THORNBURG LIMITED TERM MUNICIPAL FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information of Thornburg Limited Term
Municipal Fund, Inc. (the "Company") is not a prospectus but should be read
in conjunction with the Company's Prospectus dated November 1, 1996, (the
"Prospectus") which may be obtained, without charge, by writing to Thornburg
Securities Corporation (the "Distributor"), 119 East Marcy Street, Suite 202,
Santa Fe, New Mexico 87501. Prior to June 28, 1985, the Company's name was
"Tax-Free Municipal Lease Fund, Inc.;" and the Company operated under the
name "Limited Term Municipal Fund, Inc." from June 28, 1985 to November 1,
1992.
The date of this Statement of Additional Information is November 1,
1996, as revised May 6, 1997.
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS . . . . . . . . . . . . . . . . . i
INVESTMENT OBJECTIVES AND POLICIES . . . . . . . . 1
Ratings . . . . . . . . . . . . . . . . . . . 8
Temporary Investments. . . . . . . . . . . . . 10
Repurchase Agreements. . . . . . . . . . . . . 10
U.S. Government Obligations. . . . . . . . . . 11
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . 11
PERFORMANCE COMPUTATION . . . . . . . . . . . . . . 14
Performance Computations - In General. . . . . 14
Representative Performance Figures -
Limited Term National Fund
(Classes A and C). . . . . . . . . . 15
Representative Performance Figures -
Limited Term California Fund
(Classes A and C). . . . . . . . . . 17
DISTRIBUTIONS AND TAXES . . . . . . . . . . . . . . 19
Distributions. . . . . . . . . . . . . . . . . 19
Tax Matters . . . . . . . . . . . . . . . . . 19
State and Local Tax Aspects. . . . . . . . . . 22
Special Risks Affecting the
California Portfolio. . . . . . . . . . . . . 22
Accounts of Shareholders . . . . . . . . . . . 25
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES
AGREEMENTS . . . . . . . . . . . . . . . . . . . . 26
Investment Management Services . . . . . . . . 26
Administrative Services Agreement. . . . . . . 27
SERVICE AND DISTRIBUTION PLANS. . . . . . . . . . . 28
Service Plan - Class A and C . . . . . . . . . 28
Class C Distribution Plan. . . . . . . . . . . 29
General Matters Relating to Service and
Distribution Plans . . . . . . . . . . . . 29
PORTFOLIO TRANSACTIONS. . . . . . . . . . . . . . . 30
MANAGEMENT . . . . . . . . . . . . . . . . . . . . 31
PRINCIPAL HOLDERS OF SECURITIES . . . . . . . . . . 35
HOW TO PURCHASE FUND SHARES . . . . . . . . . . . . 35
NET ASSET VALUE . . . . . . . . . . . . . . . . . . 38
REDEMPTION OF SHARES. . . . . . . . . . . . . . . . 38
DISTRIBUTOR . . . . . . . . . . . . . . . . . . . . 38
INDEPENDENT AUDITORS. . . . . . . . . . . . . . . . 39
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . 39
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The Company currently offers two separate investment portfolios or
Funds: Thornburg Limited Term Municipal Fund National Portfolio ("Limited
Term National Fund") and Thornburg Limited Term Municipal Fund California
Portfolio ("Limited Term California Fund"). Each Fund currently offers two
classes of shares, Class A shares and Class C shares.
The investment objective of the Funds is to provide for their respective
shareholders as high a level of current interest income exempt from federal
income tax as is consistent, in the view of the Funds' management, with
preservation of capital. Additionally, the Limited Term California Fund
seeks to provide as high a level of current interest income exempt from
California state income tax as is consistent in the view of the Fund's
management with preservation of capital. Investors should recognize,
however, that income otherwise exempt from federal income tax may be subject
to the federal minimum tax and state income taxes. See "DISTRIBUTIONS AND
TAXES", below.
A secondary investment objective of the Funds is to minimize expected
fluctuations in net asset value per share relative to municipal bond
portfolios with longer average maturities by maintaining a portfolio with a
dollar-weighted average maturity that will normally not exceed five years.
There is a risk in all investments, however, and there can be no assurance
that the Funds' objectives will be achieved. The objective of preservation
of capital may preclude the Funds from obtaining the highest available
yields.
The Funds will seek to achieve their objective by investing in a
diversified portfolio of obligations issued by state and local governments
the interest on which is exempt from federal income tax ("Municipal
Obligations"). The Fund may invest its assets in Municipal Obligations (or
participation interest therein) that constitute leases or installment
purchase or conditional sale contracts by state or local governments or
authorities to obtain property or equipment ("Municipal Leases").
Municipal Obligations include debt obligations issued by states, cities
and local authorities to obtain funds for various public purposes, including
the construction of a wide range of public facilities such as airports,
bridges, highways, housing, hospitals, mass transportation, schools, streets
and water and sewer works. Other public purposes for which Municipal
Obligations may be issued include the refunding of outstanding obligations,
the obtaining of funds for general operating expenses and the obtaining of
funds to lend to other public institutions and facilities. In addition,
certain types of industrial development bonds are issued by or on behalf of
public authorities to obtain funds to provide privately-operated housing
facilities, sports facilities, convention or trade show facilities, airport,
mass transit, port or parking facilities, air or water pollution control
facilities and certain local facilities for water supply, gas, electricity or
sewage or solid waste disposal. Municipal Obligations have also been issued
to finance single-family mortgage loans and to finance student loans. Such
obligations are included within the term Municipal Obligations if the
interest paid thereon is exempt from federal income tax. Municipal
Obligations also include obligations issued by or on behalf of territories or
possessions of the United States and their agencies and instrumentalities.
The two principal classifications of Municipal Obligations 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 payable only from the revenues
derived from a particular facility or class of facilities or, in some cases,
from the proceeds of a specific revenue source. Industrial development bonds
are in most cases revenue bonds and are generally not secured by the pledge
of the credit or taxing power of the issuer of such bonds. There are, of
course, variations in the security of Municipal Obligations, both within a
particular classification and between classifications, depending on numerous
factors.
The Funds' assets will normally consist of (1) Municipal Obligations
(including municipal Leases) or participations therein that are rated at the
time of purchase within the four highest grades by Moody's or S&P and
(2) Municipal Obligations (including Municipal Leases) or participations
therein that are not rated by a rating agency, but are issued by obligors
that either have other comparable debt obligations that are rated within the
four highest grades (Baa or BBB or better) by Moody's Investors Service
("Moody's") Standard & Poor's Corporation ("S&P") or Fitch Investors Service
("Fitch") or, in the case of obligors whose obligations are unrated, are
deemed by the Funds' investment adviser, Thornburg Management Company, Inc.
("TMC"), to be comparable with issuers having such debt ratings, (3) cash and
receivables. Investments in Municipal Obligations may also include
(i) variable rate demand instruments that are rated within the two highest
grades of either rating agency or, if unrated, are deemed by TMC to be of
high quality and minimal credit risk; (ii) tax-exempt commercial paper that
is rated within the two highest grades of either rating agency;
(iii) municipal notes that are rated within the two highest grades of either
rating agency or, if unrated, are deemed by TMC to be of comparable quality
to such rated municipal notes; and (iv) other municipal demand instruments
rated within the three highest grades of either rating agency or, if unrated,
are deemed by TMC to be of comparable quality to such rated municipal demand
instruments. Unrated Municipal Leases will be purchased only subject to
certain restrictions described in the Prospectus under the caption
"Investment Objectives and Policies -- Municipal Obligations". To the extent
that unrated Municipal Obligations may be less liquid, there may be somewhat
greater risk in purchasing unrated Municipal Obligations than in purchasing
comparable rated Municipal Obligations. Except to the extent that a Fund is
invested in temporary investments for defensive purposes, the Fund will,
under normal conditions, invest 100% of its net assets in Municipal
Obligations, and as a matter of fundamental policy normally will not invest
less than 80% in Municipal Obligations. Under normal conditions the Limited
Term California Fund will attempt to invest 100% and as a matter of
fundamental policy, will invest at least 65% of its net assets in Municipal
Obligations (and participation interests therein) issued by public entities
located in the State of California.
In some cases, investments by a Fund in Municipal Leases will take the
form of purchases of participation interests therein from banks and other
responsible parties. A participation interest gives the Fund a specified
undivided interest in the obligation in the proportion that the Fund's
participation interest bears to the total principal amount of the Municipal
Lease.
The foregoing restrictions and other limitations discussed herein and
under "Investment Limitations" will apply only at the time of purchase of
securities and will not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of an acquisition of
securities.
The Fund has reserved the right to invest up to 20% of its net assets in
"temporary" investments in taxable securities, but it does not expect to find
it necessary to do so. See "Temporary Investments" and "Repurchase
Agreements" below.
Portfolio trading will be undertaken to accomplish the Funds' investment
objectives in relation to actual and anticipated movements in interest rates.
The Funds also may engage to a limited extent in short-term trading
consistent with their investment objectives. Securities may be sold in
anticipation of a market decline (a rise in interest rates) or purchased in
anticipation of a market rise (a decline in interest rates) and later sold,
but the Funds will not engage in trading solely to recognize a gain. In
addition, a security may be sold and another of comparable quality purchased
at approximately the same time to take advantage of what a Fund believes to
be a temporary disparity in the normal yield relationship between the two
securities. Yield disparities may occur for reasons not directly related to
the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for or supply of
various types of Municipal Obligations or changes in the investment
objectives of investors. With respect to income tax consequences to the
Funds and their shareholders resulting from short-term trading by the Funds,
see "Distributions and Taxes".
Subject to the foregoing, each Fund will attempt to achieve its
investment objective by prudent selection of Municipal Obligations with a
view to holding them for investment. While there can be no assurance
thereof, each Fund anticipates that its annual portfolio turnover rate
generally will not exceed 70%. However, each Fund reserves the right to make
changes in its portfolio whenever it deems such action advisable, and the
rate of turnover will not be a limiting factor when the Fund deems it
desirable to sell or purchase securities. Therefore, depending upon market
conditions, each Fund's annual portfolio turnover rate may exceed 70% in
particular years.
Except as expressly set forth in this Statement of Additional
Information or in the Prospectus, the investment objective and the
permissible investments set forth herein under the caption "Investment
Objective and Policies" are not fundamental policies and may be changed by
the Board of Directors of the Company without approval by Fund shareholders.
Any fundamental policy may be changed only with the approval of a majority of
the outstanding shares of each Fund which would be affected by the change.
See "Investment Limitations".
Each Fund may invest a portion of its assets in Municipal Leases and
participation interests therein. Such obligations, which may take the form
of a lease or an installment purchase of conditional sale contract, are
issued by state and local governments and authorities to acquire a wide
variety of equipment and facilities, such as fire and sanitation vehicles,
telecommunications equipment and other capital assets. Interest payments on
qualifying Municipal Leases are exempt from federal income taxes.
Municipal Leases have special risks not normally associated with general
obligation or revenue bonds. The constitutions and statutes of all states
contain requirements that the state or a municipality must meet to incur
debt. These often include voter referenda, interest rate limits and public
sale requirements. Leases and installment purchase or conditional sale
contracts (which normally provide for title to the leased asset to pass
eventually to the governmental issuer) have evolved as a means for
governmental issuers to acquire property and equipment without meeting their
constitutional and statutory requirements for the issuance of debt. The
debt-issuance limitations are deemed to be inapplicable because of the
inclusion in many leases or contracts of "non-appropriation" clauses which
provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for such
purpose by the appropriate legislative body on a yearly or other periodic
basis.
Although Municipal Leases typically will be secured by the leased
property, the disposition of the property in the event of non-appropriation
or foreclosure might, in some cases, prove difficult. In addition, in
certain instances the tax-exempt status of the obligations will not be
subject to the legal opinion of a nationally recognized "bond counsel," as is
customarily required in larger issues of Municipal Obligations. However, in
all cases the Company will require that a Municipal Lease purchased by a Fund
be covered by a legal opinion (typically from the issuer's counsel) to the
effect that, as of the effective date of such Lease, the Lease is the valid
and binding obligation of the governmental issuer.
TMC will evaluate the liquidity of each Municipal Lease upon its
acquisition by a Fund and periodically while it is held based upon factors
established by the Fund's board of directors, including (i) the frequency of
trades and quotes for the obligation, (ii) the number of dealers who will buy
or sell the obligation and the potential buyers of the obligation, (iii) the
willingness of dealers to make a market for the obligation, and (iv) the
nature and timing of marketplace trades. For purposes of the preceding
sentences, an unrated Municipal Lease with non-appropriation risk that is
backed by an irrevocable bank letter of credit or an insurance policy, issued
by a bank or insurer deemed by TMC to be of high quality and minimal credit
risk, will not be deemed to be "illiquid" solely because the underlying
Municipal Lease is unrated, if TMC determines that the Municipal Lease is
readily marketable because it is backed by such letter of credit or insurance
policy.
