1993 Act Registration No. 2-95930
1940 Act Registration No. 811-4546
As filed with the Securities and Exchange Commission on May 17, 1995
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. __
Post-Effective Amendment No. 22
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 22
(Check appropriate box or boxes.)
VAM INSTITUTIONAL FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
90 SOUTH SEVENTH STREET, SUITE 4400, MINNEAPOLIS, MINNESOTA 55402
(Address of Principal Executive Offices) (Zip Code)
(612) 376-7000
(Registrant's Telephone Number, including Area Code)
JOHN G. TAFT
90 SOUTH SEVENTH STREET, SUITE 4400, MINNEAPOLIS, MINNESOTA 55402
(Name and Address of Agent for Service)
Copy to:
Kathleen L. Prudhomme, Esq.
Dorsey & Whitney P.L.L.P.
220 South Sixth Street
Minneapolis, Minnesota 55402
It is proposed that this filing will become effective (check appropriate box):
[ ] immediately upon filing pursuant to paragraph (b) of Rule 485
[ ] on (specify date) pursuant to paragraph (b) of Rule 485
[X] 75 days after filing pursuant to paragraph (a) of Rule 485
[ ] on (date) pursuant to paragraph (a) of Rule 485
The Registrant has registered an indefinite number of shares of common stock
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. A Rule 24f-2 Notice was filed by the Registrant on June 17,
1994.
CROSS REFERENCE SHEET FOR ITEMS REQUIRED BY FORM N-1A
(VAM INSTITUTIONAL FUNDS, INC.)
<TABLE>
<CAPTION>
ITEM NO. OF
FORM N-1A CAPTION IN PROSPECTUS
<S> <C>
1 Cover Page
2 Fund Expenses
3 Not Applicable
4 Investment Objectives and Policies; Risks and Characteristics of Securities and
Investment Techniques; Investment Restrictions; General Information
5 Management; General Information
6 Distributions to Shareholders and Taxes; General Information
7 Purchase of Shares; Exchange Privilege; Management; Determination of Net Asset Value
8 Redemption of Shares
9 Not Applicable
CAPTION IN STATEMENT OF ADDITIONAL INFORMATION
10 Cover Page
11 Table of Contents
12 Additional Information
13 Investment Policies and Restrictions
14 Directors and Executive Officers
15 Directors and Executive Officers
16 Directors and Executive Officers; The Investment Adviser, Sub-Adviser, Administrative
Services, Expenses and Brokerage
17 The Investment Adviser, Sub-Adviser, Administrative Services, Expenses and Brokerage
18 Not Applicable
19 Net Asset Value and Public Offering Price
20 Taxes
21 The Investment Adviser, Sub-Adviser, Administrative Services, Expenses and Brokerage
22 Calculation of Performance Data
23 Financial Statements
</TABLE>
VAM Institutional Funds, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which offers its shares in separate
diversified investment portfolios (the "Funds"), each with its own investment
objective and policies. This prospectus relates to shares of ^seven Funds as
listed below. The Funds are primarily designed to provide pension and profit
sharing plans, employee benefit trusts, endowments, foundations, other
institutions, corporations and high net worth individuals access to the
professional investment management services offered by Voyageur Fund Managers,
Inc. ("the Adviser"), which serves as investment adviser to the Funds. The
^Adviser has retained Lazard London International Investment Management Limited
(the "Sub-Adviser") to act as sub-adviser to VAM Global Fixed Income Fund. Each
Fund (other than VAM Global Fixed Income Fund) offer two classes of shares --
the Institutional Class Shares ("Institutional Shares") and the Institutional
Service Class Shares ("Service Shares"), each of which is sold pursuant to
different sales arrangements and bears different expenses. VAM Global Fixed
Income Fund offers only Institutional Shares. The Funds are:
VAM SHORT GOVERNMENT AGENCY FUND
VAM INTERMEDIATE GOVERNMENT AGENCY FUND
VAM GOVERNMENT MORTGAGE FUND
VAM SHORT DURATION TOTAL RETURN FUND
VAM INTERMEDIATE DURATION TOTAL RETURN FUND
VAM INTERMEDIATE MUNICIPAL FUND
VAM GLOBAL FIXED INCOME FUND
The investment objective of each Fund, along with a detailed
description of the types of securities in which each Fund may invest and of
investment policies and restrictions applicable to each Fund, are set forth in
this Prospectus.
