec. 31, June 30, Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD... $ 9.22 $ 8.50 $ 8.61 $ 9.02 $ 8.71 $ 8.85 $ 9.11 $ 9.38 $ 8.70 $ 8.79 $8.85
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Income from Investment
Operations
Net investment income.... .61 .30 .61 .59 .56 .55 .52 .50 .51 .48 .48
Net realized and
unrealized gains
(losses) on investments (.59) .11 .44 (.06) .19 .46 .42 (.51) .09 .06 .26
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total from investment
operations............. .02 .41 1.05 .53 .75 1.01 .94 (.01) .60 .54 .74
DISTRIBUTIONS
Net investment income.... (.61) (.30) (.61) (.59) (.56) (.55) (.52) (.50) (.51) (.48) (.48)
Net realized gains...... (.13) -- (.03) (.25) (.05) (.20) (.15) (.11) -- -- --
In excess of realized
gains .............. -- -- -- -- -- -- -- (.06) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
Total distributions... (.74) (.30) (.64) (.84) (.61) (.75) (.67) (.67) (.51) (.48) (.48)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -----
NET ASSET VALUE,
END OF PERIOD........ $ 8.50 $ 8.61 $ 9.02 $ 8.71 $ 8.85 $ 9.11 $ 9.38 $ 8.70 $ 8.79 $ 8.85 $9.11
====== ====== ====== ====== ====== ====== ====== ====== ======= ====== =====
Ratio of net expenses to
average net assets .. 0.65% *0.65% 0.65% 0.66% 0.66% 0.64% 0.64% 0.65% 0.65% 0.72% 0.73%
Ratio of net investment
income to average
net assets .......... 6.99% *7.03% 7.00% 6.66% 6.39% 6.17% 5.65% 5.45% 5.85% 5.41% 5.31%
Portfolio turnover
rate................. 113% **28% 102% 95% 203% 94% 63% 36% 33% 40% 16%
Total return........... 0.39% **4.90% 12.69% 6.15% 8.92% 11.95% 10.79% (0.29%) 7.12% 6.24% 8.56%
Net assets, end of
period (000 omitted).$458,170 $467,595 $514,898 $584,081 $655,930 $725,472 $776,694 $687,252 $629,730 $606,359 $582,366
</TABLE>
HIGH-YIELD MUNICIPALS FUND
<TABLE>
<CAPTION>
Six
Year Months
Ended Ended
Dec.31, June 30, Years Ended June 30,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD.. $12.06 $11.06 $11.37 $11.97 $11.78 $11.79 $11.83 $11.84 $11.06 $11.31 $11.40
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from Investment
Operations
Net investment income.. .87 .44 .88 .85 .82 .80 .71 .67 .66 .67 .72
Net realized and
unrealized gains
(losses) on invest-
ments ............... (.89) .31 .63 .02 .17 .22 .18 (.54) .25 .09 .27
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from investment
operations............ (.02) .75 1.51 .87 .99 1.02 .89 .13 .91 .76 .99
DISTRIBUTIONS
Net investment income... (.87) (.44) (.88) (.85) (.82) (.80) (.71) (.67) (.66) (.67) (.72)
Net realized gains ..... (.11) -- (.03) (.21) (.16) (.18) (.17) (.17) -- -- --
In excess of realized
gains ................ -- -- -- -- -- -- -- (.07) -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total distributions .... (.98) (.44) (.91) (1.06) (.98) (.98) (.88) (.91) (.66) (.67) (.72)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
NET ASSET VALUE,
END OF PERIOD......... $11.06 $11.37 $11.97 $11.78 $11.79 $11.83 $11.84 $11.06 $11.31 $11.40 $11.67
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Ratio of net expenses
to average net assets. 0.73% *0.76% 0.73% 0.71% 0.71% 0.69% 0.73% 0.76% 0.86% 0.85% 0.77%
Ratio of net investment
income to average
net assets............ 8.20% *7.87% 7.54% 7.22% 7.00% 6.75% 6.04% 5.76% 5.98% 5.86% 6.20%
Portfolio turnover
rate ................. 110% **53% 208% 261% 195% 88% 75% 36% 23% 34% 11%
Total return............ (0.16%) **6.89% 13.79% 7.59% 8.79% 9.01% 7.88% 0.95% 8.54% 6.83% 8.91%
Net assets, end of
period (000 omitted). $181,600 $201,274 $277,620 $310,582 $373,948 $410,613 $359,103 $308,181 $281,155 $282,956 $306,070
</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, 0.78%,
0.84% and 0.86% for the years ended June 30, 1995 through
1997, respectively; and for Intermediate Municipals, 0.83%
for the year ended Dec. 31, 1987, 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%,
0.81% and 0.82% for the years ended June 30, 1995 , 1996 and
1997.
(b) Computed giving effect to the Adviser's fee waiver.
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
Fund") (collectively, the "Funds"). Each of the Funds is a
no-load "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 represents
interests in a separate portfolio of securities and other
assets, with its own investment objectives and policies.
Stein Roe & Farnham Incorporated (the "Adviser")
provides investment advisory, administrative, and accounting
and recordkeeping services to the Funds and the Portfolios.
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.
On Sept. 28, 1995 and Feb. 2, 1998, respectively,
Municipal Money Fund and High-Yield Municipals Fund became
"feeder funds"--that is, each invested all of its assets in a
"master fund" that has an investment objective identical to
that of the Fund. Each master fund is a series of SR&F Base
Trust ("Base Trust") (each master fund is referred to as a
"Portfolio"). Prior to converting to a feeder fund, each
Fund had invested its assets in a diversified group of
securities. Under the "master fund/feeder fund structure," a
feeder fund and one or more feeder funds pool their assets in
a master portfolio that has the same investment objective and
substantially the same investment policies as the feeder
funds. The purpose of such an arrangement is to achieve
greater operational efficiencies and reduce costs. The
assets of each Portfolio are managed by the Adviser in the
same manner as the assets of the feeder fund were managed
before conversion to the master fund/feeder fund structure.
Managed Municipals and Intermediate Municipals may at some
time in the future convert to the master fund/feeder fund
structure; such change would be made only if the trustees
determine it to be in the best interests of a Fund and its
shareholders. (For more information, see Special
Considerations Regarding Master Fund/Feeder Fund Structure.)
INVESTMENT POLICIES
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 maximum
current income exempt from federal income tax by investing
principally in a diversified portfolio of "short-term"
Municipal Securities. Municipal Money Fund seeks to achieve
its objective by investing all of its net investable assets
in SR&F Municipal Money Market Portfolio ("Municipal Money
Portfolio"), which has the identical investment objective.
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.
- ----------
/1/ A fundamental policy may be changed only with the
approval of a "majority of the outstanding voting securities"
as defined in the Investment Company Act of 1940.
/2/ A defensive position is one that temporarily reduces
exposure to anticipated adverse market changes.
- ----------
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.
- ---------
/3/ For a description of Moody's, S&P and Fitch 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. In addition, rating modifiers showing
relative standing within a rating category do not affect
whether a security is eligible for purchase.
- ---------
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, S&P or Fitch (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, S&P or Fitch
(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 Fund. This Fund seeks a high current
yield exempt from federal income tax by investing primarily
in a diversified portfolio of Municipal Securities. High-
Yield Municipals Fund invests all of its net investable
assets in SR&F High-Yield Municipals Portfolio ("High-Yield
Muncipals Portfolio"), which has the identical investment
objective. High-Yield Municipals Portfolio 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 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
investment 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 High-Yield
Municipals Portfolio may have greater difficulty selling its
portfolio securities.
Although High-Yield Municipals Portfolio 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, 1997, High-Yield
Municipals Fund's portfolio was invested, on average, as
follows: high-quality short-term instruments, 2.3%; AAA,
15.7%; AA, 9.0%; A, 22.3%; BBB, 22.1%; BB, 9.7%; B, 0.7%; and
unrated, 18.2%. 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 High-Yield Municipals
Portfolio.
PORTFOLIO INVESTMENTS AND STRATEGIES
For purposes of discussion under Portfolio Investments and
Strategies, Investment Restrictions and Risks and Investment
Considerations, the term "the Fund" refers to Municipal Money
Fund, Municipal Money Portfolio, Intermediate Municipals,
Managed Municipals, High-Yield Municipals Fund, and High-
Yield Municipals Portfolio.
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 Investment
Policies--High-Yield Municipals Fund.
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; Forward
Commitments. Each Fund's assets may include securities
purchased on a when-issued or delayed-delivery basis, and
each Fund may purchase forward commitments. 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. The
Funds may participate in an interfund lending program,
subject to certain restrictions described in the Statement of
Additional Information.
Private Placements. Each Fund may invest in securities that
are purchased in private placements (including privately
placed securities eligible for purchase and sale under Rule
144A of the Securities Act of 1933) and, accordingly, are
subject to restrictions on resale as a matter of contract or
under federal securities laws. Because there may be
relatively few potential purchasers for such investments,
especially under adverse market or economic conditions or in
the event of adverse changes in the financial condition of
the issuer, a Fund could find it more difficult to sell such
securities when the Adviser believes it is advisable to do so
or may be able to sell such securities only at prices lower
than if such securities were more widely held. At times, it
may also be more difficult to determine the fair value of
such securities for purposes of computing a Fund's net asset
value.
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 Portfolio, which is subject to a
15% limitation on investments in illiquid securities.
Short Sales Against the Box. A Fund may sell short
securities it 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 Portfolio 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; Trust Receipts. Each Fund may purchase
tender option bonds and trust receipts. 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. A Fund may invest up to 10% of net assets in
tender option bonds and trust receipts.
INVESTMENT RESTRICTIONS
Each Fund is diversified as that term is defined in the
Investment Company Act of 1940.
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 a
Portfolio, may invest all or substantially all of its assets
in another investment company having the identical investment
objective under a master fund/feeder fund structure.