Each Fund will seek to reduce further the special risks associated with
investment in Municipal Leases by investing in Municipal Leases only where,
in TMC's opinion, certain factors established by the Fund's directors have
been satisfied, including (1) the nature of the leased equipment or property
is such that its ownership or use is deemed essential to a governmental
function of the governmental issuer, (2) the Municipal Lease has a shorter
term to maturity than the estimated useful life of the leased property and
the lease payments will commence amortization of principal at an early date,
(3) appropriate covenants will be obtained from the governmental issuer
prohibiting the substitution or purchase of similar equipment for a specified
period (usually 60 days or more) in the event payments are not appropriated,
(4) the underlying equipment has elements of portability or use that enhance
its marketability in the event foreclosure on the underlying equipment was
ever required, and (5) the governmental issuer's general credit is adequate.
The enforceability of the "non-substitution" provisions referred to in (3)
above has not been tested by the courts. Investments not meeting certain of
these criteria (such as the absence of a non-substitution clause) may be made
if the Municipal Lease is subject to an agreement with a responsible party
(such as the equipment vendor) providing warranties to the Fund that satisfy
such criteria.
Each Fund may purchase variable rate demand instruments and also may
purchase fixed rate municipal demand instruments either in the public market
or privately from banks, insurance companies and other financial
institutions. These instruments provide for periodic adjustment of the
interest rate paid to the holder. The "demand" feature permits the holder to
demand payment of principal and interest prior to the final stated maturity,
either from the issuer or by drawing on a bank letter of credit, a guarantee
or insurance issued with respect to the instrument. In some cases these
demand instruments may be in the form of units, each of which consists of
(i) a Municipal Obligation and (ii) a separate put option entitling the
holder to sell to the issuer of the option the Municipal Obligation in such
unit, or an equal aggregate principal amount of another Municipal Obligation
of the same issuer, issue and maturity as the Municipal Obligation, at a
fixed price on specified dates during the term of the put option. In those
cases, each unit taken as a whole will be considered a Municipal Obligation.
The demand option may or may not increase the liquidity of the underlying
Municipal Obligation at any point in time. The issuer of the demand option
may or may not guarantee payments of principal and interest on the underlying
Municipal Obligation. However, as long as the issuer of the option honors
its obligation, or is perceived to be able to do so, the option should
decrease the risk of downward price fluctuation of the underlying Municipal
Obligation at any point in time by establishing a fixed price for which the
Municipal Obligation can be sold before its final maturity. In order to
reduce further the risk associated with this type of investment, a Fund will
invest in a fixed rate municipal demand instrument only if the instrument or
the letter of credit, guarantee or insurance associated therewith is rated
within the three highest grades of a nationally recognized rating agency, or
if unrated, is deemed by TMC to be of comparable quality with issues having
these debt ratings. The credit quality of such investments will be reviewed
on a periodic basis by TMC under the supervision of the Fund's directors.
When a Fund holds an investment in a Municipal Obligation together with a put
option relating to it, the maturity of the Municipal Obligation for purposes
of calculating the Fund's dollar-weighted average portfolio maturity will be
deemed to be the shorter of (1) the final maturity of the Municipal
Obligation, or (2) the next date that the Fund may demand payment for the
Municipal Obligation from the issuer of the put option.
Each Fund may purchase participation interests in Municipal Leases
principally from banks or other responsible parties (such as equipment
vendors, insurance companies, broker-dealers and other financial
institutions) which have entered into a "remarketing agreement" with the Fund
providing that the other party will either remarket or repurchase the
Municipal Leases within seven days after demand by the Fund on certain
conditions described below within seven days after demand by the Fund. Such
agreements are referred to herein as "remarketing agreements" and the party
that agrees to remarket or repurchase a Municipal Lease is referred to herein
as a "remarketing party.") The agreement will provide for a remarketing
price equal to the current value of the Fund's participation interest in the
obligation as determined by the Fund's portfolio valuation service as of the
demand date (plus accrued interest). The Funds anticipate that, in most
cases, the agreement will also provide for the seller of the participation
interest or the remarketing party to service the Municipal Lease, often for
a servicing fee. The conditions to a Fund's right to require the remarketing
party to remarket the obligation are that the Fund must certify at the time
of remarketing that (1) payments under the Municipal Lease are current and
the Fund has no knowledge of any default thereunder by the governmental
issuer, (2) such remarketing is necessary in TMC's sole opinion to meet the
Fund's liquidity needs and (3) the governmental issuer has not notified the
Fund of termination of the Municipal Lease.
A Fund will enter into remarketing agreements only with banks or other
responsible parties (such as equipment vendors, insurance companies,
broker-dealers and other financial institutions) that in the opinion of TMC
are capable of meeting their obligations to the Fund. TMC will monitor on a
continuous basis the ability of remarketing parties to meet their obligations
to the Fund. Although each Fund expects to deal with a variety of
remarketing parties, it reserves the right to enter into such agreements
covering up to 25% of its net assets with any particular remarketing party
meeting TMC's normal credit criteria. In addition, up to 50% of its net
assets may be covered by a remarketing agreement with a remarketing party
that is deemed by TMC to be of high quality and minimal credit risk. The
Company received an interpretation from the staff of the Securities and
Exchange Commission on January 18, 1985, enabling the Funds to enter into
remarketing agreements with a broker-dealer, provided the broker-dealer has
sold a participation interest in the underlying Municipal lease and the Fund
reflects the investment on its balance sheet as a participation interest.
The "remarketing" feature of the remarketing agreement entitles the
remarketing party to attempt to resell a Fund's participation interest in the
Lease within seven days after demand; however, the remarketing party will be
obligated to repurchase the Lease for its own account within the seven-day
period if the Lease has not been resold. The remarketing agreement will
often be entered into with the party who has sold a participation interest in
the Municipal Lease to the Fund, but remarketing agreements may also be
entered into with a separate remarketing party of the same type and meeting
the same criteria as described above. A Fund will not invest in unrated
Municipal Leases with non-appropriation risk that are not subject to a
remarketing agreement if, as a result of such investment, more than 10% of
its net assets would be invested in (1) unrated Municipal Leases with
non-appropriation risk not covered by such agreements and (2) other
investments not considered readily marketable by the Fund (including unrated
Municipal Leases not currently subject to remarketing pursuant to any such
agreement then in effect).
The Funds will enter into remarketing agreements solely to facilitate
portfolio liquidity and do not intend to exercise their rights thereunder for
trading purposes. Remarketing agreements ordinarily will not be transferable
or assignable by a Fund, although the Fund will be entitled to sell the
underlying Municipal Obligation to another party at any time. If the Fund is
unable to exercise its rights under a remarketing agreement, it may be
required to hold the underlying Municipal Lease to maturity or treat the
Municipal Lease as an "illiquid" investment (see "Municipal Obligations",
below), unless it is able to place the investment with a new remarketing
party.
A Fund also may purchase and sell Municipal Obligations on a when-issued
or delayed delivery basis. When-issued and delayed delivery transactions
arise when securities are purchased or sold with payment and delivery beyond
the regular settlement date. (When-issued transactions normally settle
within 30-45 days.) On such transactions the payment obligation and the
interest rate are fixed at the time the buyer enters into the commitment.
The commitment to purchase securities on a when-issued or delayed delivery
basis may involve an element of risk because the value of the securities is
subject to market fluctuation, no interest accrues to the purchaser prior to
settlement of the transaction, and at the time of delivery the market value
may be less than cost. At the time the Fund makes the commitment to purchase
a Municipal Obligation on a when-issued or delayed delivery basis, it will
record the transaction and reflect the value of the security in determining
its net asset value. The Fund also will maintain liquid assets at least
equal in value to commitments for when-issued or delayed delivery securities,
such assets to be segregated by State Street Bank & Trust Co., the Funds'
custodian, specifically for the settlement of such commitments. The value of
the segregated assets will be marked to the market daily so that the Fund
will at all times maintain assets in the segregated account equal in value to
the amount of these commitments. The Fund only will make commitments to
purchase Municipal Obligations on a when-issued or delayed delivery basis
with the intention of actually acquiring the securities, but the Fund
reserves the right to sell these securities before the settlement date if it
is deemed advisable. If a when-issued security is sold before delivery any
gain or loss would not be tax-exempt.
No Fund will invest in illiquid securities if, as a result of such
investment, more than 10% of its net assets will be invested in illiquid
securities. For purposes of this limitation, "illiquid securities" shall be
deemed to include (1) Municipal Leases subject to non-appropriation risk
which are not rated at the time of purchase within the four highest grades by
Moody's or S&P and not subject to remarketing agreements (or not currently
subject to remarketing, pursuant to the conditions of any such agreement then
in effect, with a responsible remarketing party, deemed by TMC to be capable
of performing its obligations), (2) repurchase agreements maturing in more
than seven days, (3) securities which the Fund is restricted from selling to
the public without registration under the Securities Act of 1933, and
(4) other securities or participations not considered readily marketable by
the Fund, provided that for purposes of the foregoing an unrated Municipal
Lease which is backed by an irrevocable bank letter of credit or an insurance
policy, issued by a bank or insurer deemed by TMC to be of high quality and
minimal credit risk, will not be deemed to be "illiquid" solely because the
underlying Municipal Lease is readily marketable because it is backed by the
letter of credit or insurance policy.
From time to time, proposals have been introduced before Congress for
the purpose of restricting or eliminating the federal income tax exemption
for interest on municipal securities. Similar proposals may be introduced in
the future. These proposals, if enacted, may have the effect of reducing the
availability of investments for the Fund. Moreover, the value of the Fund's
portfolio may be affected. The Fund may be compelled to reevaluate its
investment objective and policies and submit possible changes in the
structure of the Funds for the approval of their shareholders.
The yields on Municipal Obligations are dependent on a variety of
factors, including the condition of the general market and the Municipal
Obligation market, the size of a particular offering, the maturity of the
obligation and the rating of the issue. The ratings of Moody's, S&P and
Fitch represent their opinions as to the quality of the Municipal Obligations
which they undertake to rate. See "Ratings". It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields, while Obligations of the same maturity and coupon
with different ratings may have the same yield. The market value of
outstanding Municipal Obligations will vary with changes in prevailing
interest rate levels and as a result of changing evaluations of the ability
of their issuers to meet interest and principal payments. Such variations in
market value of Municipal Obligations held in the Funds' portfolios arising
from these or other factors will cause changes in the net asset value of the
Funds' shares.
The ability of the Funds to achieve their investment objectives is
dependent upon the continuing ability of issuers of Municipal Obligations in
which the Funds invest to meet their payment obligations. In addition to
using public rating agencies, TMC will use its own credit analysis to assess
each issuer's financial soundness. Such analysis will include reliance upon
information from various sources including, if available, reports by the
rating agencies, research, analysis and appraisals of brokers, dealers and
commercial banks, and the views of the Funds' directors and others regarding
economic developments and the credit worthiness of particular issuers.
Ratings
Tax-Exempt Bonds. The four highest ratings of Moody's for tax-exempt
bonds are Aaa, Aa, A and Baa. Tax-exempt bonds rated Aaa are judged to be of
the "best quality". The rating of Aa is assigned to tax-exempt bonds which
are of "high quality by all standards," but as to which margins of protection
or other elements make long-term risks appear somewhat larger than Aaa rated
tax-exempt bonds. The Aaa and Aa rated tax-exempt bonds comprise what are
generally known as "high grade bonds". Tax-exempt bonds which are rated A by
Moody's possess many favorable investment attributes and are considered
"upper medium grade obligations". Factors giving security to principal and
interest of A-rated tax-exempt bonds are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future. Tax-exempt bonds rated Baa are considered as "medium grade"
obligations. 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 tax-exempt bonds lack outstanding
investment characteristics and in fact have speculative characteristics as
well. The foregoing ratings are sometimes presented in parentheses preceded
with "Con." indicating the bonds are rated conditionally. 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. The parenthetical rating denotes the probable credit status upon
completion of construction or elimination of the basis of the condition.
The four highest ratings of S&P and Fitch for tax-exempt bonds are AAA,
AA, A, and BBB. Tax-exempt bonds rated AAA bear the highest rating assigned
by S&P to a debt obligation and indicates an extremely strong capacity to pay
principal and interest. Tax-exempt bonds rated AA also qualify as
high-quality debt obligations. Capacity to pay principal and interest is
very strong, and in the majority of instances they differ from AAA issues
only in small degree. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions. The BBB rating,
which is the lowest "investment grade" security rating by S&P, indicates 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 the A
category. The foregoing ratings are sometimes followed by a "p" indicating
that the rating is provisional. A provisional rating assumes the successful
completion of the project being financed by the bonds 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, while 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.