There is no assurance that any Fund's investment objective will be achieved.
The Funds are no-load which means that there is no sales charge when
you buy or redeem shares.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
THE FUNDS' SHARES ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED
BY, ANY BANK AND ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT, THE
FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER
FEDERAL AGENCY. AN INVESTMENT IN ANY OF THE FUNDS INVOLVES INVESTMENT RISK,
INCLUDING THE POSSIBLE LOSS OF PRINCIPAL DUE TO FLUCTUATIONS IN THE APPLICABLE
FUND'S NET ASSET VALUE.
This Prospectus sets forth certain information about the Funds that a
prospective investor ought to know before investing. A Statement of Additional
Information (dated _____________^, 1995), as amended from time to time, has been
filed with the Securities and Exchange Commission. The Statement of Additional
Information is available free of charge by telephone and at the mailing address
below, and is incorporated in its entirety by reference into this Prospectus in
accordance with the Commission's rules.
90 South Seventh Street, Suite 4400
Minneapolis, Minnesota 55402
(612) 376-7000
(800) 553-2143
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated ^_______________________, 1995
TABLE OF CONTENTS
Page
Comparison of VAM Institutional Funds........................................ 3
Fund Expenses................................................................ 4
Investment Objectives and Policies........................................... 5
Risks and Characteristics of Securities and Investment Techniques............^10
Investment Restrictions......................................................^22
Purchase of Shares...........................................................^22
Redemption of Shares.........................................................^24
Exchange Privilege...........................................................^25
Management...................................................................^25
Determination of Net Asset Value.............................................^27
Distributions to Shareholders and Taxes......................................^28
Investment Performance.......................................................^29
General Information..........................................................^30
SHARES OF THE FUNDS COVERED BY THIS PROSPECTUS
ARE NOT REGISTERED IN ALL STATES. SHARES THAT ARE NOT REGISTERED
IN ONE OR MORE STATES ARE NOT BEING OFFERED AND SOLD IN SUCH STATES.
COMPARISON OF VAM INSTITUTIONAL FUNDS
<TABLE>
<CAPTION>
Maximum Total
Operating Expenses *
Primary Credit Foreign Institutional Service
Fund Securities Duration Quality Securities Shares Shares Benchmarks
<S> <C> <C> <C> <C> <C> <C> <C>
VAM Short Government/ 0-3 Years Treasury/ None .50 .75 Merrill Lynch
Government Agency Agency 1-3 Year
Agency Fund Treasury Index
VAM Government/ 3-5.5 Years Treasury/ None .50 .75 Merrill Lynch
Intermediate Agency Agency 3-7 Year
Government Treasury Index
Agency Fund
VAM Government/ 0-8 Years Agency None .50 .75 Merrill Lynch
Government Mortgage 15-Year
Mortgage Fund GNMA Index
VAM Short Government/ 0-3 Years B-Aaa 0-25% .50 .75 Merrill Lynch
Duration Total Corporate/ (0-5% 1-3 Year
Return Fund Agency below Baa) Government
Bond Index
VAM Government/ 3-5.5 Years B-Aaa 0-25% .50 .75 Lehman
Intermediate Corporate/ (0-5% Brothers
Duration Agency below Baa) Intermediate
Total Government/
Return Fund Corporate Bond
Index
VAM National 0-6.5 Years B-Aaa None .50 .75 Merrill Lynch
Intermediate Municipal (0-5% 1-10 Year
Municipal below Baa) Intermediate
Fund Term High
Quality
Corporate Bond
Index (after-tax
returns)
VAM Global Global Debt 3-8 Years B-Aaa Up to 100% 1.00 N/A (to be provided)
Fixed Income Securities (0-5%
Fund below Baa)
</TABLE>
All of the above information is qualified by the more detailed
descriptions of the Funds' investment objectives and policies contained in this
Prospectus.