- ----------
/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 and Portfolios. A
Fund may not borrow money, except for nonleveraging,
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 the second and third
paragraphs of this section are fundamental policies. 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 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 Fund 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 Investment Restrictions 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 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 Portfolio 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]program 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] program 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. Money orders will not be accepted for
initial purchases into new accounts. Credit card convenience
checks will not be accepted for initial or subsequent
purchases into your account. Each individual check submitted
for purchase must be at least $100, and Municipal Trust
generally will not accept cash, drafts, third or fourth 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 the 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 Fund
08--Intermediate Municipals
Participants in the Stein Roe Counselor [service mark]
program 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 interests 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 certain 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.
An Intermediary, who accepts orders that are processed
at the net asset value next determined after receipt of the
order by the Intermediary, accepts such orders as agent of
the Fund. The Intermediary is required to segregate any
orders received on a business day after the close of regular
session trading on the New York Stock Exchange and transmit
those orders separately for execution at the net asset value
next determined after that business day.
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] program 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 the 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 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,
regardless of the number of telephone exchange round-trips
made by an investor, Municipal Trust generally will not honor
requests for Telephone Exchanges by shareholders identified
by the Trust as "market-timers" if the officers of the Trust
determine the order not to be in the best interests of the
Trust or its shareholders. Municipal Trust generally
identifies as a "market-timer" an investor whose investment
decisions appear to be based on actual or anticipated near-
term changes in the securities markets rather than for
investment considerations. 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 $7.00 per transaction) 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 Fund, 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 First National
Bank of Boston, and you will be subject to the bank'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 of record if
the shares in the account do not have a value of at least
$1,000. If the value of the account is more than $10, 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. Municipal Trust reserves
the right to redeem any account with a value of $10 or less
without prior written notice to the shareholder. Due to the
proportionately higher costs of maintaining small accounts,
the transfer agent may charge and deduct from the account a
$5 per quarter minimum balance fee if the account is a
regular account with a balance below $2,000 or an UGMA
account with a balance below $800. This minimum balance fee
does not apply to Stein Roe IRAs and other Stein Roe
prototype retirement plans, accounts with automatic
investment plans (unless regular investments have been
discontinued), and omnibus and nominee accounts. The
transfer agent may waive the fee, at its discretion, in the
event of significant market corrections.
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
portfolio holdings and will provide you annually with tax
information.
To reduce the volume of mail you receive, only one copy
of certain materials, such as prospectuses and shareholder
reports, will be mailed to your household (same address).
Please call 800-338-2550 if you wish to receive additional
copies free of charge. This policy may not apply if you
purchased shares through an Intermediary.
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.) Information regarding your account is available to
you via Funds-on-Call [registered trademark] only after you
follow an activation process the first time you call. Your
account information is protected by a personal identification
number (PIN) that you establish.
Stein Roe Counselor [service mark] Program. The Stein Roe
Counselor [service mark] program is a professional investment
advisory service available to shareholders. This program is
designed to provide investment guidance in helping investors
to select a portfolio of Stein Roe Funds.
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
carefully read 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 gains 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 Fund, 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 determines the net
asset value of its shares as of the close of trading on the
New York Stock Exchange ("NYSE") (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. If trading is closed prior to 3:00 p.m.,
central time, solely in response to market conditions, the
net asset value of Fund shares will be determined at 3:00
p.m., central time, unless, in the judgment of the Board of
Trustees, the net asset value should be determined at an
earlier time. Each Portfolio allocates net asset value,
income and expenses to its feeder funds in proportion to
their respective interests in the Portfolio.
Net asset value will not be determined on days when the
NYSE 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 Portfolio 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 Jan. 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 12-month period ended Oct. 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 gains
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. No interest
will accrue on amounts represented by uncashed distribution
or redemption checks.
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 gains is taxable to you as ordinary
income. Distributions of net long-term capital gains are
taxable to you as long-term capital gains 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 gains 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.
The Taxpayer Relief Act of 1997 (the "Act") reduced from
28% to 20% the maximum tax rate on long-term capital gains.
This reduced rate generally applies to securities held for
more than 18 months and sold after July 28, 1997, and
securities held for more than one year and sold between May
6, 1997 and July 29, 1997.
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 Sept. 30, 1997, were
3.35% and 3.41%, 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
Trustees and Investment Adviser. The Board of Trustees of
Municipal Trust and the Board of Trustees of Base Trust have
overall management responsibility for the Trust and the Funds
and the Portfolios, 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 the feeder Funds
and the Portfolios.
The Adviser, Stein Roe & Farnham Incorporated, One South
Wacker Drive, Chicago, Illinois 60606, is responsible for
managing the investment portfolios and the business affairs
of the Funds, the Portfolios, 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 and its predecessor
have advised and managed mutual funds since 1949. The
Adviser is a wholly owned indirect 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
Portfolio) might be liable for misstatements in the
prospectus regarding information concerning another Fund (or
Portfolio).
Portfolio Managers. Veronica M. Wallace has been portfolio
manager of Municipal Money Portfolio since Sept. 1995. Ms.
Wallace was formerly a trader in taxable money market
instruments for the Adviser. As of June 30, 1997, she was
responsible for managing $119 million in mutual fund net
assets.
M. Jane McCart has been portfolio manager of Managed
Municipals since Aug. 1991 and of High-Yield Municipals
Portfolio since its inception in Feb. 1998. Prior thereto,
she had been portfolio manager of Municipal Money Fund since
its inception in 1983, and of High-Yield Municipals Fund
since Feb. 1995. Ms. McCart is 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, 1997,
was responsible for managing $888 million in mutual fund net
assets.
Joanne T. Costopoulos has been portfolio manager of
Intermediate Municipals since Aug. 1991 and is a senior vice
president of the Adviser. Responsible for managing $196
million in mutual fund net assets as of June 30, 1997, 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.
Fees and Expenses. The Adviser provides administrative
services to the Funds under an administrative agreement and
investment management services to Intermediate Municipals,
Managed Municipals, Municipal Money Portfolio and High-Yield
Municipals Portfolio under separate management agreements.
The Adviser is entitled to receive a monthly administrative
fee and a monthly portfolio management fee, based on average
net assets and computed and accrued daily, at the following
annual rates:
MANAGEMENT ADMINISTRATIVE
FUND FEE FEE
- ------------- --------------- ---------------
Intermediate .450% up to $100, .150% up to $100,
Municipals .425% next $100, .125% next $100,
Fund .400% thereafter .100% thereafter
High-Yield .-- .150% up to $100, .
Municipals .125% next $100,
Fund .100% thereafter
High-Yield .450% up to $100, . --
Municipals .425% next $100, .
Portfolio .400% thereafter .
Managed .450% up to $100, .150% up to $100, .
Municipals .425% next $100, .125% next $100,
Fund .400% next $800, .100% next $800,
.375% thereafter .075% thereafter
Municipal -- .250% up to $500,
Money .200% next $500,
Fund .150% thereafter
Municipal .250% --
Money
Portfolio
For the fiscal year ended June 30, 1997, the annualized
management fees for Intermediate Municipals, Managed
Municipals and High-Yield Municipals Fund, after the fee
waivers described under Fee Table, were 0.46%, 0.41%, and
0.43% of average net assets, respectively. Municipal Money
Fund's administrative fee in addition to its pro rata portion
of Municipal Money Portfolio's management fees was 0.34% 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 Portfolios, including computation of net asset
value and calculation of 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. 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. Shares of the Funds are distributed by Liberty
Financial Investments, Inc. ("Distributor"), One Financial
Center, Boston, Massachusetts 02111. The Distributor is a
subsidiary of Colonial Management Associates, Inc., which is
an indirect subsidiary of Liberty Financial. Fund shares are
offered for sale without any sales commissions or charges to
the Funds or to their shareholders. All distribution and
promotional expenses are paid by the Adviser, including
payments to the Distributor for sales of Fund shares.
All Fund correspondence (including purchase and
redemption orders) should be mailed to SteinRoe Services Inc.
at P.O. Box 8900, Boston, Massachusetts 02205. Participants
in the Stein Roe Counselor [service mark] program should
send orders to SteinRoe Services Inc. at P.O. Box 803938,
Chicago, Illinois 60680.
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 Oct. 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 the 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 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 series incurring financial loss
on account of unsatisfied liability of another series of
Municipal Trust also is 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 series was
unable to meet its obligations.
MASTER FUND/FEEDER FUND: STRUCTURE AND RISK FACTORS
Each of Municipal Money Fund and High-Yield Municipals Fund
(each a series of Stein Roe Municipal Trust, an open-end
management investment company) seeks to achieve its objective
by investing all of its assets in another mutual fund having
an investment objective identical to that of the Fund. The
shareholders of each Fund approved this policy of permitting
a Fund to act as a feeder Fund by investing in a master
Portfolio. Please refer to Investment Policies, Portfolio
Investments and Strategies, and Investment Restrictions for a
description of the investment objectives, policies, and
restrictions of the Funds and the Portfolios. The management
and expenses of the Funds and the Portfolios are described
under Fee Table and Management. Each feeder Fund bears its
proportionate share of the expenses of its master Portfolio.
The Adviser has provided investment management services
in connection with other mutual funds employing the master
fund/feeder fund structure since 1991.
Each Portfolio is a separate series of SR&F Base Trust
("Base Trust"), a Massachusetts common law trust organized
under an Agreement and Declaration of Trust ("Declaration of
Trust") dated Aug. 23, 1993. The Declaration of Trust of
Base Trust provides that a Fund and other investors in a
Portfolio will be liable for all obligations of that
Portfolio that are not satisfied by the Portfolio. However,
the risk of a Fund incurring financial loss on account of
such liability is limited to circumstances in which liability
was inadequately insured and a Portfolio was unable to meet
its obligations. Accordingly, the Trustees of Municipal
Trust believe that neither the Funds nor their shareholders
will be adversely affected by reason of a Fund's investing in
a Portfolio.
The Declaration of Trust of Base Trust provides that a
Portfolio will terminate 120 days after the withdrawal of a
Fund or any other investor in the Portfolio, unless the
remaining investors vote to agree to continue the business of
the Portfolio. The trustees of Municipal Trust may vote a
Fund's interests in a Portfolio for such continuation without
approval of the Fund's shareholders.