Municipal Notes. The ratings of Moody's for municipal notes are MIG 1,
MIG 2, MIG 3 and MIG 4. Notes bearing the designation MIG 1 are judged to be
of the best quality, enjoying strong protection from established cash flows
of funds for their servicing or from established and broad-based access to
the market for refinancing, or both. Notes bearing the designation MIG 2 are
judged to be of high quality, with margins of protection ample although not
so large as in the preceding group. Notes bearing the designation of MIG 3
are judged to be of favorable quality, with all security elements accounted
for but lacking the undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be less well established.
Notes bearing the designation MIG 4 are judged to be of adequate quality,
carrying specific risk but having protection commonly regarded as required of
an investment security and not distinctly or predominantly speculative.
The S&P ratings for municipal notes are SP-1+, SP-1, SP-2 and SP-3.
Notes bearing an SP-1+ rating are judged to possess overwhelming safety
characteristics, with either a strong or very strong capacity to pay
principal and interest. Notes rated SP-1 are judged to have either a strong
or very strong capacity to pay principal and interest but lack the
overwhelming safety characteristics of notes rated SP-1+. Notes bearing an
SP-2 rating are judged to have a satisfactory capacity to pay principal and
interest, and notes rated SP-3 are judged to have a speculative capacity to
pay principal and interest.
Tax-Exempt Demand Bonds. The rating agencies may assign dual ratings to
all long term debt issues that have as part of their provisions a demand or
multiple redemption 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 used to denote the put option (for example, "AAA/A-1+). For
newer "demand notes" maturing in 3 years or less, the respective note rating
symbols, combined with the commercial paper symbols, are used (for example.
"SP-1+/A-1+").
Commercial Paper. The ratings of Moody's for issuers of commercial
paper are Prime-1, Prime-2 and Prime-3. Issuers rated Prime-1 are judged to
have superior ability for repayment which is normally evidenced by
(i) leading market positions in well established industries, (ii) high rates
of return on funds employed, (iii) conservative capitalization structures
with moderate reliance on debt and ample asset protection, (iv) broad margins
in earnings coverage of fixed financial charges and high internal cash
generation, and (v) well established access to a range of financial markets
and assured sources of alternate liquidity. Issuers rated Prime-2 are judged
to have a strong capacity for repayment which is normally evidenced by many
of the characteristics cited under the discussion of issuers rated Prime-1
but to a lesser degree. Earnings trends, while sound will be more subject to
variation. Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample adequate liquidity is
maintained. Issuers rated Prime-3 are judged to have an acceptable capacity
for repayment. The effect of industry characteristics and market composition
may be more pronounced. Variability of earnings and profitability may result
in changes in the level of debt-protection measurements and the requirement
for relatively high financial leverage. Adequate alternate liquidity is
maintained.
The ratings of S&P for commercial paper are A (which is further
delineated by Categories A-1+, A-1, A-2 and A-3), B, C and D. Commercial
paper rated A is judged to have the greatest capacity for timely payment.
Commercial paper rated A-1+ is judged to possess overwhelming safety
characteristics. Commercial paper rated A-1 is judged to possess an
overwhelming or very strong degree of safety. Commercial paper rated A-2 is
judged to have a strong capacity for payment although the relative degree of
safety is not as high as for paper rated A-1. Commercial paper rated A-3 is
judged to have a satisfactory capacity for timely payment but is deemed to be
somewhat more vulnerable to the adverse changes in circumstances than paper
carrying the higher ratings. Commercial paper rated B is judged to have an
adequate capacity for timely payment but such capacity may be damaged by
changing conditions or short-term adversities. Commercial paper rated C is
judged to have a doubtful capacity for payment and commercial paper rated D
is either in default or is expected to be in default upon maturity.
Temporary Investments
Each Fund has reserved the right to invest up to 20% of its net assets
in "temporary investments" in taxable securities that would produce interest
not exempt from federal income tax. See "Distributions and Tax Matters".
Such temporary investments may be made due to market conditions, pending
investment of idle funds or to afford liquidity. These investments are
limited to the following short-term, fixed-income securities (maturing in one
year or less from the time of purchase): (i) obligations of the United
States government or its agencies, instrumentalities or authorities;
(ii) prime commercial paper within the two highest ratings of Moody's or S&P;
(iii) certificates of deposit of domestic banks with assets of $1 billion or
more; and (iv) repurchase agreements with respect to the foregoing types of
securities. Repurchase agreements will be entered into only with dealers,
domestic banks or recognized financial institutions that in the opinion of
TMC represent minimal credit risk. Investments in repurchase agreements are
limited to 5% of the Fund's net assets. See "Repurchase Agreements". In
addition, temporary taxable investments may exceed 20% of the Fund's net
assets when made for defensive purposes during periods of abnormal market
conditions. The Fund does not expect to find it necessary to make such
temporary investments.
Repurchase Agreements
Each Fund may enter into repurchase agreements with respect to taxable
securities constituting "temporary investments" in its portfolio. A
repurchase agreement is a contractual agreement whereby the seller of
securities agrees to repurchase the same security at a specified price on a
future date agreed upon by the parties. The agreed upon repurchase price
determines the yield during the Fund's holding period. Repurchase agreements
may be viewed as loans collateralized by the underlying security that is the
subject of the repurchase agreement. The Fund will not enter into a
repurchase agreement if, as a result, more than 5% of the value of its net
assets would then be invested in repurchase agreements. The Fund will enter
into repurchase agreements only with dealers, banks or recognized financial
institutions that in the opinion of TMC represent minimal credit risk. The
risk to the Fund is limited to the ability of the seller to pay the agreed
upon repurchase price on the delivery date; however, although the value of
the underlying collateral at the time the transaction is entered into always
equals or exceeds the agreed upon repurchase price, if the value of the
collateral declines there is a risk of loss of both principal and interest if
the seller defaults. In the event of a default, the collateral may be sold
but the Fund might incur a loss if the value of the collateral declines, and
might incur disposition costs or experience delays in connection with
liquidating the collateral. In addition, if bankruptcy proceedings are
commenced with respect to the seller of the security, realization upon the
collateral by the Fund may be delayed or limited. TMC will monitor the value
of the collateral at the time the transaction is entered into and
continuously during the term of the repurchase agreement in an effort to
determine that the value always equals or exceeds the agreed upon repurchase
price. In the event the value of the collateral declined below the
repurchase price, TMC will demand additional collateral from the seller to
increase the value of the collateral to at least that of the repurchase
price.
U.S. Government Obligations
The Funds' temporary investments in taxable securities may include
obligations of the U.S. government. These include bills, certificates of
indebtedness, notes and bonds issued or guaranteed as to principal or
interest by the United States or by agencies or authorities controlled or
supervised by and acting as instrumentalities of the U.S. government
established under the authority granted by the Congress, including, but not
limited to, the Government National Mortgage Association, the Tennessee
Valley Authority, the Bank for Cooperatives, the Farmers Home Administration,
Federal Home Loan Banks, Federal Intermediate Credit Banks, Federal Land
Banks, Farm Credit Banks and the Federal National Mortgage Association. Some
obligations of U.S. government agencies, authorities and other
instrumentalities are supported by the full faith and credit of the U.S.
Treasury; others by the right of the issuer to borrow from the Treasury;
others only by the credit of the issuing agency, authority or other
instrumentality. In the latter case of securities not backed by the full
faith and credit of the United States, the investor must look principally to
the agency issuing or guaranteeing the obligation for ultimate repayment, and
may not be able to assert a claim against the United States itself in the
event the agency or instrumentality does not meet its commitments.
INVESTMENT LIMITATIONS
The Company has adopted the following fundamental investment policies
which may not be changed unless approved by a majority of the outstanding
shares of each Fund that would be affected by such change. Each Fund may
not:
(1) Invest in securities other than Municipal Obligations (including
participations therein) and temporary investments within the percentage
limitations specified in the Prospectus under the caption "Investment
Objective and Policies";
(2) Purchase any security if, as a result, more than 5% of its total
assets would be invested in securities of any one issuer, excluding
obligations of, or guaranteed by, the United States government, its agencies,
instrumentalities and authorities;
(3) Borrow money, except for temporary or emergency purposes and not
for investment purposes, and then only in an amount not exceeding 5% of the
value of the Fund's total assets at the time of borrowing;
(4) Pledge, mortgage or hypothecate its assets, except to secure
borrowings permitted by subparagraph (3) above;
(5) Issue senior securities as defined in the Investment Company Act
of 1940, except insofar as the Fund may be deemed to have issued a senior
security by reason of (a) entering into any repurchase agreement;
(b) purchasing any securities on a when-issued or delayed delivery basis; or
(c) borrowing money in accordance with the restrictions described above;
(6) Underwrite any issue of securities, except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to
be an underwriter under the federal securities laws;
(7) Purchase or sell real estate and real estate mortgage loans, but
this shall not prevent the Fund from investing in Municipal Obligations
secured by real estate or interests therein;
(8) Purchase or sell commodities or commodity futures contracts or
oil, gas or other mineral exploration or development programs;
(9) Make loans, other than by entering into repurchase agreements and
through the purchase of Municipal Obligations or temporary investments in
accordance with its investment objective, policies and limitations;
(10) Make short sales of securities or purchase any securities on
margin, except for such short-term credits as are necessary for the clearance
of transactions;
(11) Write or purchase puts, calls, straddles, spreads or other
combinations thereof, except to the extent that securities subject to a
demand obligation or to a remarketing agreement may be purchased as set forth
in the Prospectus or this Statement of Additional Information under the
captions "Investment Objective and Policies -- Municipal Obligations" and --
"Municipal Leases";
(12) Invest more than 5% of its total assets in securities of
unseasoned issuers which, together with their predecessors, have been in
operation for less than three years excluding (i) obligations of, or
guaranteed by, the United States government, its agencies, instrumentalities
and authorities and (ii) obligations secured by the pledge of the faith,
credit and taxing power of any entity authorized to issue Municipal
Obligations;
(13) Invest more than 5% of its total assets in securities which the
Fund is restricted from selling to the public without registration under the
Securities Act of 1933;
(14) Purchase securities of any issuer if such purchase at the time
thereof would cause more than 10% of the voting securities of any such issuer
to be held by the Fund;
(15) Purchase securities of other investment companies, except in
connection with a merger, consolidation, reorganization or acquisition of
assets;
(16) Purchase securities (other than securities of the United States
government, its agencies, instrumentalities and authorities) if, as a result,
more than 25% of the Fund's total assets would be invested in any one
industry; or
(17) Purchase or retain the securities of any issuer other than the
securities of the Fund if, to the Fund's knowledge, those officers and
directors of the Fund, or those officers and directors of TMC, who
individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.
For the purpose of applying the limitations set forth in paragraphs (2)
and (12) above, an issuer shall be deemed a separate issuer when its assets
and revenues are separate from other governmental entities and its securities
are backed only by its assets and revenues. Similarly, in the case of a
nongovernmental user, such as an industrial corporation or a privately owned
or operated hospital, if the security is backed only by the assets and
revenues of the nongovernmental user, then such nongovernmental user would be
deemed to be the sole issuer. Where a security is also guaranteed by the
enforceable obligation of another entity it shall also be included in the
computation of securities owned that are issued by such other entity. In
addition, for purposes of paragraph (2) above, a remarketing party entering
into a remarketing agreement with a Fund as described in the Prospectus under
the caption "Investment Objective and Policies -- Municipal Obligations"
shall not be deemed an "issuer" of a security or a "guarantor" of a Municipal
Lease subject to such agreement.
Neither of the Funds will purchase securities if, as a result, more than
25% of the Fund's total assets would be invested in any one industry.
However, this restriction will not apply to purchases of (i) securities of
the United States government and its agencies, instrumentalities and
authorities, or (ii) tax exempt securities issued by different governments,
agencies, or political subdivisions, because these issuers are not considered
to be members of any one industry.
With respect to temporary investments, in addition to the foregoing
limitations, a Fund will not enter into a repurchase agreement if, as a
result thereof, more than 5% of its net assets would be subject to repurchase
agreements.
Although each of the Funds has the right to pledge, mortgage or
hypothecate its assets in order to comply with certain state statutes on
investment restrictions, a Fund will not, as a matter of operating policy
(which policy may be changed by the Board of Directors without shareholder
approval), pledge, mortgage or hypothecate its portfolio securities to the
extent that at any time the percentage of pledged securities will exceed 10%
of its total assets.