* Reflects voluntary fee waivers and expense reimbursements through September
30, 1995. For more information, see "Fund ^Expenses" below.
FUND EXPENSES
Each Fund is offered to investors on a no-load basis, without any sales
commissions or distribution ("12b-1 plan") charges. Each Fund (other than VAM
Global Fixed Income Fund) offers two classes of shares, Institutional Shares and
Service Shares, which are substantially identical except that Service Shares are
assessed a service charge. VAM Global Fixed Income Fund offers only
Institutional Shares. The purpose of the following table is to assist investors
in understanding the various fees that shareholders of each class bear directly
and indirectly.
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested Dividends None
Deferred Sales Load None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(after fee waivers and expense reimbursements
as a percentage of average net assets)
<TABLE>
<CAPTION>
INVESTMENT TOTAL
ADVISORY SERVICE OTHER OPERATING
FEES FEES EXPENSES EXPENSES
<S> <C> <C> <C> <C>
VAM SHORT GOVERNMENT AGENCY FUND
Institutional Shares................................... .40% - .10% .50%
Service Shares......................................... .40% .25% .10% .75%
VAM INTERMEDIATE GOVERNMENT AGENCY FUND
Institutional Shares................................... .40% - .10% .50%
Service Shares......................................... .40% .25% .10% .75%
VAM GOVERNMENT MORTGAGE FUND
Institutional Shares................................... .40% - .10% .50%
Service Shares......................................... .40% .25% .10% .75%
VAM SHORT DURATION TOTAL RETURN FUND
Institutional Shares................................... .40% - .10% .50%
Service Shares......................................... .40% .25% .10% .75%
VAM INTERMEDIATE DURATION TOTAL RETURN FUND
Institutional Shares................................... .40% - .10% .50%
Service Shares......................................... .40% .25% .10% .75%
VAM INTERMEDIATE MUNICIPAL FUND
Institutional Shares................................... .40% - .10% .50%
Service Shares......................................... .40% .25% .10% .75%
VAM GLOBAL FIXED INCOME FUND
Institutional Shares................................... .70% - .30% 1.00%
</TABLE>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming a
5% annual return and redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS
<S> <C> <C>
VAM SHORT GOVERNMENT AGENCY FUND
Institutional Shares..................................... $ 5 $ 16
Service Shares........................................... 8 24
VAM INTERMEDIATE GOVERNMENT AGENCY FUND
Institutional Shares..................................... 5 16
Service Shares........................................... 8 24
VAM GOVERNMENT MORTGAGE FUND
Institutional Shares..................................... 5 16
Service Shares........................................... 8 24
VAM SHORT DURATION TOTAL RETURN FUND
Institutional Shares..................................... 5 16
Service Shares........................................... 8 24
VAM INTERMEDIATE DURATION TOTAL RETURN FUND
Institutional Shares..................................... 5 16
Service Shares........................................... 8 24
VAM INTERMEDIATE MUNICIPAL FUND
Institutional Shares..................................... 5 16
Service Shares........................................... 8 24
VAM GLOBAL FIXED INCOME FUND
Institutional Shares.....................................