The common investment objective of each Fund and its
master Portfolio is non-fundamental and may be changed
without shareholder approval, subject, however, to at least
30 days' advance written notice to a Fund's shareholders.
The fundamental policies of each Fund and the corresponding
fundamental policies of its master Portfolio can be changed
only with shareholder approval.
If a Fund, as a Portfolio investor, is requested to vote
on a change in a fundamental policy of a Portfolio or any
other matter pertaining to the Portfolio (other than
continuation of the business of the Portfolio after
withdrawal of another investor), the Fund will solicit
proxies from its shareholders and vote its interest in the
Portfolio for and against such matters proportionately to the
instructions to vote for and against such matters received
from Fund shareholders. A Fund will vote shares for which it
receives no voting instructions in the same proportion as the
shares for which it receives voting instructions. 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 investors in the Portfolio. If other investors
hold a majority interest in a Portfolio, they could have
voting control over that Portfolio.
In the event that a Portfolio's fundamental policies
were changed so as to be inconsistent with those of the
corresponding Fund, the Board of Trustees of Municipal Trust
would consider what action might be taken, including changes
to the Fund's fundamental policies, withdrawal of the Fund's
assets from the Portfolio and investment of such assets in
another pooled investment entity, or the retention of an
investment adviser to invest those assets directly in a
portfolio of securities. Any of these actions would require
the approval of a Fund's shareholders. A 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 a Fund's assets
could result in a distribution in kind of portfolio
securities (as opposed to a cash distribution) to the Fund.
Should such a distribution occur, the Fund would incur
brokerage fees or other transaction costs in converting such
securities to cash. In addition, a distribution in kind
could result in a less diversified portfolio of investments
for the Fund and could affect the liquidity of the Fund.
Each investor in a Portfolio, including a Fund, may add
to or reduce its investment in the Portfolio on each day the
NYSE is open for business. The investor's percentage of the
aggregate interests in the 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 the 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 the Portfolio effected on
such day; and (ii) the denominator of which is the aggregate
beginning of the day net asset value of the Portfolio on such
day plus or minus, as the case may be, the amount of the net
additions to or withdrawals from the aggregate investments in
the Portfolio by all investors in the Portfolio. The
percentage so determined will then be applied to determine
the value of the investor's interest in the Portfolio as of
the close of business.
Base Trust may permit other investment companies and/or
other institutional investors to invest in a Portfolio, but
members of the general public may not invest directly in the
Portfolio. Other investors in a Portfolio are not required
to sell their shares at the same public offering price as a
Fund, might incur different administrative fees and expenses
than the Fund, and might charge a sales commission.
Therefore, Fund shareholders might have different investment
returns than shareholders in another investment company that
invests exclusively in a Portfolio. Investment by such other
investors in a Portfolio would provide funds for the purchase
of additional portfolio securities and would tend to reduce
the operating expenses as a percentage of the Portfolio's net
assets. Conversely, large-scale redemptions by any such
other investors in a Portfolio could result in untimely
liquidations of the Portfolio's security holdings, loss of
investment flexibility, and increases in the operating
expenses of the Portfolio as a percentage of its net assets.
As a result, a Portfolio's security holdings may become less
diverse, resulting in increased risk.
Information regarding other investors in a Portfolio may
be obtained by writing to SR&F 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
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"),
Standard & Poor's Corporation ("S&P"), and Fitch Investors
Service, L.P. ("Fitch").
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: Moody's applies numerical modifiers 1, 2, and 3
in the Aa through B classifications of its municipal bond
rating system and in the Aa through Caa 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.
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 and their meanings is identical to that of its
Municipal Bond ratings as set forth above.
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.
RATINGS BY FITCH
Investment Grade Bond Ratings
Fitch investment grade bond ratings provide a guide to
investors in determining the credit risk associated with a
particular security. The ratings represent Fitch's
assessment of the issuer's ability to meet the obligations of
a specific debt or preferred issue in a timely manner. The
rating takes into consideration special features of the
issue, its relationship to other obligations of the issuer,
the current and prospective financial condition and operating
performance of the issuer and any guarantor, as well as the
economic and political environment that might affect the
issuer's future financial strength and credit quality.
Fitch ratings do not reflect any credit enhancement that
may be provided by insurance policies or financial guaranties
unless otherwise indicated.
Fitch ratings are not recommendations to buy, sell, or
hold any security. Ratings do not comment on the adequacy of
market price, the suitability of any security for a
particular investor, or the tax-exempt nature or taxability
of payments made in respect of any security. Fitch ratings
are based on information obtained from issuers, other
obligors, underwriters, their experts, and other sources
Fitch believes to be reliable. Fitch does not audit or
verify the truth or accuracy of such information. Ratings
may be changed, suspended, or withdrawn as a result of
changes in, or the unavailability of, information or for
other reasons.
AAA. Bonds and preferred stock considered to be
investment grade and of the highest credit quality. The
obligor has an exceptionally strong ability to pay interest
and/or dividends and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA. Bonds and preferred stock considered to be
investment grade and of very high credit quality. The
obligor's ability to pay interest and/or dividends and repay
principal is very strong, although not quite as strong as
bonds rated AAA. Because bond and preferred rated in the AAA
and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
A. Bonds and preferred stock considered to be
investment grade and of high quality. The obligor's ability
to pay interest and/or dividends and repay principal is
considered to be strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than
debt or preferred securities with higher ratings.
BBB. Bonds and preferred stock considered to be
investment grade and of satisfactory credit quality. The
obligor's ability to pay interest or dividends and repay
principal is considered to be adequate. Adverse changes in
economic conditions and circumstances, however, are more
likely to have adverse impact on these securities and,
therefore, impair timely payment. The likelihood that the
ratings of these bonds or preferred will fall below
investment grade is higher than for securities with higher
ratings.
BB. Bonds are considered speculative. The obligor's
ability to pay interest and repay principal may be affected
over time by adverse economic changes. However, business and
financial alternatives can be identified which could assist
the obligor in satisfying its debt service requirements.
B. Bonds are considered highly speculative. While
bonds in this class are currently meeting debt service
requirements, the probability of continued timely payment of
principal and interest reflects the obligor's limited margin
of safety and the need for reasonable business and economic
activity throughout the life of the issue.
CCC. Bonds have certain identifiable characteristics
which, if not remedied, may lead to default. The ability to
meet obligations requires an advantageous business and
economic environment.
CC. Bonds are minimally protected. Default in payment
of interest and/or principal seems probable over time.
C. Bonds are in imminent default in payment of interest
or principal.
DDD, DD, and D. Bonds are in default on interest and/or
principal payments. Such bonds are extremely speculative and
should be valued on the basis of their ultimate recovery
value in liquidation or reorganization of the obligor. DDD
represents the highest potential for recovery on these bonds,
and D represents the lowest potential for recovery.
Plus (+) or Minus (-). Plus and minus signs are used
with a rating symbol to indicate the relative position of a
credit within the rating category. Plus and minus signs,
however, are not used in the AAA, DDD, DD or D categories.
NR. Indicates that Fitch does not rate the specific
issue.
Conditional. A conditional rating is premised on the
successful completion of a project or the occurrence of a
specific event.
Suspended. A rating is suspended when Fitch deems the
amount of information available from the issuer to be
inadequate for rating purposes.
Withdrawn. A rating will be withdrawn when an issue
matures or is called or refinanced, and, at Fitch's
discretion, when an issuer fails to furnish proper and timely
information.
FitchAlert. Ratings are placed on FitchAlert to notify
investors of an occurrence that is likely to result in a
rating change and the likely direction of such change. These
are designated as "Positive," indicating a potential upgrade,
"Negative," for potential downgrade, or "Evolving," where
ratings may be raised or lowered. FitchAlert is relatively
short-term and should be resolved within 12 months.
Ratings Outlook. An outlook is used to describe the
most likely direction of any rating change over the
intermediate term. It is described as "Positive" or
"Negative." The absence of a designation indicates a stable
outlook.
Short-Term Ratings
F-1+. Exceptionally Strong Credit Quality. Issues
assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1. Very Strong Credit Quality. Issues assigned this
rating reflect an assurance of timely payment only slightly
less in degree than issues rated F-1+.
F-2. Good Credit Quality. Issues assigned this rating
have a satisfactory degree of assurance for timely payment,
but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
F-3. Fair Credit Quality. Issues assigned this rating
have characteristics suggesting that the degree of assurance
for timely payment is adequate; however, near-term adverse
changes could cause these securities to be rated below
investment grade.
F-S. Weak Credit Quality. Issues assigned this rating
have characteristics suggesting a minimal degree of assurance
for timely payment and are vulnerable to near-term adverse
changes in financial and economic conditions.
D. Default. Issues assigned this rating are in actual
or imminent payment default.
<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 MUTUAL FUNDS LOGO]
The Stein Roe Funds
Stein Roe Cash Reserves 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 Special Fund
Stein Roe Special Venture Fund
Stein Roe Capital Opportunities Fund
Stein Roe Growth Opportunities Fund
Stein Roe International Fund
Stein Roe Emerging Markets Fund
Stein Roe Mutual Funds
P. O. Box 8900
Boston, Massachusetts 02205-8900
Financial Advisors call: 1-800-322-0593
Shareholders call 1-800-338-2550
http://www.steinroe.com
In Chicago, visit our Fund Center at One South Wacker Drive,
Suite 3200
Liberty Securities Corporation, Distributor
Member, SIPC
<PAGE>
Statement of Additional Information Dated Feb. 2, 1998
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 Feb. 2, 1998,
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........................3
Investment Policies....................................4
Municipal Money Fund................................4
Intermediate Municipals.............................5
Managed Municipals..................................6
High-Yield Municipals Fund..........................7
Portfolio Investments and Strategies...................7
Investment Restrictions...............................20
Additional Investment Considerations..................23
Purchases and Redemptions.............................25
Management............................................27
Financial Statements..................................30
Principal Shareholders................................30
Investment Advisory Services..........................31
Distributor...........................................33
Transfer Agent........................................34
Custodian.............................................34
Independent Auditors..................................34
Portfolio Transactions................................34
Additional Income Tax Considerations..................36
Investment Performance................................38
Additional Information on Net Asset Value--
Municipal Money Fund and Municipal Money Portfolio..45
Glossary..............................................46
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") and are referred to collectively as
"the Funds." Each series of Municipal Trust invests in a
separate portfolio of securities and other assets, with its
own objectives and policies.