In the event a Fund acquires disposable assets as a result of the
exercise of a security interest relating to Municipal Obligations, the Fund
will dispose of such assets as promptly as possible.
Under the Investment Company Act of 1940 (the "Act"), a "vote of the
majority of the outstanding voting securities" of the Company or of a
particular Fund means the affirmative vote of the lessor of (1) more than 50%
of the outstanding shares of the Company or of such Fund or (2) 67% or more
of the shares of the Company or of such Fund present at a shareholders'
meeting if more than 50% of the outstanding shares of the Company or of such
Fund are represented at the meeting in person or by proxy.
Rule 18f-2 under the Act provides that any matter required to be
submitted by the provisions of the Act or applicable state law, or otherwise,
to the holder of the outstanding voting securities of a series investment
company such as the Company shall not be deemed to have been effectively
acted upon unless approved by the holders of a majority of the outstanding
shares of each Fund affected by such matter. Rule 18f-2 further provides
that a Fund shall be deemed to be affected by a matter unless it is clear
that the interests of each Fund in the matter are substantially identical or
that the matter does not affect any interest of that Fund. However, the Rule
exempts the selection of independent public accountants, the approval of
principal distribution contracts and the election of directors from the
separate voting requirements of the Rule.
PERFORMANCE COMPUTATION
Performance Computations - In General
The return or yield of any Fund class may, from time to time, be quoted
in reports, sales literature and advertisements published by the Funds, the
Distributor, or investment dealers offering the Funds. Any such quotation
must include a standardized calculation which computes yield for a 30-day or
one month period by dividing a Fund class's net investment income per share
during the period by the maximum offering price on the last day of the
period. The standardized calculation may include the effect of semiannual
compounding and will reflect amortization of premiums for those bonds which
have a market value in excess of par. New schedules based on market value
will be computed each month for amortizing premiums. Provided that any such
quotation also is accompanied by the standardized calculation referred to
above, any Fund also may quote as to any of its classes non-standardized
performance data for a specified period by dividing the net investment income
per share for that period by either the class's average public offering price
per share for that same period or the offering price per share on the first
or last day of the period, and multiplying the result by 365 divided by the
number of days in the specified period. For purposes of this
non-standardized calculation net investment income will include accrued
interest income plus or minus any amortized purchases discount or premium
less accrued expenses. The primary differences between the yield
calculations obtained using the standardized performance measure and any
non-standardized performance measure will be caused by the following factors:
(1) the non-standardized calculation may cover periods other than the 30-day
or one month period required by the standardized calculation; (2) the
non-standardized calculation may reflect amortization of premium based upon
historical cost rather than market value. Amortization of premium based upon
historical cost is required by the Internal Revenue Service for tax reporting
purposes; (3) the non-standardized calculation may reflect the average
offering price per share for the period of the beginning offering price per
share for the period, whereas the standardized calculation will always
reflect the maximum offering price per share on the last day of the period;
(4) the non-standardized calculation may reflect an offering price per share
other than the maximum offering price; provided that any time the Fund's
performance is quoted in reports, sales literature or advertisements using a
public offering price, the performance computed by using the Fund's maximum
public offering price also will be quoted in the same piece; (5) the
non-standardized performance quotation may include the effective return
obtained by compounding the monthly dividends.
Any performance computation also must include average annual total
return quotations for the 1, 5 and 10 year periods ended on the date of the
most recent balance sheet included in the registration statement, computed by
finding the average annual compounded rates of return over such periods which
would equate the initial amount invested at the maximum public offering price
to the ending redeemable value. To the extent that a portfolio has been in
operation less than 1, 5 and 10 years, the time period during which the
portfolio has been in operation will be substituted for any 1, 5 or 10 year
period for which a total return quotation is not obtainable.
Yield or total return quotations described in this section also may be
quoted on a "taxable equivalent yield" basis, provided that the following
information is furnished: (1) a standardized taxable equivalent yield based
on a 30-day or one month period ended on the date of the most recent balance
sheet included in the registration statement; (2) the length of and the last
day of the base period used in computing the quotation; and (3) a description
of the method by which the quotation is computed.
Any quoted yield or return should not be considered a representation of
the yield or return in the future because neither the yield nor the return
are fixed. Actual performance will depend not only on the type, quality and
maturities of the investments held by the portfolios and changes in interest
rates on those investments, but also on changes in a Fund's expenses during
the period. In addition, a change in the Fund's net asset value will affect
its yield and return.
REPRESENTATIVE PERFORMANCE FIGURES - LIMITED TERM NATIONAL FUND (CLASSES A
AND C)
THE FOLLOWING DATA FOR THE LIMITED TERM NATIONAL FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
Standardized Method of Computing Yield. The Limited Term National
Fund's yields for the 30-day period ended on June 30, 1996, computed in
accordance with the standardized calculation described above, were 4.19% and
3.89% for Class A shares and Class C shares, respectively. This method of
computing yield does not take into account changes in net asset value.
Non-Standardized Method of Computing Yield. The Limited Term National
Fund's non-standardized yields, computed in accordance with a non-
standardized method described above, were 4.62% and 4.35% for Class A shares
and Class C shares, respectively, for the 30-day period ended June 30, 1996
and 4.56% and 4.31% for Class A shares and Class C shares, respectively, for
the 7-day period ended June 30, 1996. This non-standardized method differs
from the standardized method of computing yield in that the 7-day non-
standardized yield is computed for the 7-day period rather than a 30-day or
one month period, the non-standardized yield reflects amortization of premium
based upon historical cost rather than market value, and the non-standardized
yield is computed by compounding dividends monthly rather than semiannually.
This method of computing performance does not take into account changes in
net asset value.
Taxable Equivalent Yield. The Limited Term National Fund's taxable
equivalent yield, computed in accordance with the methods described above
using a maximum federal tax rate of 39.6%, was as shown below for the
indicated periods ending on June 30, 1996.
Yield Taxable Equivalent Yield*
----- -------------------------
Standardized Method
-------------------
30 days ended 6/30/96
Class A 4.19% 6.93%
Class C 3.89% 6.44%
Non-Standardized Method
-----------------------
7 days ended 6/30/96
Class A 4.56% 7.55%
Class C 4.31% 7.13%
30 days ended 6/30/96
Class A 4.62% 7.65%
Class C 4.35% 7.20%
1 year ended 6/30/96
Class A 4.58% 7.58%
Class C 4.23% 7.00%
* A portion of income may be subject to state and local taxes. These
taxable equivalent yields do not take into account the effect, if
any, of state and local taxes.
The non-standardized method of computation differs from the standardized
method in that the non-standardized yields for the 7-day period and the one-
year period are computed on a basis of seven days or one year rather than the
standard 30-day or one month period, the non-standardized yields reflect
amortization of premium based upon historical cost rather than market value,
and the nonstandardized yields are computed by compounding dividends monthly
rather than semiannually. The standardized and non-standardized methods of
computing yield and taxable equivalent yield do not take into account changes
in net asset value.
Average Annual Total Return. The average annual total return for
Limited Term National Fund for Class A and Class C shares are set forth below
for the periods shown ending June 30, 1996. Shares denoted as Class A were
first offered on September 28, 1984, and Class C shares were first offered on
September 1, 1994. This computation assumes that an investor reinvested all
dividends, and further assumes the deduction of the maximum sales commission
of 2.50% imposed on Class A shares. Class C shares purchased on or after
October 2, 1995 are subject to a contingent deferred sales charge if redeemed
within one year of purchase.
Although the maximum Class A sales charge imposed at the commencement of
investment operations on September 28, 1984 was 4.75%, the charge was reduced
two times to 2.50% as of April 1, 1993. Consequently, the computation for
Class A shares assumes today's maximum sales charge of 2.50%. "Total
return," unlike the standardized yield and non-standardized yield figures
shown above, takes into account changes in net asset value over the periods
shown.
since
1 year 5 years 10 years inception
------ ------- -------- ---------
Class A 2.01% 5.48% 6.30% 7.09%
Class C 4.05% N/A N/A 4.54%
REPRESENTATIVE PERFORMANCE FIGURES - LIMITED TERM CALIFORNIA FUND (CLASSES A
AND C)
THE FOLLOWING DATA FOR THE LIMITED TERM CALIFORNIA FUND REPRESENT PAST
PERFORMANCE, AND THE INVESTMENT RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
IN THE FUND WILL FLUCTUATE. AN INVESTOR'S SHARES, WHEN REDEEMED, MAY BE
WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
Standardized Method of Computing Yield. The Limited Term California
Fund's yields for the 30-day period ended on June 30, 1996, computed in
accordance with the standardized calculation described above, were 4.25% and
3.95% for Class A shares and Class C shares, respectively. This method of
computing yield does not take into account changes in net asset value.
Non-standardized Method of Computing Yield. The Limited Term California
Fund's non-standardized yields, computed in accordance with a
non-standardized method described above, were 4.63% and 4.35% for Class A
shares and Class C shares, respectively, for the 30-day period ended June 30,
1996 and 4.60% and 4.32% for Class A shares and Class C shares, respectively,
for the 7-day period ended June 30, 1996. The commencement of investment
operations for the California Portfolio was February 19, 1987. The non-
standardized method differs from the standardized method of computing yield
in that the 7-day non-standardized yield is computed for the 7-day period
rather than a 30-day or one month period, the non-standardized yield reflects
amortization of premium based upon historical cost rather than market value,
and the non-standardized yield is computed by compounding dividends monthly
rather than semiannually. This method of computing performance does not take
into account changes in net asset value.
Taxable Equivalent Yield. The Limited Term California Fund's taxable
equivalent yield, computed in accordance with the methods described above
using a maximum federal tax rate of 39.6%, and a maximum California tax rate
of 9.3%, was as shown below for the indicated periods ending on June 30,
1996:
Yield Taxable Equivalent Yield*
Standardized Method
-------------------
30 days ended 6/30/96
Class A 4.25% 8.31%
Class C 3.95% 7.73%
Non-standardized Method
-----------------------
7 days ended 6/30/96
Class A 4.60% 9.00%
Class C 4.32% 8.45%
30 days ended 6/30/96
Class A 4.63% 9.06%
Class C 4.35% 8.51%
1 year ended 6/30/96
Class A 4.50% 8.80%
Class C 4.15% 8.12%
* These taxable equivalent yields take into account the effect of
California income taxes.
The non-standardized method of computation differs from the standardized
method in that the non-standardized yields for the 7-day period and the one-
year period are computed on a basis of seven days or one year rather than the
standard 30-day or one month period, the non-standardized yields reflect
amortization of premium based upon historical cost rather than market value,
and the non-standardized yields are computed by compounding dividends monthly
rather than semiannually. The standardized and non-standardized methods of
computing yield and taxable equivalent yield do not take into account changes
in net asset value.
Average Annual Total Return. The average annual total returns for
Limited Term California Fund for Class A and Class C shares are set forth
below for the periods shown ending June 30, 1996. Shares denoted as Class A
were first offered on February 19, 1987, and Class C shares were first
offered on September 1, 1994. This computation assumes that an investor
reinvested all dividends, and further assumes the deduction of the maximum
sales charge of 2.50% imposed upon purchases of Class A shares. Class C
shares purchased on or after October 2, 1995 are subject to a contingent
deferred sales charge if redeemed within one year of purchase. "Total
return" unlike the standardized yield and non-standardized yield figures
shown above, takes into account changes in net asset value over the periods
shown.
since
1 year 5 years 10 years inception
------ ------- -------- ---------
Class A 2.34% 5.23% N/A 5.87%
Class C 4.46% N/A N/A 4.62%
DISTRIBUTIONS AND TAXES
Distributions
All of the net income of each Fund is declared daily as a dividend on
shares for which the Fund has received payment. Net income of a Fund
consists of all interest income accrued on portfolio assets less all expenses
of the Fund. Expenses of the Fund are accrued each day. Dividends are paid
monthly and are reinvested in additional shares of the Fund at the net asset
value per share at the close of business on the dividend payment date or, at
the shareholder's option, paid in cash. Net realized capital gains, if any,
will be distributed annually and reinvested in additional shares of the Fund
at the net asset value per share at the close of business on the distribution
date. See "Accounts of shareholders".