</TABLE>
THE EXAMPLES CONTAINED IN THE TABLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN. The purpose of the above Fund Expenses table is to assist the
investor in understanding the various costs and expenses that investors in the
Funds will bear directly or indirectly. The Adviser and Voyageur Fund
Distributors, Inc. (the "Underwriter") have voluntarily agreed to waive fees and
reimburse expenses to the levels set forth in the table through September 30,
1995. The Investment Advisory Fees set forth in the table reflect a voluntary
fee ^waiver for each Fund other than VAM Global Fixed Income Fund. Under its
Investment Advisory Agreement with the Company, the Adviser is entitled to
receive from each such Fund a monthly advisory and management fee equivalent on
an annual basis to .50% of the average daily net assets of such Fund. See
"Management -Investment ^Adviser." In addition to the operating expenses paid by
each Fund, the Service Shares pay an additional service fee, equal on an annual
basis, of up to .25% of the Fund's average daily net assets attributable to
Service Shares. Such fee is paid to Service Organizations to provide additional
administrative, recordkeeping and other shareholder services to their customers
who are beneficial owners of Service Shares. See "Management -- Service
Organizations." After September 30, 1995, the voluntary expense limitations
reflected in the table may be discontinued or modified by the Adviser and the
Underwriter in their sole discretion. Absent such voluntary limitations or
waivers, Total Operating Expenses for the Institutional Shares and the Service
Shares of each Fund (other than VAM Global Fixed Income Fund) are not expected
to exceed 1.10% and 1.35% per annum, respectively, of the average daily net
assets attributable to such shares. The Total Operating Expenses for the
Institutional Shares of VAM Global Fixed Income Fund are not expected to exceed
____ % of the average daily net assets of the Fund.
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and policies of each Fund are described below.
The securities in which the Funds invest and the investment techniques discussed
in this section are described in greater detail in the Prospectus under "Risks
and Characteristics of Securities and Investment Techniques" and in the
Statement of Additional Information. Each Fund's investment objective is
fundamental, which means that it cannot be changed without the vote of its
respective shareholders as provided in the Investment Company Act of 1940, as
amended (the "1940 Act"). The investment policies and techniques employed in
pursuit of the Funds' objectives may be changed without shareholder approval,
unless otherwise noted. There are risks in any investment program and there is
no assurance that a Fund's investment objective will be achieved. The value of
each Fund's shares will fluctuate with changes in the market value of its
investments. References to a "Fund" which appear below through the heading
"Duration" relate only to the Fund or Funds described in the heading preceding
such reference.
VAM SHORT GOVERNMENT AGENCY FUND AND VAM INTERMEDIATE GOVERNMENT AGENCY FUND
The investment objective of each Fund is to seek as high a level of
current income as is consistent with preservation of principal and the average
duration of its respective portfolio securities. VAM Short Government Agency
Fund ("Short Government Fund") seeks to maintain an average portfolio duration
ranging from zero to three years and VAM Intermediate Government Agency Fund
("Intermediate Government Fund") seeks to maintain an average portfolio duration
ranging from three to five and one-half years.
Each Fund will invest exclusively in securities issued or guaranteed by
the United States government or its agencies or instrumentalities ("U.S.
Government Securities") and repurchase agreements fully secured by U.S.
Government Securities. The Funds may invest in mortgage-related U.S. Government
Securities, including derivative mortgage securities. The Funds will not,
however, invest in any derivative mortgage securities that have risk
characteristics which, in the opinion of the Adviser, are greater than those of
the underlying collateral, or in any derivative mortgage securities that have an
imbedded leverage component. Each Fund may purchase securities on a when-issued
basis and purchase or sell securities on a forward commitment basis and lend
their securities to brokers, dealers and other financial institutions to earn
income. The foregoing techniques involve special risk considerations. See "Risks
and Characteristics of Securities and Investment Techniques" for a description
of these techniques and the risks involved in their use.
VAM GOVERNMENT MORTGAGE FUND
The investment objective of VAM Government Mortgage Fund ("Government
Mortgage Fund") is to seek as high a level of current income as is consistent
with preservation of principal and the average duration of its portfolio
securities. The Fund seeks to maintain an average portfolio duration ranging
from zero to eight years. In attempting to achieve its investment objective, the
Fund will invest at least 65% of its total assets in mortgage-related U.S.