As used herein, "Municipal Money Fund," "Intermediate
Municipals," "Managed Municipals," and "High-Yield Municipals
Fund" refer to the series of Municipal Trust designated Stein
Roe Municipal Money Market Fund, Stein Roe Intermediate
Municipals Fund, Stein Roe Managed Municipals Fund, and Stein
Roe High-Yield Municipals Fund, respectively. The name of
Municipal Trust and each of its series was changed on Nov. 1,
1995 to separate "SteinRoe" into two words.
Currently, four series of Municipal Trust are authorized
and outstanding. Each share of a series, without par value,
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 its 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
those of other investment companies for investment in another
mutual fund having the same investment objective and
substantially the same investment policies 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 Funds currently
operating under the master fund/feeder fund structure are
Municipal Money Fund and High-Yield Municipals Fund, which
converted into feeder funds on Sept. 28, 1995 and Feb. 2,
1998, respectively. Municipal Money Fund invests all of its
net investable assets in SR&F Municipal Money Market
Portfolio ("Municipal Money Portfolio") and High-Yield
Municipals Fund invests all of its net investable assets in
SR&F High-Yield Municipals Portfolio ("High-Yield Municipals
Portfolio"). The master funds are series of SR&F Base Trust
("Base Trust") and are referred to collectively as the
"Portfolios." For more information, please refer to the
Prospectus under the caption Master Fund/Feeder Fund:
Structure and Risk Factors.
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 to the Prospectus. 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. In addition, rating modifiers showing
relative standing within a rating category do not affect
whether a security is eligible for purchase.
- ---------
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 Fund
This Fund seeks a high current yield exempt from federal
income tax. High-Yield Municipals Fund seeks to achieve its
objective by investing all of its net investable assets in
shares of High-Yield Municipals Portfolio, another mutual
fund that has an identical investment objective and identical
investment policies to the Fund. High-Yield Municipals
Portfolio 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 High-Yield Municipals
Portfolio will be made when due.
It is a fundamental policy that normally the 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 High-Yield Municipals Portfolio 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 or Portfolio as indicated. Unless
otherwise noted, for purposes of discussion under Portfolio
Investments and Strategies, Investment Restrictions, and
Additional Investment Considerations, the term "the Fund"
refers to the Funds and the Portfolios.
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 Portfolio, other money market
instruments, and in the case of 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 Portfolio limits repurchase agreements to
those that are short-term, subject to item (g) 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").
Private Placements
Each Fund may invest in securities that are purchased in
private placements (including privately placed securities
eligible for purchase and sale under Rule 144A of the
Securities Act of 1933 ["1933 Act"]) and, accordingly, are
subject to restrictions on resale as a matter of contract or
under federal securities laws. Because there may be
relatively few potential purchasers for such investments,
especially under adverse market or economic conditions or in
the event of adverse changes in the financial condition of
the issuer, a Fund could find it more difficult to sell such
securities when the Adviser believes it is advisable to do so
or may be able to sell such securities only at prices lower
than if such securities were more widely held. At times, it
may also be more difficult to determine the fair value of
such securities for purposes of computing a Fund's net asset
value.
Rule 144A Securities
Rule 144A permits certain qualified institutional
buyers, such as the Funds, to trade in privately placed
securities that have not been registered for sale under the
1933 Act. The Adviser, under the supervision of the Board of
Trustees, will consider whether securities purchased under
Rule 144A are illiquid and thus subject to the Funds'
restriction of investing no more than 10% of its net assets
in illiquid securities for all Funds other than High-Yield
Municipals Portfolio and no more than 15% for that Fund. A
determination of whether a Rule 144A security is liquid or
not is a question of fact. In making this determination, the
Adviser will consider the trading markets for the specific
security, taking into account the unregistered nature of a
Rule 144A security. In addition, the Adviser could consider
the (1) frequency of trades and quotes, (2) number of dealers
and potential purchasers, (3) dealer undertakings to make a
market, and (4) nature of the security and of marketplace
trades (e.g., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of transfer).
The liquidity of Rule 144A securities would be monitored and
if, as a result of changed conditions, it is determined that
a Rule 144A security is no longer liquid, a Fund's holdings
of illiquid securities would be reviewed to determine what,
if any, steps are required to assure that the Fund does not
invest more than 10% of its assets in illiquid securities for
all Funds other than High-Yield Municipals Portfolio and no
more than 15% for that Fund. Investing in Rule 144A
securities could have the effect of increasing the amount of
a Fund's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such
securities. No Fund expects to invest as much as 5% of its
total assets in Rule 144A securities that have not been
deemed to be liquid by the Adviser.
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 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; Forward
Commitments
Each Fund may purchase securities on a when-issued or
delayed-delivery basis or purchase forward commitments, 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 Against the Box
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 its 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.
Repurchase Agreements
Each Fund may invest in repurchase agreements, provided
that it will not invest more than 15% (High-Yield Municipals
Portfolio) or 10% (Managed Municipals, Intermediate
Municipals, and Municipal Money Portfolio) of net assets in
repurchase agreements maturing in more than seven days and
any other illiquid securities. A repurchase agreement is a
sale of securities to a Fund in which the seller agrees to
repurchase the securities at a higher price, which includes
an amount representing interest on the purchase price, within
a specified time. In the event of bankruptcy of the seller,
a Fund could experience both losses and delays in liquidating
its collateral.
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 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 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 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, S&P,
or Fitch Investors Service 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 Portfolio.
Zero Coupon Bonds
Each of Intermediate Municipals, Managed Municipals, and
High-Yield Municipals Portfolio 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; Trust Receipts
Each Fund may purchase tender option bonds and trust
receipts. 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. A Fund may invest up to 10% of net assets in
tender option bonds and trust receipts.
Interfund Borrowing and Lending Program
Pursuant to an exemptive order issued by the Securities
and Exchange Commission, the Funds have received permission
to lend money to, and borrow money from, other mutual funds
advised by the Adviser. A Fund will borrow through the
program when borrowing is necessary and appropriate and the
costs are equal to or lower than the costs of bank loans.
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. 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 Portfolio 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 Portfolio 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.
- --------
/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 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.
A 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 Portfolio 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%].
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). 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.
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.
The Taxpayer Relief Act of 1997 (the "Act") imposed
constructive sale treatment for federal income tax purposes
on certain hedging strategies with respect to appreciated
securities. Under these rules, taxpayers will recognize
gain, but not loss, with respect to securities if they enter
into short sales of "offsetting notional principal contracts"
(as defined by the Act) or futures or "forward contracts" (as
defined by the Act) with respect to the same or substantially
identical property, or if they enter into such transactions
and then acquire the same or substantially identical
property. These changes generally apply to constructive
sales after June 8, 1997. Furthermore, the Secretary of the
Treasury is authorized to promulgate regulations that will
treat as constructive sales certain transactions that have
substantially the same effect as short sales, offsetting
notional principal contracts, and futures or forward
contracts to deliver the same or substantially similar
property.
INVESTMENT RESTRICTIONS
The Funds and Portfolios operate 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). A Fund or Portfolio may not:
(i) invest in a security if, with respect to 75% of its
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 [Funds only] 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 it
and guaranteed by such guarantor (plus any other investments
in securities issued by the guarantor) does not exceed 10% of
its 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, High-Yield
Municipals Fund, High-Yield Municipals Fund, and High-Yield
Municipals Portfolio only] but it 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 and
Portfolios 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
nonleveraging, 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 Portfolios, 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 it except (a) as may be necessary in connection
with borrowings mentioned in (iv) above, and [Intermediate
Municipals, Managed Municipals, High-Yield Municipals Fund,
and High-Yield Municipals Portfolio 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, [Funds only] 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, High-Yield Municipals Fund
and High-Yield Municipals Portfolio only] except that it 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 and
Portfolios. The Funds and Portfolios 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 Municipal Money Fund, Intermediate Municipals,
Managed Municipals, or High-Yield Municipals 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. No
Fund or Portfolio may:
(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 it
may participate as part of a group in bidding, or bid alone,
for the purchase of Municipal Securities directly from an
issuer for its own portfolio;
(f) 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 it to require sellers of securities to the
Fund to repurchase them upon demand by the Fund [Intermediate
Municipals, Managed Municipals, High-Yield Municipals Fund,
and High-Yield Municipals Portfolio only] and that
transactions in options, futures, and options on futures are
not treated as short sales;
(g) [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 Fund and High-Yield Municipals
Portfolio 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;
(h) purchase shares of other open-end investment
companies, except in connection with a merger, consolidation,
acquisition, or reorganization;
(i) 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;
(j) [Intermediate Municipals, Managed Municipals, High-
Yield Municipals Fund, and High-Yield Municipals Portfolio
only] write an option on a security unless the option is
issued by the Options Clearing Corporation, an exchange, or
similar entity;
(k) [Intermediate Municipals, Managed Municipals, High-
Yield Municipals Fund, and High-Yield Municipals Portfolio
only] 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 to the Prospectus). 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 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.
In 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 high-quality
debt 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 Jan., the
third Monday in Feb., 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 bank 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 bank 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.
Municipal Trust reserves the right to redeem shares in
any account and send the proceeds to the owner of record if
the shares in the account do not have a value of at least
$1,000. If the value of the account is more than $10, 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. Municipal Trust reserves
the right to redeem any account with a value of $10 or less
without prior written notice to the shareholder. Due to the
proportionately higher costs of maintaining small accounts,
the transfer agent may charge and deduct from the account a
$5 per quarter minimum balance fee if the account is a
regular account with a balance below $2,000 or an UGMA
account with a balance below $800. This minimum balance fee
does not apply to Stein Roe IRAs and other Stein Roe
prototype retirement plans, accounts with automatic
investment plans (unless regular investments have been
discontinued), and omnibus and nominee accounts. The
transfer agent may waive the fee, at its discretion, in the
event of significant market corrections. 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>
William D. Andrews 50 Executive Vice-President Executive vice president of Stein Roe & Farnham
(4) Incorporated (the "Adviser")
Gary A. Anetsberger 42 Senior Vice-President Chief financial officer of the Mutual Funds division of the
(4) Adviser; senior vice president of the Adviser since Apr.