Tax Matters
The Funds qualified under Subchapter M of the Internal Revenue Code (the
"Code") for tax treatment as regulated investment companies for the fiscal
year ended June 30, 1996, and intend to continue this qualification so long
as this qualification is in the best interest of the shareholders. This tax
treatment relieves the Funds from paying federal income tax on income which
is currently distributed to their shareholders. The Funds also intend to
satisfy conditions (including requirements as to the proportion of its assets
invested in Municipal Obligations) which will enable each Fund to designate
distributions from the interest income generated by its investments in
Municipal Obligations, which are exempt from federal income tax when received
by the Fund, as Exempt Interest Dividends. Shareholders receiving Exempt
Interest Dividends will not be subject to federal income tax on the amount of
those dividends, except to the extent the alternative minimum tax may apply.
Under the Code, interest on indebtedness incurred or continued to
purchase or carry shares is not deductible. Under rules issued by the
Department of the Treasury for determining when borrowed funds are considered
used for the purpose of purchasing or carrying particular assets, the
purchase of shares may be considered to have been made with borrowed funds
even though the borrowed funds are not directly traceable to the purchase of
shares. Investors with questions regarding this issue should consult with
their own tax advisers.
Shares of a Fund may not be an appropriate investment for persons who
are "substantial users" of facilities financed by industrial development
bonds (including any Municipal Lease that may be deemed to constitute an
industrial development bond) or persons related to such "substantial users".
Such persons should consult their own tax advisers before investing in
shares.
Distributions by each Fund of net interest income received from certain
temporary investments (such as certificates of deposit, commercial paper and
obligations of the United States government, its agencies, instrumentalities
and authorities), short-term capital gains realized by the Fund, if any, and
realized amounts attributable to market discount on bonds, will be taxable to
shareholders as ordinary income whether received in cash or additional
shares. Distributions to shareholders will not qualify for the dividends
received deduction for corporations.
Any net long-term capital gains realized by a Fund, whether or not
distributed in cash or reinvested in additional shares, must be treated as
long-term capital gains by shareholders regardless of the length of time
investors have held their shares. If the Fund should have net undistributed
capital gain in any year, the Fund would pay the tax on such gains and each
shareholder would be deemed, for federal tax purposes, to have paid his or
her pro rata share of such tax.
If in any year a Fund should fail to qualify under Subchapter M for tax
treatment as a regulated investment company, (i) the Fund would incur a
regular corporate federal income tax upon its net interest income, other than
interest income from Municipal Obligations, for that year, and
(ii) distributions to its shareholders out of net interest income from
Municipal Obligations or other investments, or out of net capital gains,
would be taxable to shareholders as ordinary dividend income for federal
income tax purposes to the extent of the Fund's current or accumulated
earnings or profits. A Fund would fail to qualify under Subchapter M if,
among other requirements, in any year (i) 30% or more of its gross income
were derived from the sale or other disposition of securities held for less
than three months, (ii) less than 90% of the Fund's gross income were derived
from specified income sources such as dividends, interest and gains from the
disposition of stock or securities or (iii) the Fund failed to satisfy the
diversification of investments requirement of the Code and failed to timely
cure such failure. Furthermore, the Fund would be unable to make Exempt
Interest Dividends if, at the close of any quarter of its taxable year, more
than 50% of the value of the Fund's total assets consisted of assets other
than Municipal Obligations. Additionally, if in any year the Fund qualified
as a regulated investment company but failed to distribute all of its net
income, the Fund would be taxable on the undistributed portion of its net
income. Although each Fund intends to distribute all of its net income
currently, it could have undistributed net income if, for example, expenses
of the Fund were reduced or disallowed on audit.
If a Fund has both tax-exempt and taxable interest, it will use the
"actual earned method" for determining the designated percentage that is
taxable income and designate the use of such method within 45 days after the
end of the Fund's taxable year. Under this method the ratio of taxable
income earned during the period for which a distribution was made to total
income earned during the period determines the percentage of the distribution
designated taxable. The percentages of income, if any, designated as taxable
will under this method vary from distribution to distribution.
The Tax Reform Act of 1986 imposes a nondeductible excise tax on
regulated investment companies if they fail to satisfy certain minimum
distribution requirements. This excise tax should not have a material
adverse effect on the Funds' operation, because each Fund intends to
distribute all of its net income currently.
Although the Company currently intends to have two investment Funds
outstanding, each authorized to issue multiple classes of shares, the
Company's Board of Directors is authorized to divide the Company's authorized
shares into additional Funds and classes. Each additional series of Fund
stock would relate to a separate investment Fund that would be different from
the other Funds. Each Fund may be divided into multiple classes, each of
which would represent an interest in the same investment portfolio of that
Fund, and subject to the same investment objectives, policies and limitations
in common with the other classes of that Fund, but may differ from other
classes of the Fund with respect to sales charges, distribution fees, the
possible allocation of some expenses, and some voting rights. Separate Funds
will be treated under the Code as separate corporations except with respect
to the definitional requirements under Section 851(a) of the Code.
As is the case with other types of income, including other tax-exempt
interest income, Exempt Interest Dividends received by an individual
shareholder will be added to his or her "modified adjusted gross income" in
determining what portion, if any, of the individual's Social Security
benefits will be subject to federal income taxation. Shareholders are
advised to consult their own advisors as to the effect of this treatment.
For taxable years beginning after December 31, 1986, the Code treats
interest on certain Municipal Obligations which are private activity bonds
under the code issued after August 7, 1986 (in certain cases, after September
1, 1986) as a preference item for purposes of the alternative minimum tax on
individuals and corporations. Each Fund may purchase private activity bonds
which are subject to treatment under the Code as a preference item for
purposes of the alternative minimum tax on individuals and corporations,
although the frequency and amounts of those purchases are uncertain. Some
portion of Exempt Interest Dividends may, as a result of such purchases, be
treated as a preference item for purposes of the alternative minimum tax on
individuals and corporations. Shareholders are advised to consult their own
tax advisers as to the extent and effect of such treatment.
In addition, the Code provides that a portion of the adjusted current
earnings of a corporation reported on its financial statement and not
otherwise included in the minimum tax base will be included for purposes of
calculating the alternative minimum tax for such years. The adjusted current
earnings of a corporation will include Exempt Interest Dividends in
calculating the alternative minimum tax on corporations to the extent that
such Dividends are not otherwise treated as a preference item for the reasons
discussed above. An environmental tax is imposed on the excess of a
corporation's modified alternative minimum taxable income (minimum taxable
base, discussed above, with certain modifications) over $2 million. Modified
alternative minimum taxable income includes Exempt Interest Dividends. The
environmental tax applies with respect to taxable years beginning after
December 31, 1986 and before January 1, 1996. Exempt Interest Dividends are
included in effectively connected earnings and profits for purposes of
computing the branch profits tax on certain foreign corporations doing
business in the United States.
With respect to property and casualty companies, the amount of certain
cost deductions otherwise allowed is reduced (in certain cases below zero) by
a specified percentage of, among other things, Exempt Interest Dividends
received on shares acquired after August 7, 1986, for taxable years beginning
after 1986. Commercial banks, thrift institutions and other financial
institutions may not deduct their cost of carrying shares acquired after
August 7, 1986, for taxable years ending after December 31, 1986.
Redemption or resale of shares will be a taxable transaction for federal
income tax purposes and the shareholder will recognize gain or loss in an
amount equal to the difference between the shareholder's basis in the shares
and the amount realized by the shareholder on the redemption or resale.
Assuming that the shareholder holds the shares as a capital asset, the gain
or loss will be a capital gain or loss and will be long term if the shares
were held for more than 12 months.
The foregoing is a general and abbreviated summary of the provisions of
the Code and Treasury Regulations presently in effect as they directly govern
the taxation of the Funds and their shareholders. For complete provisions,
reference should be made to the pertinent Code sections and Treasury
Regulations. The Code and Treasury Regulations are subject to change by
legislative or administrative action, and any such change may be retroactive
with respect to Fund transactions. Shareholders are advised to consult their
own tax advisers for more detailed information concerning the Federal
taxation of the Fund and the income tax consequences to its shareholders. In
particular, prospective investors who are not individuals are advised that
the preceding discussion relates primarily to tax consequences affecting
individuals, and the tax consequences of an investment by a person which is
not an individual may be very different.
State and Local Tax Aspects
The exemption from federal income tax for distributions of interest
income from Municipal Obligations which are designated Exempt Interest
Dividends will not necessarily result in exemption under the income or other
tax laws of any state or local taxing authority.
The exemption from the State of California personal income taxes for
distributions of interest income in the Limited Term California Fund applies
only to shareholders who are residents of the State of California, and only
to the extent such income qualifies as "exempt-interest dividends" under
Section 17145 of the California Revenue and Taxation Code and is not derived
from interest on obligations from any state other than from California or its
political subdivisions.
The laws of the several states and local taxing authorities vary with
respect to the taxation of such distributions, and shareholders of the Fund
are advised to consult their own tax advisers in that regard. Each Fund will
advise shareholders within 60 days of the end of each calendar year as to the
percentage of income derived from each state in which the Fund has any
Municipal Obligations in order to facilitate shareholders in the preparation
of their state and local tax returns.
Special Risks Affecting the California Portfolio
Due to the Limited Term California Fund's policy of concentrating its
investments in municipal securities exempt from California personal income
taxes, this Fund will invest primarily in California state, municipal, and
agency obligations. For this reason, an investment in the Limited Term
California Fund may be considered riskier than an investment in the Limited
Term National Fund, which buys Municipal Obligations from throughout the
United States. Prospective investors should consider the risks inherent in
the investment concentration of the Limited Term California Fund before
investing.
California's economy is the largest among the 50 states and one of the
largest in the world. The state's July 1, 1995 population of approximately
32.1 million represents 12.2 percent of the total United States population
and total personal income in the state, at an estimated $748 billion in 1995,
accounts for 12.6 percent of all personal income in the nation. Total
employment is about 14.2 million, the majority of which is in the service,
trade and manufacturing sectors.
Changes in California constitutional and other laws raise questions
about the ability of California state and municipal issuers to obtain
sufficient revenue to pay their bond obligations in all situations. In 1978,
California voters approved an amendment to the California Constitution known
as Proposition 13, which has had an affect on California issuers that rely in
whole or in part, directly or indirectly, on ad valorem real property taxes
as a source of revenue. Proposition 13 limits ad valorem taxes on real
property and restricts the ability of taxing entities to increase real
property taxes. In 1979, California voters approved another constitutional
amendment, Article XIIIB, which may have an adverse impact on California
state and municipal issuers. Article XIIIB prohibits government agencies and
the state from spending "appropriations subject to limitation" in excess of
the appropriations limit imposed. "Appropriations subject to limitation" are
authorizations to spend "proceeds of taxes", which consist of tax revenues,
certain state subventions and certain other funds, including proceeds from
regulatory licenses, user charges or other fees to the extent that such
proceeds exceed "the cost reasonably borne by such entity in providing the
regulation, product or service". No limit is imposed on appropriations of
funds which are not "proceeds of taxes", such as debt service on indebtedness
existing or authorized before January 1, 1979, or subsequently authorized by
the voters, appropriations required to comply with mandates of the courts or
the federal government, reasonable user charges or fees and certain other
non-tax funds. The amendment restricts the spending authority of state and
local government entities. If revenues exceed such appropriations limits,
such revenues must be returned either as revisions in the tax rate or fee
schedules.
California obtains roughly 44% of general fund revenues from personal
income taxes (individual and corporate) compared to an average of only 30%
for other states. Income taxes serve as a bellwether which is frequently a
leading indicator of economic weakness. Much of California's recent deficit
was caused by lower than projected income tax receipts. California's other
principal revenue source is sales taxes.
A recession began in mid-1990 due largely to job losses in the aerospace
and defense-related industries. The 1993 unemployment rate of 9.4% was 135%
of the national rate. The recession affected California's General Fund
revenues, and increased expenditures above initial budget appropriations due
to greater health and welfare costs. The state's budget problems in recent
years have also been caused by a structural imbalance in that the largest
General Fund Programs -- K-14 education, health, welfare and corrections --
were increasing faster than the revenue base, driven by the state's rapid
population growth. These pressures are expected to continue as population
trends maintain strong demand for health and welfare services, as the school
age population continues to grow, and as the state's corrections program
responds to a "Three-Strikes" law enacted in 1994, which requires mandatory
life prison terms for certain third-time felony offenders.