Government Securities; up to 35% of the Fund's total assets may be invested in
any combination of other U.S. Government Securities (e.g., Treasury bills, notes
and bonds and U.S. Government agency securities which are not mortgage-related)
and privately issued mortgage-related securities. Privately issued
mortgage-related securities in which the Fund invests must be rated A or higher
at the time of investment by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P") or comparably rated by any other
nationally recognized statistical rating organization. For a discussion of the
various ratings assigned by Moody's and S&P, see Appendix A to the Statement of
Additional Information. The Fund's investments in mortgage-related securities
may include derivative mortgage securities. Risk characteristics of any
derivative mortgage securities in which the Fund invests will be limited as
described above for the Short and Intermediate Government Funds. The Fund may
enter into repurchase agreements collateralized by the securities in which it
may invest. In addition, the Fund may purchase securities on a when-issued basis
and purchase or sell securities on a forward commitment basis, lend its
securities to brokers, dealers and other financial institutions to earn income,
and enter into reverse repurchase agreements as a means of borrowing money for
investment purposes. The foregoing techniques involve special risk
considerations. See "Risks and Characteristics of Securities and Investment
Techniques" for a description of these techniques and the risks involved in
their use.
VAM SHORT DURATION TOTAL RETURN FUND AND VAM INTERMEDIATE
DURATION TOTAL RETURN FUND
The investment objective of each Fund is to achieve as high a level of
total return as is consistent with reasonable risk and with the average duration
of its respective portfolio securities. Under normal circumstances, VAM Short
Duration Total Return Fund ("Short Duration Fund") seeks to maintain an average
portfolio duration ranging from zero to three years and VAM Intermediate
Duration Total Return Fund ("Intermediate Duration Fund") seeks to maintain an
average portfolio duration ranging from three to five and one-half years. The
total return sought by the Funds is the combination of income and capital
appreciation. The Adviser emphasizes income in selecting securities for the
Funds, but also considers the potential for changes in value resulting from
changes in interest rates, individual issuers' credit standing and other
factors.
Each Fund will seek to realize its objective by investing in a
diversified portfolio of U.S. Government Securities (including mortgage-related
securities), corporate bonds and other fixed-income securities, including
privately issued mortgage-backed securities, asset-backed securities,
convertible bonds fixed-income securities issued by foreign governmental and
non-governmental issuers, foreign index linked securities and short-term
fixed-income securities. The Funds' investments in foreign securities (which
include securities issued by both governmental and non-governmental issuers)
will be limited to no more than 25% of a Fund's total assets and will consist
only of dollar denominated securities. The Funds' investments in
mortgage-related securities include derivative mortgage securities. Risk
characteristics of any derivative mortgage security in which the Funds invest
will be limited as described above for the Short and Intermediate Government
Funds.
The securities in each Fund's portfolio will have an overall
dollar-weighted average quality of at least A (as rated by Moody's or S&P). In
determining a Fund's overall dollar-weighted average quality, unrated securities
are treated as if rated, based on the Adviser's view of their comparability to
rated securities. Each Fund may invest up to 5% of its net assets in securities
that are rated lower than BBB by S&P or lower than Baa by Moody's but rated at
least B by S&P or Moody's (or, in either case, if unrated, deemed by the Adviser
to be of comparable quality). Securities rated Baa are considered by Moody's as
medium-grade obligations which lack outstanding investment characteristics and
in fact have speculative characteristics as well, while securities rated BBB are
regarded by S&P as having an adequate capacity to pay principal and interest.
Securities rated lower than Baa or BBB are sometimes referred to as "high yield"
or "junk" bonds. See "Investment Policies and Restrictions -- High Yield
Securities" in the Statement of Additional Information for a discussion of the
risks of investing in high yield securities. The Funds may be more dependent on
the Adviser's investment analysis with respect to securities for which a
comparable quality determination is made than is the case with respect to rated
securities. See Appendix A to the Statement of Additional Information for a
description of Moody's and S&P ratings applicable to fixed income securities.