1996; vice president of the Adviser prior thereto
Timothy K. Armour 49 President; Trustee President of the Mutual Funds division of the Adviser
(1)(2) (4) and director of the Adviser
Jilaine Hummel Bauer (4) 42 Executive Vice-President; General counsel and secretary (since Nov. 1995) and
Secretary senior vice president of the Adviser
William W. Boyd (3) (4) 71 Trustee Chairman and director of Sterling Plumbing Group,
Inc. (manufacturer of plumbing products)
Thomas W. Butch (4) 41 Executive Vice-President Senior vice president of the Adviser since Sept.
1994; first vice president, corporate communications,
of Mellon Bank Corporation prior thereto
Lindsay Cook (1)(4) 45 Trustee Executive vice president of Liberty Financial
Companies, Inc. (the indirect parent of the Adviser)
since Mar. 1997; senior vice president prior thereto
Joanne T. Costopoulos 50 Vice-President Senior portfolio manager of the Adviser; senior vice
president of the Adviser since Nov. 1995; vice
president of the Adviser from Jan. 1994 to Nov. 1995;
associate of the Adviser prior thereto
Philip J. Crosley 51 Vice-President Senior vice president of the Adviser since Feb. 1996;
vice president, institutional sales - advisor sales,
Invesco Funds Group prior thereto
Douglas A. Hacker (3)(4) 42 Trustee Senior vice president and chief financial officer of
United Airlines, since July 1994; senior vice
president, finance, United Airlines, Feb. 1993 to
July 1994; vice president, American Airlines prior
thereto
Loren A. Hansen (4) 49 Executive Vice-President Executive vice president of the Adviser since Dec., 1995;
vice president of The Northern Trust (bank) prior thereto
Janet Langford Kelly 40 Trustee Senior vice president, secretary and general counsel
(3)(4) of Sara Lee Corporation (branded, packaged, consumer-
products manufacturer), since 1995; partner, Sidley &
Austin (law firm) prior thereto
Lynn C. Maddox 57 Vice-President Senior vice president of the Adviser
Anne E. Marcel 40 Vice-President Vice president of the Adviser since Apr. 1996;
manager of mutual fund sales & services of the
Adviser since Oct. 1994; supervisor of the Counselor
Department of the Adviser prior thereto
M. Jane McCart 42 Vice-President Senior vice president of the Adviser
Charles R. Nelson(3)(4) 55 Trustee Van Voorhis Professor of Political Economy of the
University of Washington
Nicolette D. Parrish(4) 48 Vice-President; Senior compliance administrator and assistant
Assistant Secretary secretary of the Adviser since Nov. 1995; senior
legal assistant for the Adviser prior thereto
Sharon R. Robertson (4) 36 Controller Accounting manager for the Adviser's Mutual Funds
division
Janet B. Rysz (4) 42 Assistant Secretary Senior compliance administrator and assistant
secretary of the Adviser
Thomas C. Theobald 60 Trustee Managing director, William Blair Capital Partners
(3)(4) (private equity fund) since 1994; chief executive
officer and chairman of the Board of Directors of
Continental Bank Corporation prior thereto
Scott E. Volk (4) 26 Treasurer Financial reporting manager for the Adviser's Mutual
Funds division since Oct. 1997; senior auditor with
Ernst & Young LLP from Sept. 1993 to Apr. 1996 and
from Oct. 1996 to Sept. 1997; financial analyst with
John Nuveen & Company Inc. from May 1996 to Sept. 1996;
full-time student prior to Sept. 1993
Veronica M. Wallace 51 Vice-President Portfolio manager for the Adviser since Sept. 1995;
trader in taxable short-term instruments for the
Adviser prior thereto
Heidi J. Walter (4) 30 Vice-President Legal counsel for the Adviser since Mar. 1995;
associate with Beeler Schad & Diamond PC (law firm)
prior thereto
Stacy H. Winick (4) 32 Vice-President Senior legal counsel for the Adviser since Oct. 1996;
associate of Bell, Boyd & Lloyd (law firm) from June
1993 to Sept. 1996; associate of Debevoise & Plimpton
(law firm) prior thereto
Hans P. Ziegler (4) 56 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) 31 Assistant Treasurer Project manager for the Adviser's Mutual Funds
division since Apr. 1997; compliance manager from
Aug. 1995 to Apr. 1997; compliance accountant, Jan.
1995 to July 1995; section manager, Jan. 1994 to Jan.
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 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. The address 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 Ms. Kelly is Three First National Plaza, Chicago, Illinois
60602; 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; 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 Dec. 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 fees are 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 during the
fiscal year ended June 30, 1997, to 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-
Kenneth L. Block** $14,700 $70,693
William W. Boyd 16,750 80,593
Douglas A. Hacker 15,750 76,593
Janet Langford Kelly 8,200 51,600
Francis W. Morley** 15,750 76,943
Charles R. Nelson 16,750 80,593
Thomas C. Theobald 15,750 76,593
_______________
* At June 30, 1997, the Stein Roe Fund Complex consisted of
four series of Municipal Trust, six series of Stein Roe
Income Trust, ten series of Stein Roe Investment Trust, one
series of Stein Roe Institutional Trust, one series of Stein
Roe Trust, seven series of Stein Roe Advisor Trust, and nine
series of Base Trust.
**Messrs. Block and Morley retired as trustees on Dec. 31,
1997.
FINANCIAL STATEMENTS
Please refer to the Funds' June 30, 1997 Financial
Statements (balance sheets and schedules of investments as of
June 30, 1997 and the statements of operations, changes in
net assets, and notes thereto) and the report of independent
auditors contained in the June 30, 1997 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 Nov. 21, 1997, 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, were as follows:
Approximate % of
Outstanding
Name and Address Fund Shares Held
- ---------------------- ----------------------- ----------------
First Bank National Intermediate Municipals 6.9%
Association* High-Yield Municipals 9.9%
410 N. Michigan Avenue
Chicago, IL 60611
Charles Schwab & Co., Intermediate Municipals 11.1%
Inc.* High-Yield Municipals 6.5%
Attn: Mutual Fund Dept.
101 Montgomery Street
San Francisco, CA 94104
___________________
*Shares held of record, but not beneficially.
The following table shows shares of the Funds as of Nov.
30, 1997, 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 **
Intermediate Municipals **
Managed Municipals **
High-Yield Municipals **
_________________
*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.
Adviser disclaims actual beneficial ownership of such shares.
INVESTMENT ADVISORY SERVICES
Stein Roe & Farnham Incorporated (the "Adviser") serves
as investment adviser to Intermediate Municipals, Managed
Municipals, High-Yield Municipals Portfolio, and Municipal
Money Portfolio. The Adviser also provides administrative
services to each Fund and Portfolio. 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,
Harold W. Cogger, C. Allen Merritt, Jr., Timothy K. Armour,
and Hans P. Ziegler. Mr. Leibler is President and Chief
Executive Officer of Liberty Financial; Mr. Cogger is
Executive Vice President of Liberty Financial; Mr. Merritt is
Executive 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, Cogger,
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, 1997, the Adviser
managed over $28 billion in assets: over $9 billion in
equities and over $19 billion in fixed income securities
(including $1.7 billion in municipal securities). The $28
billion in managed assets included over $7.9 billion held by
open-end mutual funds managed by the Adviser (approximately
15% of the mutual fund assets were held by clients of the
Adviser). These mutual funds were owned by over 259,000
shareholders. The $7.9 billion in mutual fund assets
included over $766 million in over 50,000 IRA accounts. In
managing those assets, the Adviser utilizes a proprietary
computer-based information system that maintains and
regularly updates information for approximately 7,000
companies. The Adviser also monitors over 1,400 issues via a
proprietary credit analysis system. At June 30, 1997, the
Adviser employed 16 research analysts and 55 account
managers. The average investment-related experience of these
individuals was 24 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 descriptions of the Adviser,
administrative agreement, management agreements, fees,
expense limitations, and transfer agency services under
Management and Fee Table in the Prospectus, which is
incorporated herein by reference. The table below shows
gross fees paid and any expense reimbursements by the Adviser
for the past three fiscal years:
YEAR YEAR YEAR
TYPE OF ENDED ENDED ENDED
FUND PAYMENT 6/30/97 6/30/96 6/30/95
- ----------------- ---------------- --------- --------- ----------
Municipal Money
Fund Advisory fee -- $ 169,982 $ 786,956
Administrative fee $300,244 248,793 --
Reimbursement 194,629 194,035 120,433
Municipal Money
Portfolio Management fee 351,742 289,880 --
Intermediate
Municipals Advisory fee -- 1,220,311 1,248,808
Management fee 876,108 -- --
Administrative fee 274,088 -- --
Reimbursement 240,300 227,352 36,038
Managed Municipals Advisory fee -- 3,261,714 3,392,060
Management fee 2,482,110 -- --
Administrative fee 674,444 -- --
High-Yield
Municipals Fund Advisory fee -- 1,549,376 1,587,995
Management fee 1,255,595 -- --
Administrative fee 368,923 -- --
The Adviser provides office space and executive and
other personnel to the Funds and bears any sales or
promotional expenses. Each Fund 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.
The 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. In addition, in the interest of further limiting
expenses, from time to time, the 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
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 shall be paid
solely out of that Fund's assets. Any expenses incurred by
Municipal Trust that are not solely attributable to a
particular Fund 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, 1996 and 1997, the
Adviser received aggregate fees of $74,069, $147,330 and
$125,437 from Municipal Trust for services performed under
this agreement.