As a result of these factors and others, from the late 1980's until
1992-'93, the state had a period of budget imbalance. During this period,
expenditures exceeded revenues in four out of six years, and the state
accumulated and sustained a budget deficit approaching $2.8 billion at its
peak at June 30, 1993. Starting in the 1990-'91 fiscal year and for each
fiscal year thereafter, each budget required multibillion dollar actions to
bring projected revenues and expenditures into balance. The Legislature and
Governor agreed on the following principal steps to produce Budget Acts in
the years 1991-'92 to 1994-'95, including:
- significant cuts in health and welfare program expenditures;
- transfers of program responsibilities and funding from the state to
local governments (referred to as "realignment"), coupled with some reduction
in mandates on local government;
- transfer of about $3.6 billion in local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing state funding for schools under
Proposition 98;
- reduction in growth of support for higher education programs, coupled
with increases in student fees;
- maintenance of the minimum Proposition 98 funding guarantee for K-14
schools, and the disbursement of additional funds to keep a constant level of
about $4,200 per K-12 pupil;
- revenue increases (particularly in the 1991-'92 fiscal year budget),
most of which were for a short duration;
- increased reliance on aid from the federal government to offset the
costs of incarcerating, educating and providing health and welfare services
to illegal immigrants, although during this time frame most of the additional
aid requested by the administration was not received; and
- various one-time adjustments and accounting changes.
Despite these budget actions as noted, the effects of the recession led to
large, unanticipated deficits in the budget reserve as compared to projected
positive balances. By the 1993-'94 fiscal year, the accumulated deficit was
so large that it was impractical to budget to retire it in one year, so a
two-year program was implemented, using the issuance of revenue anticipation
warrants to carry a portion of the deficit over the end of the fiscal year.
When the economy failed to recover sufficiently in 1993-'94, a second two-
year plan was implemented in 1994-'95, again using cross-fiscal year revenue
anticipation warrants to partly finance the deficit into the 1995-'96 fiscal
year.
With strengthening revenues and reduced caseload growth based on an
improving economy, the state entered the 1995-'96 fiscal year budget
negotiations with the smallest nominal "budget gap" to be closed in many
years. Nonetheless, serious policy differences between the Governor and
Legislature prevented timely enactment of the budget. The 1995-'96 Budget
Act was signed by the Governor on August 3, 1995, 34 days after the start of
the fiscal year. The Budget Act projected General Fund revenues and
transfers of $44.1 billion, a 3.5 percent increase from the prior year.
Expenditures were budgeted at $43.4 billion, a 4% increase. The Department
of Finance projected that, after repaying the last of the carryover budget
deficit, there would be a positive balance of $28 million in the budget
reserve, the Special Fund for Economic Uncertainties, at June 30, 1996. The
Budget Act also projected Special Fund revenues of $12.7 billion and
appropriated Special Fund expenditures of $13.0 billion.
The Department of Finance's May revision to the 1996-'97 Governor's
budget, released on May 21, 1996 (the "May Revision"), updated the
projections for the 1995-'96 fiscal year, so that revenues and transfers were
estimated to be $46.1 billion, some $2 billion over the original fiscal year
estimate, which was attributed to the strong economic recovery. Expenditures
also increased, to an estimated $45.4 billion, as a result of the requirement
to expend revenues for schools under Proposition 98, and, among other things,
failure of the federal government to enact welfare reform and to budget new
aid for illegal immigrant costs, both of which the administration had counted
on to allow reductions in state costs. The Special Fund for Economic
Uncertainties was projected to have a small negative balance of about $70
million at June 30, 1996, all but eliminating the accumulated budget deficit.
Available cash, after payment of all obligations due would be about $4
billion, representing a significant improvement in the state's cash position,
and ending the need for deficit borrowing over the end of the fiscal year.
The state's improved cash position allowed it to repay the $4.0 billion
Revenue Anticipation Warrant issue on April 25, 1996, and to issue only $2.0
billion of revenue anticipation notes during the fiscal year, which matured
on June 28, 1996.
Accounts of Shareholders
When an investor makes an initial investment in shares of a Fund, the
Transfer Agent will open an account on the books of the Fund, and investor
will receive a confirmation of the opening of the account. Thereafter,
whenever a transaction, other than the reinvestment of interest income, takes
place in the account - such as a purchase of additional shares or redemption
of shares or a withdrawal of shares represented by certificates - the
investor will receive a confirmation statement giving complete details of the
transaction. Shareholders will also receive at least quarterly statements
setting forth all distributions of interest income and other transactions in
the account during the period and the balance of full and fractional shares.
The final statement for the year will provide the information for income tax
purposes described in the Prospectus under the caption "Distributions and
Taxes".
The monthly distributions of interest income, net of expenses, and the
annual distributions of net realized capital gains, if any, will be credited
to the accounts of a Fund's shareholders in full and fractional shares of the
Fund at net asset value on the payment or distribution date, as the case may
be. Upon written notice to the Transfer Agent, a shareholder may elect to
receive monthly distributions of net interest income in cash. This election
will remain in effect until changed by written notice to the Transfer Agent,
which change may be made at any time in the sole discretion of the
shareholder.
The issuance and delivery of certificates for shares is unnecessary, and
shareholders are thereby relieved of the responsibility of safekeeping. Upon
written request to the Transfer Agent, a certificate will be issued for any
or all of the full shares credited to a shareholder's account. Certificates
which have been issued to a shareholder may be returned at any time for
credit to his or her account. Shares so held will be redeemed as described
in the Prospectus under the caption "How to Redeem Fund Shares".
INVESTMENT ADVISORY AND ADMINISTRATIVE SERVICES AGREEMENTS
Investment Management Services
Pursuant to the Investment Advisory Agreement, Thornburg Management
Company, Inc., 119 East Marcy Street, Suite 202, Santa Fe, New Mexico 87501
("TMC"), will act as the investment adviser for, and will manage the
investment and reinvestment of the assets of, the Funds in accordance with
the Funds' investment objectives and policies, subject to the general
supervision and control of the Company's Board of Directors.
TMC is (i) investment adviser for Thornburg Investment Trust (a
registered investment company having 12 separate funds, ten of which have
investment objectives and policies for tax-exempt income similar to those of
the Fund) with assets aggregating approximately $578,333,000 on June 30,
1996, and (ii) sub-adviser for Daily Tax Free Income Fund, Inc. (a registered
investment company with investment objectives and policies for tax-exempt
income similar to those of the Fund), with assets aggregating approximately
$618,600,000 on June 30, 1996.
TMC will provide continuous professional investment supervision in
accordance with the Investment Advisory Agreement. In addition to managing
the Funds' investments, TMC will administer the Funds' business affairs,
provide office facilities and related services. Pursuant to the Investment
Advisory Agreement, the Fund will pay to TMC a monthly management fee
described in the Prospectus in consideration of the services and facilities
furnished by TMC. All fees and expenses are accrued daily and deducted
before payment of dividends to investors.
In addition to the fee of TMC under the Investment Advisory Agreement,
the Funds will pay all other costs and expenses of their operations. The
Funds will not bear any sales or promotion expenses incurred in connection
with the offering of their shares, except for payments made under the
distribution and service plans described below, which might be considered
sales or promotional expenses, but expenses of registering and qualifying the
Funds and the shares for distribution under federal and state securities laws
(including legal fees) will not be deemed to be sales or promotion expenses.
For the three most recent fiscal periods ended June 30, 1994, 1995 and
1996 with respect to each Fund, the amounts paid to TMC by each Fund were as
follows:
1994 1995 1996
---- ---- ----
Limited Term National $7,033,240 $6,805,432 $6,584,836
Limited Term California $768,812 $740,936 $748,077
TMC waived its rights to fees in the same periods, as follows:
1994 1995 1996
---- ---- ----
Limited Term National - $16,669 $29,691
Limited Term California $33,907 $45,876 $75,198
The foregoing fees do not reflect the fee reduction effected by the
restatement of the Investment Advisory Agreement, described below. TMC may
(but is not obligated to) waive its rights to any portion of its fee in the
future, and may use any portion of its fee for purposes of shareholder and
administrative services and distribution of Fund shares. The expense ratio
of each Fund will fluctuate in the future as Fund expenses increase or
decrease. During the fiscal year ended June 30, 1996, the Funds reimbursed
TMC in the amounts of $99,648 (National) and $10,961 (California) for certain
accounting expenses incurred by TMC on behalf of the Funds.
The Investment Advisory Agreement was originally approved on July 10,
1984, by the Company's Board of Directors, including a majority of the
directors who are not "interested persons" (as defined in the Act) of the
Fund or TMC. The Investment Advisory Agreement was approved by the
shareholders at their first annual meeting on October 16, 1985 and ratified
by the shareholders of the Limited Term California Fund on December 29, 1993.
The initial term of the Agreement extended until September 28, 1986, and
thereafter for successive 12-month periods, provided that such continuation
is specifically approved at least annually by the Board of Directors or by a
vote of a majority of the outstanding voting securities, and, in either case,
by a majority of the directors who are not "interested directors" within the
meaning of the Investment Company Act of 1940. The directors restated the
Investment Advisory Agreement to reduce the management fees provided for
thereunder, and to provide that TMC would no longer furnish certain
administrative services associated with shareholder maintenance under the
Investment Advisory Agreement. Instead, TMC will furnish those
administrative services under the terms of an Administrative Services
Agreement specific to each class of each of the Funds. See "Administrative
Services Agreement," below. The restatement of the Investment Advisory
Agreement was approved by the shareholders on April 16, 1996, and became
effective on July 1, 1996. The directors also determined on June 10, 1996 to
extend the term of the Agreement, as restated, for another 12 months. The
Agreement may be terminated by either party, at any time, without penalty,
upon 60 days' written notice, and will automatically terminate in the event
of its assignment. Termination will not affect the right of TMC to receive
payments on any unpaid balance of the compensation earned prior to
termination. The Investment Advisory Agreement provides that in the absence
of willful misfeasance, bad faith or gross negligence on the part of TMC, or
of reckless disregard of its obligations and duties thereunder, TMC shall not
be liable for any action or failure to act in accordance with its duties
thereunder.
Administrative Services Agreement
Effective July 1, 1996, TMC furnishes to each class of shares certain
administrative services necessary for the maintenance of the shareholders of
that class. These services are performed under the terms of an
Administrative Services Agreement, and TMC is paid a fee for the services
under the Agreement applicable to Class A and Class C shares of the Funds
which is described in the Prospectus applicable to Class A and Class C shares
of the Funds. These services were previously performed under the terms of
the Investment Advisory Agreement until its restatement, as described above.
The Administrative Services Agreement provides for successive 12-month
terms, provided that continuation is approved by the Board of Directors in
the same manner pertaining to the Investment Advisory Agreement. The
Agreement may be terminated by either party, at any time, without penalty on
60 days' written notice. The Agreement provides that in the absence of
willful misfeasance, bad faith or gross negligence of TMC, or of reckless
disregard of its obligations thereunder, TMC shall not be liable for any
action or failure to act in accordance with its duties thereunder.
H. Garrett Thornburg, Jr., Chairman, Treasurer and a Director of the
Company, is also Director and controlling stockholder of TMC.
SERVICE AND DISTRIBUTION PLANS
Service Plan - All Classes
The Funds have adopted a Plan and Agreement of Distribution pursuant to
Rule 12b-1 under the Investment Company Act of 1940 (the "Service Plan")
which is applicable to Class A and Class C shares of each Fund. The Plan
permits payments to be made by each Fund in respect of its Class A and Class
C shares to TMC up to an amount on an annual basis not to exceed .25 of 1% of
the average daily net assets of Class A and Class C shares of the applicable
Fund, to reimburse TMC for particular expenditures incurred by it to obtain
certain services from securities dealers and other financial institutions and
organizations, including banks. No assets of any class or Fund will be used
to reimburse expenses attributable to any other class or Fund. Such services
likely will include answering shareholder questions and furnishing of
information to shareholders, preparing and transmitting to the transfer agent
computer processable tapes of customer transactions, obtaining proxies,
effecting redemptions, and other activities in connection with servicing
shareholder accounts. In addition, TMC may make payments under the Service
Plan, including incentive compensation, in connection with the distribution
of shares. Payments may be made by TMC to banks, savings and loan
associations and other depository institutions to the extent permissible
under applicable provisions of federal banking laws. TMC currently makes
payments described in the first sentence of this paragraph to the brokerage
firm of record with respect to each shareholder account in the following
manner: TMC intends to pay at an annual rate of (1) .10% based upon the
average daily net asset value of the account for all accounts opened less
than one year, and (2) .25% based upon the average daily net asset value of
the account, for all accounts opened more than one year.
The Service Plan permits accrued but unpaid reimbursements to be carried
over and reimbursed to TMC in later years. That is, payments by a Fund in
later years may be used to reimburse TMC for expenses incurred in a prior
year but not paid because the amount of those expenses exceeded the Service
Plan's annual percentage limitation. TMC will not charge interest or
carrying charges on any carry over amounts, and a Fund is not obligated to
pay TMC any carry over amounts if the Service Plan is terminated or not
renewed. Current distribution expenses will be paid first, then carryovers
would be paid. TMC has waived repayment of any carryovers accumulated to
June 30, 1996, but is under no obligation to waive any carryovers in the
future. Carryovers not waived are contingent and would not be reflected as
liabilities on a Fund balance sheet. Any carryover paid in a future period
would be treated for accounting purposes as a current expense for that
period, reducing income for the period. The Funds' management believes that
it is unlikely that the Funds will be called upon to pay any such carryovers
of expenses described in the Service Plan; furthermore, proposed Securities
and Exchange Commission regulations may reduce or prohibit such carryovers in
the future.