Each Fund may buy or sell interest rate futures contracts, options on
interest rate futures contracts and options on debt securities for the purpose
of hedging against changes in the value of securities which a Fund owns or
anticipates purchasing due to anticipated changes in interest rates. The Funds
may enter into swap agreements for purposes of attempting to obtain a particular
investment return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that provided that desired return. In addition, the
Funds may purchase securities on a when-issued basis and purchase or sell
securities on a forward commitment basis, lend their securities to brokers,
dealers and other financial institutions to earn income, and enter into reverse
repurchase agreements as a means of borrowing money for investment purposes. The
foregoing techniques involve special risk considerations. See "Risks and
Characteristics of Securities and Investment Techniques" for a description of
these techniques and the risks involved in their use.
VAM INTERMEDIATE MUNICIPAL FUND
The investment objective of VAM Intermediate Municipal Fund ("Municipal
Fund") is to provide current income that is exempt from regular federal income
tax, consistent with prudent investment risk and preservation of capital. The
Fund will seek to achieve its objective by investing substantially all (in
excess of 80%) of its total assets in tax-exempt Municipal Obligations rated
investment grade at the time of investment or determined by the Adviser to be of
comparable quality. Investment grade securities are those rated Baa or better by
Moody's or BBB or better by S&P in the case of long-term obligations, or having
equivalent ratings in the case of short-term obligations. Municipal Obligations
rated Baa are considered by Moody's as medium-grade obligations which lack
outstanding investment characteristics and in fact have speculative
characteristics as well, while Municipal Obligations rated BBB are regarded by
S&P as having an adequate capacity to pay principal and interest. The Fund may
invest up to 5% of its net assets in securities that are rated lower than BBB by
S&P or lower than Baa by Moody's but rated at least B by S&P or Moody's (or, in
either case, if unrated, deemed by the Adviser to be of comparable quality).
Such securities are sometimes referred to as "high yield" or "junk" bonds. See
"Investment Policies and Restrictions -- High Yield Securities" in the Statement
of Additional Information for a discussion of the risks of investing in high
yield securities. The securities in the Fund's portfolio will have an overall
dollar-weighted average quality of at least Aa or AA (as rated by Moody's or
S&P, respectively, or, if unrated, determined by the Adviser to be of comparable
quality). In determining the Fund's overall dollar-weighted average quality,
unrated securities are treated as if rated, based on the Adviser's view of their
comparability to rated securities. The Fund seeks to maintain an average
portfolio duration ranging from zero to six and one-half years.
The Fund does not intend to invest more than 25% of its total assets in
securities of governmental units located in any one state, territory or
possession of the United States. In addition, the Fund will not invest more than
25% of its total assets in limited obligation bonds payable only from revenues
derived from facilities or projects within a single industry. As to utility
companies, gas, electric, water and telephone companies will be considered as
separate industries.
In order to hedge its investment portfolio against market risk, the
Fund may purchase and sell futures contracts and may purchase and sell (or
write) exchange-listed and over-the-counter put and call options on securities
and futures contracts. The Fund may also purchase securities on a when-issued
basis and purchase or sell securities on a forward commitment basis. These
techniques involve special risk considerations. See "Risks and Characteristics
of Securities and Investment Techniques" for a description of these techniques
and the risks involved in their use.
The securities owned by the Fund may generate interest that is subject
to federal alternative minimum tax ("AMT"). Therefore, shares of the Fund may
not be an appropriate investment for investors who are, or as a result of an
investment in the Fund would be, subject to AMT. See "Distributions to
Shareholders and Taxes."
VAM GLOBAL FIXED INCOME FUND
The investment objective of VAM Global Fixed Income Fund ("Global
Fund") is to maximize total return, consistent with preservation of capital and
prudent investment management. The Fund will attempt to achieve its investment
objective by investing primarily in debt securities issued by issuers located
anywhere in the world.
Total investment return is the combination of income and capital
appreciation. The Adviser and the Sub-Adviser emphasize income in selecting
securities for the Fund, but also considers the potential for changes in value
resulting from changes in currency relationships, interest rates, individual
issuers' credit standing and other factors. The Fund seeks to maintain an
average portfolio duration ranging from three to eight years.