DISTRIBUTOR
Shares of the Funds are distributed by Liberty Financial
Investments, Inc. ("Distributor"), One Financial Center,
Boston, MA 02111, under a Distribution Agreement. The
Distributor is a subsidiary of Colonial Management
Associates, Inc., which is an indirect subsidiary of Liberty
Financial. The Distribution Agreement continues in effect
from year to year, provided such continuance is approved
annually (1) by a majority of the trustees or by a majority
of the outstanding voting securities of Municipal Trust, and
(2) 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, the Distributor 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. The Distributor 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 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 Fund 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 each 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, receiving and paying for
securities purchased, delivering against payment securities
sold, receiving and collecting income from investments,
making all payments covering expenses, 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 each
Portfolio are Ernst & Young LLP, 233 South Wacker Drive,
Chicago, Illinois 60606. The independent auditors audit and
report on the annual financial statements, review certain
regulatory reports and the 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, High-Yield Municipals Fund, and High-Yield
Municipals Portfolio.
The Adviser places the orders for the purchase and sale
of portfolio securities and options and futures contracts.
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
Municipals Managed Intermediate
Fund Municipals Municipals
---------- ---------- ------------
Total brokerage commissions
paid during year ended
6/30/97 -0- -0- -0-
Number of futures contracts -0- -0- -0-
Total brokerage commissions
paid during year ended
6/30/96 -0- -0- -0-
Total brokerage commissions
paid during year ended
6/30/95 $58,366 $58,366 $14,023
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. The
Adviser may also receive research in connection with selling
concessions and designations in fixed price offerings in
which the Funds participate. 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 Portfolio intends to comply with the
special provisions of the Internal Revenue Code that relieve
it of federal income tax to the extent of its net investment
income and capital gains currently distributed to
shareholders. Throughout this section, the term "Fund" also
refers to a 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.)
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 advisors 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, 1997 were:
$0.0.000657808 365
-------------- ---
Current Yield = $1.00 x 7 = 3.43%
[1+$0.0.000657808]365/7
---------------------
Effective Yield = $1.00 - 1 = 3.48%
Tax-Equivalent Current Yield = 5.67% (assuming 39.6% tax rate)
Tax-Equivalent Effective Yield = 5.77% (assuming 39.6% tax rate)
The average dollar-weighted portfolio maturity for the
seven days ended June 30, 1997, 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 Fund
Intermediate Municipals, Managed Municipals, and High-
Yield Municipals Fund 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.
6
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, 1997 were:
Intermediate Municipals
Yield = 4.23%
Tax-Equivalent Yield = 7.00%
(assuming 39.6% tax rate)
Managed Municipals
Yield = 4.73%
Tax-Equivalent Yield = 7.83%
(assuming 39.6% tax rate)
High-Yield Municipals
Yield = 5.10%
Tax-Equivalent Yield = 8.45%
(assuming 39.6% tax rate)
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, 1997 were:
TOTAL RETURN AVERAGE ANNUAL
FUND TOTAL RETURN PERCENTAGE TOTAL RETURN
- --------------------- ------------ ------------ -------------
Municipal Money Fund
1 year $1,030 3.04% 3.04%
5 years 1,138 13.76 2.61
10 years 1,432 43.16 3.65
Intermediate Municipals
1 year 1,071 7.07 7.07
5 years 1,351 35.07 6.20
10 years 1,943 94.33 6.87
Managed Municipals
1 year 1,086 8.56 8.56
5 years 1,365 36.48 6.42
10 years 2,141 114.09 7.91
High-Yield Municipals Fund
1 year 1,089 8.91 8.91
5 years 1,376 37.55 6.58
10 years 2,170 117.01 8.06
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 Fund
Intermediate Municipals, Managed Municipals, and High-
Yield Municipals Fund may compare performance to the
following as indicated below:
BENCHMARK FUND(S)
- ----------------------------------- ----------------------
Lehman Brothers Municipal Bond Index High-Yield Municipals Fund,
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 Municipal Funds
Lipper Municipal Bond Fund Average Intermediate Municipals,
Managed Municipals,
High-Yield Municipals Fund
Morningstar Municipal Bond
(General) Funds Average Managed Municipals,
Intermediate Municipals
Morningstar Municipal Bond (High-
Yield) Funds Average High-Yield Municipals Fund
Morningstar Long-Term Tax-Exempt
Fund Average High-Yield Municipals Fund,
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 its
monthly returns less the 3-month T-bill return) from its
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 Fund 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 Investment Restrictions in the Prospectus and
restriction number (i) under Investment Restrictions in this
Statement of Additional Information. 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.
-------------------
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) 1. Financial statements included in Part A of this Amendment
to the Registration Statement: Financial Highlights.
2. Financial statements included in Part B of this Amendment:
The following financial statements are incorporated by
reference to Registrant's June 30, 1997 annual report:
Investments as of June 30, 1997 of SR&F Municipal Money
Market Portfolio, Stein Roe Intermediate Municipals Fund,
Stein Roe Managed Municipals Fund and Stein Roe High-Yield
Municipals Fund; and balance sheets as of June 30, 1997,
statements of operations for the year ended June 30, 1997,
statements of changes in net assets for each of the two
years in the period ended June 30, 1997, notes thereto and
report of independent auditors of SR&F Municipal Money
Market Portfolio, Stein Roe Municipal Money Market Fund,
Stein Roe Intermediate Municipals Fund, Stein Roe Managed
Municipals Fund and Stein Roe High-Yield Municipals Fund.
(b) Exhibits: [Note: As used herein, the term "Registration
Statement" refers to the Registration Statement of the
Registrant under the Securities Act of 1933, No. 2-99356. The
terms "Pre-Effective Amendment" and "PEA" refer, respectively,
to a pre-effective and a post-effective amendment to the
Registration Statement.]
1. (a) Agreement and Declaration of Trust of Registrant as
amended through 10/25/94. (Exhibit 1 to PEA #18.)*
(b) Amendment to Agreement and Declaration of Trust dated
11/1/95. (Exhibit 1(b) to PEA #20.)*
2. By-Laws of Registrant as amended through 2/3/93. (Exhibit
2 to PEA #21.)*
3. None.
4. None.
5. Management agreement dated 7/1/96 between Registrant and
Stein Roe & Farnham Incorporated (the "Adviser") relating
to the series designated Stein Roe Intermediate Municipals
Fund, Stein Roe High-Yield Municipals Fund and Stein Roe
Managed Municipals Fund. (Exhibit 5(a) to PEA #21.)*
6. Underwriting agreement between Registrant and Liberty
Securities Corporation as amended through 10/28/92.
(Exhibit 6 to PEA #21.)*
7. None.
8. Custodian contract between Registrant and State Street
Bank and Trust Company ("Bank") dated 12/31/87 as amended
through May 8, 1995. (Exhibit 8 to PEA #18.)*
9. (a) Transfer agency agreement between Registrant and
SteinRoe Services Inc. dated 8/1/95. (Exhibit 9(a) to
PEA #19.)*
(b) Accounting and Bookkeeping Agreement between
the Registrant and the Adviser dated 11/1/94.
(Exhibit 9(b) to PEA #21.)*
(c) Administrative agreement between Registrant and the
Adviser as amended through 7/1/96. (Exhibit 9(c) to
PEA #21.)*
(d) Sub-transfer agent agreement between SteinRoe Services
Inc. and Colonial Investors Service Center, Inc. as
amended through June 30, 1997. (Exhibit 9(d) to PEA
#23.)*
10. Opinions and consents of Bell, Boyd & Lloyd and Ropes &
Gray with respect to the series of Registrant designated
SteinRoe Tax-Exempt Money Fund (now named Stein Roe
Municipal Money Market Fund), Stein Roe Intermediate
Municipals Fund, Stein Roe Managed Municipals Fund, and
Stein Roe High-Yield Municipals Fund. (Exhibit 10 to PEA
#21.)*
11. (a) Opinion and consent of Bell, Boyd & Lloyd regarding
tax-exempt status of standby commitments. (Exhibit
11(a) to PEA #21.)*
(b) Consent of Morningstar, Inc. (Exhibit 11(b) to PEA
#21.)*
(c) Consent of Ernst & Young LLP.
12. None.
13. Inapplicable.
14. None.
15. None.
16. Schedules for computation of yield and total return of
SteinRoe Tax-Exempt Money Fund (now named Stein Roe
Municipal Money Market Fund), Stein Roe Intermediate
Municipals Fund, Stein Roe Managed Municipals Fund, and
Stein Roe High-Yield Municipals Fund. (Exhibit 16 to PEA
#21.)*
17. (a) Financial Data Schedule, 6/30/97--Intermediate
Municipals Fund.
(b) Financial Data Schedule, 6/30/97--High-Yield
Municipals Fund.
(c) Financial Data Schedule, 6/30/97--Municipal Money
Market Fund.
(d) Financial Data Schedule, 6/30/97--Managed Municipals
Fund.
18. Inapplicable.
19. (Miscellaneous.)
(a) Funds Application. (Exhibit 19(a) to PEA #23.)*
(b) Automatic Redemption Services Application. (Exhibit
19(b) to PEA #21.)*
_______________________________
*Incorporated by reference.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH
REGISTRANT.
The Registrant does not consider that it is directly or indirectly
controlled by, or under common control with, other persons within
the meaning of this Item. See "Investment Advisory Services,"
"Management," "Distributor," and "Transfer Agent" in the statement
of additional information, each of which is incorporated herein by
reference.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
Number of Record
Title of Series Holders as of September 30, 1997
- ----------------- --------------------------------
Stein Roe Intermediate Municipals Fund 2,794
Stein Roe High-Yield Municipals Fund 5,954
Stein Roe Municipal Money Market Fund 3,102
Stein Roe Managed Municipals Fund 8,561
ITEM 27. INDEMNIFICATION.
Article Tenth of the Agreement and Declaration of Trust of
Registrant (Exhibit 1), which Article is incorporated herein by
reference, provides that Registrant shall provide indemnification
of its trustees and officers (including each person who serves or
has served at Registrant's request as a director, officer, or
trustee of another organization in which Registrant has any
interest as a shareholder, creditor or otherwise) ("Covered
Persons") under specified circumstances.