For the fiscal year ended June 30, 1996, the Fund paid the following
amounts to TMC under the Service Plans:
Class A Class C
------- -------
Limited Term National $1,154,408 $28,391
Limited Term California $ 122,572 $ 3,628
All amounts paid to TMC under the Service Plans were paid by TMC to brokerage
firm or other securities dealer of record for providing shareholder services
as described above.
Class C Distribution Plan
Each Fund has adopted a plan and agreement of distribution pursuant to
Rule 12b-1 under the Investment Company Act of 1940, applicable only to the
Class C shares of that Fund ("Class C Distribution Plan"). The Class C
Distribution Plan provides for the Fund's payment to TSC on a monthly basis
of an annual distribution fee of .75% of the average daily net assets
attributable to the Fund's Class C shares.
The purpose of the Class C Distribution Plan is to compensate TSC for
its services in promoting the sale of Class C shares of the Fund. TSC
expects to pay compensation to dealers and others selling Class C shares from
amounts it receives under the Class C Distribution Plan. TSC also may incur
additional distribution-related expenses in connection with its promotion of
Class C share sales, including payment of additional incentives to dealers,
advertising and other promotional activities and the hiring of other persons
to promote the sale of shares.
For the fiscal year ended June 30, 1996, the Funds paid the following
amounts to TSC under the Class C Distribution Plan:
Limited Term National (Class C only) $35,489
Limited Term California (Class C only) $ 4,534
General Matters Relating to Service and Distribution Plans
In reviewing the foregoing service and distribution plans, the Company's
Board of Directors received and considered all pertinent information and
determined that there was a reasonable likelihood that adoption of the Plans
would benefit each class and its shareholders. Specifically, the Directors
reviewed among other things (i) the nature and current extent of services to
be provided by TMC and TSC, (ii) the quality of past services provided by
TSC, (iii) the expenses of each Fund and class as compared with those of
similar mutual funds, (iv) the aggregate value of economic benefits received
by TMC and TSC from the Funds, (v) the possible disadvantages to shareholders
of the Funds of insufficient future increases in total shares of the Funds,
(vi) the expenses incurred in distributing shares of the Funds and dealer
feedback, (vii) the financial condition of TMC, and (viii) the merits of
possible alternative plans to reduce net redemptions and increase sales of
Fund shares.
Each Plan provides that if will continue in effect from year to year if
the continuance is specifically approved at least annually (i) either by a
vote of the "majority of the outstanding voting securities" (as that term is
defined in the 1940 Act) or the class or classes affected by the Plan or by
the Company's Board of Directors of the Fund and (ii) by a vote of the
majority of the Directors who are not "interested persons" (as defined in the
1940 Act) and have no direct or indirect financial interest in the operation
of the Plan, cast in person at a meeting called for the purpose of voting on
the Plan.
Approval by the shareholders of a class will be required before the
reimbursement percentage paid under a Plan to TMC or TSC, as the case may be,
for any class may be materially increased. A Plan may not be amended unless
the amendment is approved by a majority of the Board of Directors and a
majority of the Directors who are not "interested persons" of the Fund or by
a majority of the shares of the relevant class or classes of the Fund. A
Plan may be terminated as to any class at any time without the payment of any
penalty by vote of a majority of the Directors who are not "interested
persons" of the Company or a majority vote of the shares of the affected
class or classes.
So long as a Plan is in effect, the Board of Directors will receive and
review, at least quarterly, a written report of the amounts expended pursuant
to each such Plan and the purposes for which such expenditures were made; the
selection and nomination of the Directors who are not "interested persons" of
the Company shall be committed to the discretion of the Directors who are not
"interested persons" of the Company; the Directors will at least annually
request and evaluate and TMC will furnish information reasonably necessary to
an informed determination of whether the Plan should be continued; and the
Plan's continuance will be approved as to any class only if the Directors
conclude, in the exercise of reasonable judgment and light of their duties,
that there is a reasonable likelihood that the Plan will benefit the class
and the shareholders of the class.
PORTFOLIO TRANSACTIONS
TMC, in effecting purchases and sales of portfolio securities for the
accounts of the Funds, will place orders in such manner as, in the opinion of
TMC, will offer the best price and market for the execution of each
transaction. Participations in Municipal Leases will normally be purchased
from banks or other parties such as equipment vendors, insurance companies
and broker-dealers on a principal basis. Other portfolio securities will
normally be purchased directly from an underwriter or in the over-the-counter
market from the principal dealers in such securities, unless it appears that
a better price or execution may be obtained elsewhere. Purchases from
underwriters will include a commission or concession paid by the issuer to
the underwriter, and purchases from dealers will include the spread between
the bid and asked price. Given the best price and execution obtainable, it
will be the practice of the Company to select dealers which, in addition,
furnish research information (primarily credit analyses of issuers) and
statistical and other services to TMC. It is not possible to place a dollar
value on information and statistical and other services received from
dealers. Since it is only supplementary to TMC's own research efforts, the
receipt of research information is not expected significantly to reduce TMC's
expenses. In selecting among the firms believed to meet the criteria for
handling a particular transaction, TMC may also give consideration to those
firms which have sold or are selling shares of the Funds. While TMC will be
primarily responsible for the placement of the Funds' business, the policies
and practices of TMC in this regard must be consistent with the foregoing and
will at all times be subject to review by the Board of Directors of the
Company. For the Funds' fiscal year ended June 30, 1996, the Funds did not
pay any brokerage commissions to TSC.
TMC reserves the right to manage other investment companies and
investment accounts for other clients which may have investment objectives
similar to those of the Funds. Subject to applicable laws and regulations,
TMC will attempt to allocate equitably portfolio transactions among the Funds
and the portfolios of its other clients purchasing securities whenever
decisions are made to purchase or sell securities by the Funds and one or
more of such other clients simultaneously. In making such allocations the
main factors to be considered will be the respective investment objectives of
the Funds and such other clients, the relative size of portfolio holdings of
the same or comparable securities, the availability of cash for investment by
the Funds and such other clients, the size of investment commitments
generally held by the Funds and such other clients and opinions of the
persons responsible for recommending investments to the Funds and such other
clients. While this procedure could have a detrimental effect on the price
or amount of the securities available to the Funds from time to time, it is
the opinion of the Company's Board of Directors that the benefits available
from TMC's organization will outweigh any disadvantage that may arise from
exposure to simultaneous transactions. The Company's Board of Directors will
review simultaneous transactions.
The Funds' portfolio turnover rates for the two fiscal years ending June
30, 1996 are as follows:
1995 1996
---- ----
Limited Term National Fund 23.02% 20.60%
Limited Term California Fund 18.54% 22.68%
MANAGEMENT
The management of the Company and its Funds, including general
supervision of the duties performed by TMC under the Investment Advisory
Agreement, is the responsibility of the Board of Directors. There are six
Directors of the Company, three of whom are "interested persons" (as the term
"interested" is defined in the Investment Company Act of 1940) and three of
whom are "disinterested" persons. The names of the Directors and officers
and their principal occupations and other affiliations during the past five
years are set forth below, with those Directors who are "interested persons"
of the Company indicated by an asterisk:
Name of Director / Position / Principal Occupation During Past 5 Years
- ----------------------------------------------------------------------
H. Garrett Thornburg, Jr.,* 50 / Director, Chairman and Treasurer / President
and Trustee of Thornburg Investment Trust (mutual fund) since June, 1987;
Chairman and Director Thornburg Mortgage Advisory Corporation since its
formation in 1989; Chairman and Director of Thornburg Mortgage Asset
Corporation (real estate investment trust) since its formation in 1993;
Executive Vice President of Daily Tax Free Income Fund, Inc. (mutual fund)
since its formation in 1982 and a Director from 1982 to June 1993; President
of TMC since its formation in 1982.
J. Burchenal Ault, 69 /Director / Consultant to and fundraiser for charities,
1990 to present; Trustee of Thornburg Investment Trust (Mutual Fund) since
June 1987; Director of Farrar, Strauss & Giroux (publishers) since 1968.
Eliot R. Cutler ,* 49 / Director / Partner, Cutler & Stanfield, Attorneys,
Washington, D.C. since 1988.
James E. Monaghan, Jr., 48 / Director / President, Monaghan & Associates,
Inc. and Strategies West, Inc. Denver, Colorado, (business consultants) since
1983.
A.G. Newmyer III, 47 / Director / President, from 1983 to December 1992, and
Senior Officer from January 1993, Newmyer Associates, Inc., Washington, D.C.,
(business consultants).
Richard M. Curry ,* 56 / Director / Senior Vice President McDonald & Co.,
Cleveland, Ohio (securities dealers) since May 1984.
Brian J. McMahon, 40 / President / President of the Company since January,
1987; Vice President of the Company from 1984 to 1987; Vice President of
Thornburg Investment Trust (mutual fund) since June 1987 and a Trustee since
June, 1996; Managing Director of TMC since December 1985 and a Vice President
since April 1984.
Steven J. Bohlin, 37 / Vice President / Assistant Vice President of the
Company from July, 1985 to October 1989; Vice President of Thornburg
Investment Trust (mutual fund) since June 1987 and Treasurer since 1989;
Managing Director and Vice President of TMC since April 1991.
Dawn B. Shapland, 49 / Secretary / Secretary of the Company since its
formation; Secretary and Assistant Treasurer of Thornburg Investment Trust
(mutual fund) since June 1987; Managing Director of TMC since December 1985
and Vice President and Secretary of TMC since January 1984.
Susan Rossi, 35 / Assistant Vice President / Assistant Vice President of the
Company since July 1992; Assistant Vice President of Thornburg Investment
Trust (mutual fund) since June 1992; Associate of TMC since June 1990.
George Strickland, 33 / Assistant Vice President / Assistant Vice President
of the Company since July 1992; Assistant Vice President of Thornburg
Investment Trust (mutual fund) since June 1992; Associate of TMC from 1991 to
1996 and a Managing Director since 1996; Investor Representative, Calvert
Group, Washington, D.C., 1989 to 1991.
Jonathan Ullrich, 27 / Assistant Vice President / Assistant Vice President of
the Company since July 1992; Assistant Vice President of Thornburg Investment
Trust (mutual fund) since 1992; Associate of TMC since September 1991;
student, Brown University, 1987 to 1991.
Christine E. Thompson, 30 / Assistant Vice President / Assistant Vice
President of the Company and of Thornburg Investment Trust (mutual fund)
since June 1993; Associate of TMC since June 1992; Office Manager, Town and
Country Janitorial Services, Inc., Greenland, New Hampshire, September 1991
to February 1992; Salesperson and later Department Manager, The Harvard
Cooperative society, Cambridge, Massachusetts, May, 1990 to September, 1991.
The business address of each person listed is 119 East Marcy Street,
Suite 202, Santa Fe, New Mexico 87501. Mr. Thornburg is a Director and the
President of TSC, and Executive Vice President of Daily Tax-Free Income Fund,
Inc. Ms. Shapland is the Secretary of TSC.
The officers and Directors affiliated with TMC will serve without any
compensation from the Company. The Company pays each Director who is not an
employee of TMC or an affiliated company a quarterly fee of $1,000 plus a
$500 fee for each meeting of the Board of Directors attended by the Director.
In addition, the Company pays a $1,000 annual stipend to each member of the
audit committee, and reimburses all Directors for travel and out-of-pocket
expenses incurred in connection with attending such meetings. The Company
paid fees to the Directors during the year ended June 30, 1996 as follows:
<TABLE>
Pension or
Retirement Estimated Total
Aggregate Benefits Annual Compensation
Name of Compensation Accrued as Benefits from Company and
Person, from Part of Upon Fund Complex
Position Company Fund Expenses Retirement Paid to Directors
- -------- ------------ ------------- ------------- -----------------
<C> <C> <C> <C> <C>
H. Garrett - 0 - - 0 - - 0 - - 0 -
Thornburg,
Jr.
J. Burchenal $7,000 - 0 - - 0 - $13,000
Ault
Eliot R. $6,000 - 0 - - 0 - $6,000
Cutler
James E. $6,500 - 0 - - 0 - $6,500
Monaghan, Jr.