Foreign debt securities in which the Fund may invest include: (a)
obligations issued or guaranteed by foreign national governments, their
agencies, instrumentalities, or political subdivisions; (b) debt securities
issued or guaranteed by supranational organizations established or supported by
several national governments; (c) Brady Bonds; and (d) non-government foreign
debt securities. U.S. debt obligations in which the Fund may invest include U.S.
Government Securities, including mortgage-related securities, privately issued
mortgage-related securities, asset-backed securities and corporate debt
securities. The Fund may also invest in American Depository Receipts and
European Depository Receipts and in foreign index linked securities. A more
complete description of some of these types of securities is set forth under
"Risks and Characteristics of Securities and Investment Techniques."
The Fund will invest primarily in investment grade debt securities
(securities rated at least Baa by Moody's or BBB by S&P or, if unrated, of
comparable quality as determined by the Adviser or Sub-Adviser). Securities
rated Baa are considered by Moody's as medium-grade obligations which lack
outstanding investment characteristics and in fact have speculative
characteristics as well, while securities rated BBB are regarded by S&P as
having an adequate capacity to pay principal and interest. However, the Fund may
invest up to 5% of its net asset in debt securities that are rated below
investment grade but rated B or higher by Moody's or S&P (or, if unrated,
determined by the Adviser or the Sub-Adviser to be of comparable quality). Such
securities are sometimes referred to as "high yield" or "junk" bonds. See
"Investment Policies and Restrictions -- High Yield Securities" in the Statement
of Additional Information for a discussion of the risks of investing in high
yield securities. See Appendix A to the Statement of Additional Information for
a description of Moody's and S&P ratings applicable to fixed income securities.
Global Fund may invest in securities issued anywhere in the world,
including the United States. Under normal conditions, the Fund will be invested
in at least three different countries, one of which may be the United States.
Subject to the requirement that Global Fund may not invest 25% or more of its
total assets in obligations issued by the government of any one country (other
than the United States), there is no limit on the amount the Fund may invest in
any one country, or in securities denominated in the currency of any one
country, to take advantage of what the Sub-Adviser believes to be favorable
yields, currency exchange conditions or total investment return potential.
Depending on the Sub-Adviser's current opinion as to the proper allocation of
assets among domestic and foreign issuers, investments in the securities of
issuers located outside the United States will normally vary between 25% and 75%
of the Fund's assets.
The Fund may invest in securities denominated in the currencies of
countries that the Sub-Adviser considers to have stable governments and in debt
securities denominated in multi-national currency units, such as the European
Currency Unit ("ECU"). The ECU is a "basket" consisting of specified amounts of
the currencies of certain of the 12-member states of the European Community.
Securities of issuers within a given country may be denominated in the currency
of another country.
The Sub-Adviser will actively manage the allocation of the Fund's
investments among countries, geographic regions and currency denominations in an
attempt to achieve the Fund's objective. In allocating the Fund's assets among
various markets, the Sub-Adviser will consider such factors as the relative
yields and anticipated direction of interest rates in particular markets, the
level of inflation, liquidity and financial soundness of each country or market,
the general market and economic conditions existing in each country or market,
and the relationship of currencies of various countries to the U.S. dollar and
to each other. In its evaluations, the Sub-Adviser will utilize its internal
financial, economic, and credit analysis resources as well as information
obtained from other sources. The Fund's share price and yield will fluctuate due
to the movement of foreign currencies against the U.S. dollar and changes in
world wide interest rates and fixed-income markets. By actively managing the
portfolio and using currency hedging techniques, however, the Sub-Adviser will
attempt to reduce the risks.