Section 17(h) of the Investment Company Act of 1940 ("1940 Act")
provides that neither the Agreement and Declaration of Trust nor
the By-Laws of Registrant, nor any other instrument pursuant to
which Registrant is organized or administered, shall contain any
provision which protects or purports to protect any trustee or
officer of Registrant against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office. In
accordance with Section 17(h) of the 1940 Act, Article Tenth shall
not protect any person against any liability to Registrant or its
shareholders to which he would otherwise be subject by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
To the extent required under the 1940 Act,
(i) Article Tenth does not protect any person against any
liability to Registrant or to its shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in
the conduct of his office;
(ii) in the absence of a final decision on the merits by a
court or other body before whom a proceeding was brought that a
Covered Person was not liable by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office, no indemnification is
permitted under Article Tenth unless a determination that such
person was not so liable is made on behalf of Registrant by (a) the
vote of a majority of the trustees who are neither "interested
persons" of Registrant, as defined in Section 2(a)(19) of the 1940
Act, nor parties to the proceeding ("disinterested, non-party
trustees"), or (b) an independent legal counsel as expressed in a
written opinion; and
(iii) Registrant will not advance attorneys' fees or other
expenses incurred by a Covered Person in connection with a civil or
criminal action, suit or proceeding unless Registrant receives an
undertaking by or on behalf of the Covered Person to repay the
advance (unless it is ultimately determined that he is entitled to
indemnification) and (a) the Covered Person provides security for
his undertaking, or (b) Registrant is insured against losses
arising by reason of any lawful advances, or (c) a majority of the
disinterested, non-party trustees of Registrant or an independent
legal counsel as expressed in a written opinion, determine, based
on a review of readily-available facts (as opposed to a full trial-
type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
Any approval of indemnification pursuant to Article Tenth does not
prevent the recovery from any Covered Person of any amount paid to
such Covered Person in accordance with Article Tenth as
indemnification if such Covered Person is subsequently adjudicated
by a court of competent jurisdiction not to have acted in good
faith in the reasonable belief that such Covered Person's action
was in, or not opposed to, the best interests of Registrant or to
have been liable to Registrant or its shareholders by reason of
willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of such Covered
Person's office.
Article Tenth also provides that its indemnification provisions are
not exclusive.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to trustees, officers, and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a trustee, officer, or
controlling person of Registrant in the successful defense of any
action, suit, or proceeding) is asserted by such trustee, officer,
or controlling person in connection with the securities being
registered, Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issue.
Registrant, its trustees and officers, Stein Roe & Farnham
Incorporated (the "Adviser"), the other investment companies
advised by the Adviser, and persons affiliated with them are
insured against certain expenses in connection with the defense of
actions, suits, or proceedings, and certain liabilities that might
be imposed as a result of such actions, suits, or proceedings.
Registrant will not pay any portion of the premiums for coverage
under such insurance that would (1) protect any trustee or officer
against any liability to Registrant or its shareholders to which he
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his office or (2) protect the Adviser or
principal underwriter, if any, against any liability to Registrant
or its shareholders to which such person would otherwise be subject
by reason of willful misfeasance, bad faith, or gross negligence,
in the performance of its duties, or by reason of its reckless
disregard of its duties and obligations under its contract or
agreement with the Registrant; for this purpose the Registrant will
rely on an allocation of premiums determined by the insurance
company.
Pursuant to the indemnification agreement dated July 1, 1995, among
the Registrant, its transfer agent and the Adviser, Registrant, its
trustees, officers and employees, its transfer agent and the
transfer agent's directors, officers and employees are indemnified
by Registrant's Adviser against any and all losses, liabilities,
damages, claims and expenses arising out of any act or omission of
the Registrant or its transfer agent performed in conformity with a
request of the Adviser that the transfer agent and the Registrant
deviate from their normal procedures in connection with the issue,
redemption or transfer of shares for a client of the Adviser.
Registrant, its trustees, officers, employees and representatives
and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933 are indemnified
by the distributor of Registrant's shares (the "distributor"),
pursuant to the terms of the distribution agreement, which governs
the distribution of Registrant's shares, against any and all
losses, liabilities, damages, claims and expenses arising out of
the acquisition of any shares of the Registrant by any person which
(i) may be based upon any wrongful act by the distributor or any of
the distributor's directors, officers, employees or representatives
or (ii) may be based upon any untrue or alleged untrue statement of
a material fact contained in a registration statement, prospectus,
statement of additional information, shareholder report or other
information covering shares of the Registrant filed or made public
by the Registrant or any amendment thereof or supplement thereto or
the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement
therein not misleading if such statement or omission was made in
reliance upon information furnished to the Registrant by the
distributor in writing. In no case does the distributor's
indemnity indemnify an indemnified party against any liability to
which such indemnified party would otherwise be subject by reason
of willful misfeasance, bad faith, or negligence in the performance
of its or his duties or by reason of its or his reckless disregard
of its or his obligations and duties under the distribution agreement.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Adviser is a wholly owned subsidiary of SteinRoe Services Inc.
("SSI"), which in turn is a wholly owned subsidiary of Liberty
Financial Companies, Inc., which 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. The Adviser acts as investment
adviser to individuals, trustees, pension and profit-sharing plans,
charitable organizations, and other investors. In addition to
Registrant, it also acts as investment adviser to other investment
companies having different investment policies.
For a two-year business history of officers and directors of the
Adviser, please refer to the Form ADV of Stein Roe & Farnham
Incorporated and to the section of the statement of additional
information (part B) entitled "Investment Advisory Services."
Certain directors and officers of the Adviser also serve and have
during the past two years served in various capacities as
officers, directors, or trustees of SSI and of the Registrant,
SR&F Base Trust, and/or other investment companies managed by
the Adviser. (The listed entities are located at One South
Wacker Drive, Chicago, Illinois 60606, except for SteinRoe
Variable Investment Trust and Keyport Variable Investment Trust,
which are located at 600 Atlantic Avenue, Boston, MA 02210 and
LFC Utilities Trust, which is located at One Financial Center,
Boston, MA 02111.) A list of such capacities is given below.
POSITION FORMERLY
HELD WITHIN
CURRENT POSITION PAST TWO YEARS
------------------- --------------
STEINROE SERVICES INC.
Gary A. Anetsberger Vice President
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President; Secretary
Kenneth J. Kozanda Vice President; Treasurer
Kenneth R. Leibler Director
C. Allen Merritt, Jr. Director; Vice President
Hans P. Ziegler Director, President, Vice Chairman
Chairman
SR&F BASE TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive Vice-President;
Secretary
Thomas W. Butch Executive Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Lynn C. Maddox Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INCOME TRUST; STEIN ROE INSTITUTIONAL TRUST; AND
STEIN ROE TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Steven P. Luetger Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Jane M. Naeseth Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE INVESTMENT TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE ADVISOR TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Bruno Bertocci Vice-President
David P. Brady Vice-President
Thomas W. Butch Executive Vice-President Vice-President
Daniel K. Cantor Vice-President
Philip J. Crosley Vice-President
E. Bruce Dunn Vice-President
Erik P. Gustafson Vice-President
Loren A. Hansen Executive Vice-President
David P. Harris Vice-President
Harvey B. Hirschhorn Vice-President
Michael T. Kennedy Vice-President
Stephen F. Lockman Vice-President
Eric S. Maddix Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Arthur J. McQueen Vice-President
Richard B. Peterson Vice-President
M. Gerard Sandel Vice-President
Gloria J. Santella Vice-President
Hans P. Ziegler Executive Vice-President
STEIN ROE MUNICIPAL TRUST
William D. Andrews Executive Vice-President
Gary A. Anetsberger Sr. Vice-President Treasurer
Timothy K. Armour President; Trustee
Jilaine Hummel Bauer Executive V-P; Secretary
Thomas W. Butch Executive Vice-President Vice-President
Joanne T. Costopoulos Vice-President
Philip J. Crosley Vice-President
Loren A. Hansen Executive Vice-President
Lynn C. Maddox Vice-President
Anne E. Marcel Vice-President
M. Jane McCart Vice-President
Hans P. Ziegler Executive Vice-President
STEINROE VARIABLE INVESTMENT TRUST
Gary A. Anetsberger Treasurer
Timothy K. Armour Vice President
Jilaine Hummel Bauer Vice President
E. Bruce Dunn Vice President
Erik P. Gustafson Vice President
Harvey B. Hirschhorn Vice President
Michael T. Kennedy Vice President
Jane M. Naeseth Vice President
Richard B. Peterson Vice President
LFC UTILITIES TRUST
Gary A. Anetsberger Vice President
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
KEYPORT VARIABLE INVESTMENT TRUST
Ophelia L. Barsketis Vice President
Deborah A. Jansen Vice President
ITEM 29. PRINCIPAL UNDERWRITERS.
Registrant's principal underwriter, Liberty Securities
Corporation, is a wholly owned subsidiary of Liberty Investment
Services, Inc., a wholly owned subsidiary of Liberty Financial
Services, Inc. which, in turn, is a wholly owned subsidiary of
Liberty Financial Companies, Inc. Liberty Financial Companies,
Inc. is a public corporation whose majority shareholder is LFC
Holdings, Inc., a wholly owned subsidiary of Liberty Mutual Equity
Corporation. Liberty Mutual Equity Corporation is a wholly owned
subsidiary of Liberty Mutual Insurance Company.