A. G. $7,000 - 0 - - 0 - $7,000
Newmyer, III
Richard M. $6,000 - 0 - - 0 - $6,000
Curry
</TABLE>
PRINCIPAL HOLDERS OF SECURITIES
As of July 31, 1996, Limited Term National Fund had 69,574,750 shares
outstanding, and Limited Term California Fund had 7,724,290 shares
outstanding.
No persons are known to have held of record or beneficially 5% or more
of any Fund's outstanding shares on July 31, 1996.
At July 31, 1996, the officers, Directors and related persons of the
Fund, as a group, owned less than one percent of the outstanding shares of
either Fund.
HOW TO PURCHASE FUND SHARES
Procedures with respect to the manner in which Fund shares may be
purchased and how the offering price is determined are set forth in the
Prospectus under the caption "Your Account - Buying Fund Shares."
The Prospectus states that certain classes of investors, specified
below, may purchase Class A shares of a Fund at variations to the Public
Scale. The Company may change or eliminate these variations at any time.
(1) Existing shareholders of a Fund may purchase shares upon the
reinvestment of dividends and capital gains distributions with no sales
charge. This practice is followed by many investment funds that charge sales
loads for new investments.
(2) Shareholders of a Fund who have redeemed all or any portion of
their investment in Class A shares of a Fund may purchase Class A shares of
the Fund with no sales charge up to the maximum dollar amount of their shares
redeemed within 24 months of the redemption date, provided that the
shareholder's dealer or the shareholder must notify TSC or the Transfer Agent
at the time an order is placed that such a purchase would qualify for this
variation to the Public Scale. Similar notifications must be made in writing
by the dealer, the broker, or the shareholder when the order is placed by
mail. The sales charge will not be eliminated if notification is not
furnished at the time of the order or a review of TSC's or the Transfer
Agent's records fails to confirm the investor's represented previous
holdings.
(3) Persons may purchase Class A shares of a Fund at no sales charge
if they redeem Class A shares of the Fund or any other series of Thornburg
Limited Term Municipal Fund, Inc., or of any series of Thornburg Investment
Trust, and reinvest some or all of the proceeds within 24 months. The
shareholder's dealer or the shareholder must notify TSC or the Transfer Agent
at the time an order is placed that the purchase qualifies for this variation
to the Public Scale.
The special classes of shareholders in subsections (2) and (3) above
were created as a convenience for those shareholders who invest in a Fund and
subsequently make a decision to redeem all or part of their investment for a
temporary period. In some cases, the existence of this special class of
shareholders will act as further inducement for certain individuals to make
an initial investment in a Fund, particularly if those investors feel that
they might have a temporary need to redeem all or part of their investment in
the coming years. Shareholders who have previously invested in a Fund are
more familiar than the general public with the Fund, its investment
objectives, and its results. The costs to TSC of its marketing to these
individuals and maintaining the records of their prior investment are minimal
compared to the costs of marketing the Fund to the public at large.
(4) Officers, trustees, directors and employees of the Company, TMC,
TSC and the Custodian and Transfer Agent, while in such capacities, and
members of their families, including trusts for the benefit of the foregoing,
may purchase shares of a Fund with no sales charge, provided that they notify
TSC or the Transfer Agent at the time an order is placed that a purchase will
qualify for this variation from the Public Scale. The sales charge will not
be eliminated if the notification is not furnished at the time of the order
or a review of Fund records fails to confirm that the investor's
representation is correct. The reduced sales charge to these persons is
based upon the Company's view that their familiarity with and loyalty to the
Funds will require less selling effort by the Fund, such as a solicitation
and detailed explanation of the conceptual structure of the Funds, and less
sales-related expenses, such as advertising expenses, computer time, paper
work, secretarial needs, postage and telephone costs, than are required for
the sale of shares to the general public. Inclusion of the families of these
persons is based upon the Company's view that the same economies exist for
sales of shares to family members.
(5) Employees of brokerage firms who are members in good standing with
the National Association of Securities Dealers, Inc. ("NASD"), employees of
financial planning firms who place orders for a Fund placed directly with the
Transfer Agent or TSC and through a broker/dealer who is a member in good
standing with the NASD, and employees of eligible non-NASD members which
accept orders for shares of the Fund on an agency basis and clear those
orders through a broker/dealer who is a member in good standing with NASD,
and their families, including trusts for the benefit of the foregoing, may
purchase shares of the Funds for themselves with no sales charge, provided
that (i) the order must be through a NASD member firm which has entered into
an agreement with TSC to distribute shares of the Fund, and (ii) the
shareholder's broker/dealer or the shareholder must notify TSC or the
Transfer Agent at the time an order is placed that the purchase would qualify
for this variation to the Public Scale. Similar notification must be made in
writing by the dealer, the broker, or the shareholder when such an order is
placed by mail. The reduced sales charge will not apply if the notification
is not furnished at the time of the order or a review of TSC's, the dealer's
the broker's or the Transfer Agent's records fails to confirm that the
investor's representation is correct.
Because they sell the Funds' shares, these individuals tend to be much
more aware of the Funds than the general public. Any additional costs to TSC
of marketing to these individuals are minimal.
(6) Bank trust departments, companies with trust powers, and
investment advisors who charge fees for service, including investment dealers
who utilize wrap fees or similar arrangements, may purchase shares of a Fund
for their customers at no sales charge, provided that these persons notify
TSC or the Transfer Agent, at the time an order qualifying for this reduced
charge is placed, that such a purchase would qualify for this variation to
the Public Scale.
(7) Purchases of Class A shares of any Fund may be made at net asset
value provided that such purchases are placed through a broker that maintains
one or more omnibus accounts with the Funds and such purchases are made by
(i) investment advisers or financial planners who place trades for their own
accounts or the accounts of their clients and who charge a management,
consulting or other fee for their services; (ii) clients of such investment
advisers or financial planners who place trades for their own accounts if the
accounts are linked to the master account of such investment adviser or
financial planner on the books and records of the broker or agent; and (iii)
retirement and deferred compensation plans and trusts used to fund those
plans, including, but not limited to, those defined in Sections 401(a)
through 403(b) or 457 of the Internal Revenue Code and "rabbi trusts."
Investors may be charged a fee if they effect transactions in Fund shares
through a broker or agent.
These organizations may charge fees to clients for whose accounts they
purchase shares of a Fund in a fiduciary capacity. Where the reduced sales
charge applies, notification is required at the time the order is received,
and a review of TSC's or Transfer Agent's records must confirm that the
investor's representation is correct.
(8) No sales charge will be payable at the time of purchase on
investments of $1 million or more made by a purchaser. A contingent deferred
sales charge (CDSC) will be imposed on these investments in the event of a
share redemption within 1 year following the share purchase at the rate of
1/2 of 1% of the value of the shares redeemed. In determining whether a CDSC
is payable and the amount of any fee, it is assumed that shares not subject
to the charge are the first redeemed, followed by other shares held for the
longest period of time. The applicability of these charges will be
unaffected by transfers of registration. TSC or TMC intend to pay a
commission of up to 1/2 of 1% to dealers who place orders of $1 million or
more for a single purchaser.
(9) Such persons as are determined by the Directors to have acquired
shares under special circumstances, not involving any sales expense to the
Fund or to TSC, may purchase shares of the Fund with no sales charge. This
variation from the Public Scale contemplates circumstances where a relatively
large sale can be made at no distribution cost to a large investor or a
number of smaller investors who are similarly situated. In the contemplated
circumstances, there would be no cost of distribution, or any costs would be
paid by TMC.
(10) Investors may purchase shares of either Fund at net asset value
without a sales charge to the extent that the purchase represents proceeds
from a redemption (within the previous 60 days) of shares of another mutual
fund which has a sales charge. When making a direct purchase at net asset
value under this provision, the Fund must receive one of the following with
the direct purchase order: (i) the redemption check representing the
proceeds of the shares redeemed, endorsed to the order of the Fund, or (ii)
a copy of the confirmation from the other fund, showing the redemption
transaction. Standard back office procedures should be followed for wire
order purchases made through broker dealers. Purchases with redemptions from
money market funds are not eligible for this privilege. This provision may
be terminated anytime by TSC or the Funds without notice.
NET ASSET VALUE
Each Fund will calculate the net asset value at least once daily on days
when the New York Stock Exchange is open for trading, and more frequently if
deemed desirable by the Fund. Net asset value will not be calculated on New
Year's Day, Washington's Birthday (on the third Monday in February), Good
Friday, Memorial Day (on the last Monday in May), Independence Day, Labor
Day, Thanksgiving Day, Christmas Day, on the preceding Friday if any of the
foregoing holidays falls on a Saturday, and on the following Monday if any of
the foregoing holidays falls on a Sunday. Under the Investment Company Act
of 1940, net asset value must be computed at least once daily on each day
(i) in which there is a sufficient degree of trading in a Fund's portfolio
securities that the current net asset value of its shares might be materially
affected by changes in the value of such securities and (ii) on which an
order for purchase or redemption of its shares is received.
REDEMPTION OF SHARES
Procedures with respect to redemption of Fund shares are set forth in
the Prospectus under the caption "Selling Fund Shares."
A Fund may suspend the right of redemption or delay payment more than
seven days (a) during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), (b) when trading in the
markets the Fund normally utilizes is restricted, or an emergency exists as
determined by the Securities and Exchange Commission so that disposal of the
Fund's investments or determination of its net asset value is not reasonably
practicable, or (c) for such other periods as the Securities and Exchange
Commission by order may permit for protection of the shareholders of the
Fund.
DISTRIBUTOR
Pursuant to a Distribution Agreement with the Fund, Thornburg Securities
Corporation ("TSC") acts as the principal underwriter of Fund shares in a
continuous offering of those shares. The Funds do not bear selling expenses
except (i) those involved in registering shares with the Securities and
Exchange Commission and qualifying them or the issuing Fund with state
regulatory authorities, and (ii) expenses paid under the Service and
Distribution Plans and which might be considered selling expenses. Terms of
continuation, termination and assignment under the Distribution Agreement are
identical to those described above with regard to the Investment Advisory
Agreement, except that termination other than upon assignment requires six
months' notice.
H. Garrett Thornburg, Jr. President, Treasurer and a Director of the
Company, is also Director and controlling stockholder of TSC.
The following table shows the commissions and other compensation
received by TSC from each of the Funds for the most recent fiscal year ending
June 30, 1996, except for compensation or amounts paid under Rule 12b-1
plans, which are described above under the caption "Service and Distribution
Plans."
<TABLE>
Fiscal Year Ended
June 30, 1996
- -----------------
<CAPTION> Net Underwriting
Aggregate Discounts and Compensation on
Underwriting Commissions Redemptions and Brokerage Other
Commissions Paid to TSC Repurchases Commissions Compensation
------------ ------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Limited Term $904,416 $124,901 $7,505 - 0 - *
National Fund
Limited Term 132,164 16,639 1,115 - 0 - *
California Fund
* See "Service and Distribution Plans."
</TABLE>
Limited Term National Fund paid aggregate underwriting commissions with
respect to sales of its shares in the fiscal years ending June 30, 1994 and
June 30, 1995 of $1,751,023 and $1,199,224, respectively; and TSC received
net underwriting commissions with respect to sales of Limited Term National
Fund shares in fiscal years ending June 30, 1994 and June 30, 1995 of
$657,126 and $171,476, respectively. Limited Term California Fund paid
aggregate underwriting commissions with respect to sales of its shares in the
fiscal years ending June 30, 1994 and June 30, 1995 of $266,021 and $168,930,
respectively; and TSC received net underwriting commissions with respect to
sales of Limited Term California Fund shares in fiscal years ending June 30,
1994 and June 30, 1995 of $75,217 and $24,622, respectively.
INDEPENDENT AUDITORS
McGladrey & Pullen, LLP, 555 Fifth Avenue, New York, New York 10017, is
the independent auditor of the Funds for the fiscal year ending June 30,
1996. The financial statements of the Funds have been audited by McGladrey
& Pullen, LLP, for the periods indicated in their reports thereon.
Shareholders will receive semi-annual unaudited financial statements and
annual financial statements audited by the independent accountants.
FINANCIAL STATEMENTS
Statements of Assets and Liabilities, including Schedules of
Investments, as of June 30, 1996, Statements of Operations for the year ended
June 30, 1996 and Statements of Changes in Net Assets for the two years in
the period ended June 30, 1996, Notes to Financial Statements and Financial
Highlights, Schedules of Investments as of June 30, 1996 and Independent
Auditor's Report dated July 26, 1996, for Limited Term National Fund and
Limited Term California Fund are incorporated herein by reference from the
Funds' respective Annual Reports to Shareholders, June 30, 1996.