Liberty Securities Corporation is principal underwriter for the
following investment companies:
Stein Roe Income Trust
Stein Roe Municipal Trust
Stein Roe Investment Trust
Stein Roe Institutional Trust
Stein Roe Trust
Set forth below is information concerning the directors and
officers of Liberty Securities Corporation:
Positions
Positions and Offices and Offices
Name with Underwriter with Registrant
- ------------------ -------------------- ---------------
Porter P. Morgan Chairman of the Board; Director None
Frank L. Tarantino President; Chief Operating
Officer; Director None
Robert L. Spadafora Executive Vice President -
Sales and Marketing None
John T. Treece, Jr. Senior Vice President - Operations None
John W. Reading Senior Vice President and
Assistant Secretary None
Valerie A. Arendell Senior Vice President - Sales None
Gerald H. Stanney, Vice President and Compliance
Jr. Officer (Boston) None
Jilaine Hummel Bauer Vice President and Compliance Exec. V-P &
Officer (Chicago) Secretary
Bruce F. Ripepi Vice President, General Counsel None
and Assistant Secretary
Timothy K. Armour Vice President President,
Trustee
Lindsay Cook Vice President Trustee
Ralph E. Nixon Vice President None
Joyce B. Riegel Vice President None
Heidi J. Walter Vice President V-P
Glenn E. Williams Assistant Vice President None
Philip J. Iudice Treasurer None
John A. Benning Secretary None
John A. Davenport Assistant Secretary None
Marjorie M. Pluskota Assistant Secretary None
C. Allen Merritt, Jr. Assistant Treasurer; Assistant
Secretary; Director None
The principal business address of Mr. Armour, Ms. Bauer, Ms.
Pluskota, Ms. Riegel and Ms. Walter is One South Wacker Drive,
Chicago, IL 60606; that of Mr. Williams is Two Righter Parkway,
Wilmington, DE 19803; that of Mr. Ripepi is 100 Manhattanville
Road, Purchase, NY 10577; and that of the other officers is 600
Atlantic Avenue, Boston, MA 02210-2214.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Jilaine Hummel Bauer
Executive Vice-President and Secretary
One South Wacker Drive
Chicago, Illinois 60606
ITEM 31. MANAGEMENT SERVICES.
None.
ITEM 32. UNDERTAKINGS.
Since the information called for by Item 5A for the Funds (other
than Stein Roe Municipal Money Market Fund, to which this item does
not relate) is contained in the latest annual report to
shareholders, Registrant undertakes to furnish each person to whom
a prospectus is delivered with a copy of the Registrant's latest
annual report to shareholders upon request and without charge.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
amendment to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of
Chicago and State of Illinois on the 1st day of December, 1997.
STEIN ROE MUNICIPAL TRUST
By TIMOTHY K. ARMOUR
Timothy K. Armour
President
Pursuant to the requirements of the Securities Act of 1933, this
amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates
indicated:
Signature Title* Date
- ------------------------ --------------------- --------------
TIMOTHY K. ARMOUR President and Trustee December 1, 1997
Timothy K. Armour
Principal Executive Officer
GARY A. ANETSBERGER Senior Vice-President December 1, 1997
Gary A. Anetsberger
Principal Financial Officer
SHARON R. ROBERTSON Controller December 1, 1997
Sharon R. Robertson
Principal Accounting Officer
KENNETH L. BLOCK Trustee December 1, 1997
Kenneth L. Block
WILLIAM W. BOYD Trustee December 1, 1997
William W. Boyd
LINDSAY COOK Trustee December 1, 1997
Lindsay Cook
DOUGLAS A. HACKER Trustee December 1, 1997
Douglas A. Hacker
JANET LANGFORD KELLY Trustee December 1, 1997
Janet Langford Kelly
FRANCIS W. MORLEY Trustee December 1, 1997
Francis W. Morley
CHARLES R. NELSON Trustee December 1, 1997
Charles R. Nelson
THOMAS C. THEOBALD Trustee December 1, 1997
Thomas C. Theobald
* This amendment to the Registration Statement has also been signed
by the above persons in their capacities as trustees and officers
of the SR&F Base Trust as it relates to the Stein Roe Municipal
Money Market Fund and Stein Roe High-Yield Municipals Fund.
<PAGE>
STEIN ROE MUNICIPAL TRUST
INDEX TO EXHIBITS FILED WITH THIS AMENDMENT
Exhibit
Number Description
- ------- -----------
11(c) Consent of Ernst & Young LLP
17(a) Financial Data Schedule--Intermediate Municipals Fund
17(b) Financial Data Schedule--High-Yield Municipals Fund
17(c) Financial Data Schedule--Municipal Money Market Fund
17(d) Financial Data Schedule--Managed Municipals Fund
Exhibit 11(c)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Financial Highlights" and "Independent Auditors" and to the
incorporation by reference of our report dated August 12,
1997 with respect to Stein Roe Municipal Money Market Fund,
Stein Roe Intermediate Municipals Fund, Stein Roe Managed
Municipals Fund, Stein Roe High-Yield Municipals Fund and
SR&F Municipal Money Market Portfolio in the Registration
Statement (Form N-1A) of Stein Roe Municipal Trust
filed with the Securities and Exchange Commission in this
Post-Effective Amendment No. 25 to the Registration Statement
under the Securities Act of 1933 (Registration No. 2-99356)
and in this Amendment No. 26 to the Registration Statement
under the Investment Company Act of l940 (Registration No.
811-4367).
ERNST & YOUNG LLP
Chicago, Illinois
November 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> STEIN ROE INTERMEDIATE MUNICIPALS FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 184,135
<INVESTMENTS-AT-VALUE> 193,788
<RECEIVABLES> 3,566
<ASSETS-OTHER> 192
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 197,546
<PAYABLE-FOR-SECURITIES> 1,006
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 534
<TOTAL-LIABILITIES> 1,540
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 186,019
<SHARES-COMMON-STOCK> 17,220
<SHARES-COMMON-PRIOR> 18,243
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9,653
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 334
<NET-ASSETS> 197,546
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,091
<OTHER-INCOME> 0
<EXPENSES-NET> 1,401
<NET-INVESTMENT-INCOME> 9,690
<REALIZED-GAINS-CURRENT> 913
<APPREC-INCREASE-CURRENT> 3,038
<NET-CHANGE-FROM-OPS> 13,641
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (9,690)
<DISTRIBUTIONS-OF-GAINS> 1,149
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30,850
<NUMBER-OF-SHARES-REDEEMED> (48,377)
<SHARES-REINVESTED> 6,005
<NET-CHANGE-IN-ASSETS> (8,720)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 570
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 876
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,641
<AVERAGE-NET-ASSETS> 200,162
<PER-SHARE-NAV-BEGIN> 11.22
<PER-SHARE-NII> .55
<PER-SHARE-GAIN-APPREC> .22
<PER-SHARE-DIVIDEND> (.55)
<PER-SHARE-DISTRIBUTIONS> (.06)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.38
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> STEIN ROE HIGH-YIELD MUNICIPALS FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 291,318
<INVESTMENTS-AT-VALUE> 305,514
<RECEIVABLES> 7,124
<ASSETS-OTHER> 645
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 313,283
<PAYABLE-FOR-SECURITIES> 5,976
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,237
<TOTAL-LIABILITIES> 7,213
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 301,155
<SHARES-COMMON-STOCK> 26,222
<SHARES-COMMON-PRIOR> 24,814
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (9,281)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,196
<NET-ASSETS> 306,070
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 20,548
<OTHER-INCOME> 0
<EXPENSES-NET> 2,256
<NET-INVESTMENT-INCOME> 18,292
<REALIZED-GAINS-CURRENT> (4,451)
<APPREC-INCREASE-CURRENT> 11,315
<NET-CHANGE-FROM-OPS> 25,156
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (18,292)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 58,262
<NUMBER-OF-SHARES-REDEEMED> (50,971)
<SHARES-REINVESTED> 8,959
<NET-CHANGE-IN-ASSETS> 23,114
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,830)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,255
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,256
<AVERAGE-NET-ASSETS> 294,904
<PER-SHARE-NAV-BEGIN> 11.40
<PER-SHARE-NII> .72
<PER-SHARE-GAIN-APPREC> .27
<PER-SHARE-DIVIDEND> (.72)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.67
<EXPENSE-RATIO> 0.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> STEIN ROE MUNICIPAL MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 144,151
<INVESTMENTS-AT-VALUE> 119,150
<RECEIVABLES> 300
<ASSETS-OTHER> 96
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 119,546
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,122
<TOTAL-LIABILITIES> 1,122
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 118,432
<SHARES-COMMON-STOCK> 118,359
<SHARES-COMMON-PRIOR> 120,365
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 118,424
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 4,426
<OTHER-INCOME> 0
<EXPENSES-NET> 841
<NET-INVESTMENT-INCOME> 3,585
<REALIZED-GAINS-CURRENT> (2)
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 3,583
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (3,585)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 188,521
<NUMBER-OF-SHARES-REDEEMED> (193,325)
<SHARES-REINVESTED> 2,798
<NET-CHANGE-IN-ASSETS> (2,008)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (7)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,036
<AVERAGE-NET-ASSETS> 120,098
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.030
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> (0.030)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> STEIN ROE MANAGED MUNICIPALS FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> JUN-30-1997
<INVESTMENTS-AT-COST> 533,974
<INVESTMENTS-AT-VALUE> 579,837
<RECEIVABLES> 11,334
<ASSETS-OTHER> 649
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 591,820
<PAYABLE-FOR-SECURITIES> 8,020
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,434
<TOTAL-LIABILITIES> 9,454
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 539,499
<SHARES-COMMON-STOCK> 63,916
<SHARES-COMMON-PRIOR> 68,507
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,996)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 45,863
<NET-ASSETS> 582,366
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 36,314
<OTHER-INCOME> 0
<EXPENSES-NET> 4,394
<NET-INVESTMENT-INCOME> 31,920
<REALIZED-GAINS-CURRENT> 1,088
<APPREC-INCREASE-CURRENT> 16,133
<NET-CHANGE-FROM-OPS> 49,141
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (31,920)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 42,898
<NUMBER-OF-SHARES-REDEEMED> (100,667)
<SHARES-REINVESTED> 16,555
<NET-CHANGE-IN-ASSETS> (23,993)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,084)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,482
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,394
<AVERAGE-NET-ASSETS> 601,311
<PER-SHARE-NAV-BEGIN> 8.85
<PER-SHARE-NII> .48
<PER-SHARE-GAIN-APPREC> .26
<PER-SHARE-DIVIDEND> (.48)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.11
<EXPENSE-RATIO> 0.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>