Global Fund may buy or sell interest rate futures contracts, options on
interest rate futures contracts and options on debt securities for the purpose
of hedging against changes in the value of securities which the Fund owns or
anticipates purchasing due to anticipated changes in interest rates. The Fund
also may engage in foreign currency exchange transactions by means of buying and
selling foreign currency options, foreign currency futures, and options of
foreign currency futures. Foreign currency exchange transactions may be entered
into for the purpose of hedging against foreign currency exchange risk arising
from the Fund's investment or anticipated investment in securities denominated
in foreign currencies. Global Fund also may enter into foreign currency forward
contracts and buy or sell foreign currencies or foreign currency options for
purposes of increasing exposure to a particular foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. The Fund
may enter into swap agreements for purposes of attempting to obtain a particular
investment return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that provided that desired return. In addition, the
Fund may purchase and sell securities on a when-issued or delayed-delivery basis
and enter into forward commitments to purchase securities, lend its securities
to brokers, dealers and other financial institutions to earn income, and enter
into reverse repurchase agreements as a means of borrowing money for investment
purposes. See "Risks and Characteristics of Securities and Investment
Techniques" for a description of these techniques and the risks involved in
their use.
Investing in foreign securities involves certain special considerations
which are not typically associated with investing in U.S. securities. See "Risks
and Characteristics of Securities and Investment Techniques -- Foreign
Securities."
DURATION
Duration is a measure of the expected life of a fixed income security
that was developed as a more precise alternative to the concept of "term to
maturity." Duration incorporates a bond's yield, coupon interest payments, final
maturity and call features into one measure. Duration is one of the fundamental
tools used by the ^Adviser, and with respect to Global Fund, the Sub-Adviser, in
portfolio selection for the Funds. With respect to Global Fund, the Sub-Adviser
manages the over-all duration of the portfolio, and the Adviser and Sub-Adviser
jointly determine the duration of the U.S. securities held by the Fund.
Traditionally, a debt security's "term to maturity" has been used as a
proxy for the sensitivity of the security's price to changes in interest rates
(which is the "interest rate risk" or "volatility" of the security). However,
"term to maturity" measures only the time until a debt security provides its
final payment, taking no account of the pattern of the security's payments prior
to maturity. Duration is a measure of the expected life of a fixed income
security on a present value basis. Duration takes the length of the time
intervals between the present time and the time that the interest and principal
payments are scheduled or, in the case of a callable bond, expected to be
received, and weights them by the present values of the cash to be received at
each future point in time. For any fixed income security with interest payments
occurring prior to the payment of principal, duration is always less than
maturity. In general, all other things being equal, the lower the stated or
coupon rate of interest of a fixed income security, the longer the duration of
the security; conversely, the higher the stated or coupon rate of interest of a
fixed income security, the shorter the duration of the security.
Futures, options and options on futures have durations which, in
general, are closely related to the duration of the securities which underlie
them. Holding long futures or call option positions (backed by a segregated
account of cash and cash equivalents) will lengthen a Fund's duration by
approximately the same amount as holding an equivalent amount of the underlying
securities. Short futures or put option positions have durations roughly equal
to the negative duration of the securities that underlie these positions and
have the effect of reducing portfolio duration by approximately the same amount
as selling an equivalent amount of the underlying securities.
There are some situations where even the standard duration calculation
does not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or more
years; however, their interest rate exposure corresponds to the frequency of the
coupon reset. Another example where the interest rate exposure is not properly
captured by duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is up to 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure. Deviations from these estimates in
the actual prepayments experienced, however, may significantly affect the
ultimate maturity of the security and, in such an event, the maturity, duration
and risk characteristics of the security may be significantly greater or less
than intended.
TEMPORARY INVESTMENTS
Each Fund may retain cash or invest in short-term money market
instruments when economic or market conditions are such that the Adviser deems a
temporary defensive position to be appropriate. In addition, even when a Fund is
fully invested, normally up to 5% of the Fund's total assets will be held in
short-term money market securities and cash to pay redemption requests and Fund
expenses. Investments in short-term money market securities may include
obligations of the U.S. Government and its agencies and instrumentalities, time
deposits, bank certificates of deposit, bankers' acceptances, high-grade
commercial paper and other money market instruments. Municipal Fund's
investments in short-term money market instruments may include both taxable and
tax-exempt obligations. To the extent Municipal Fund invests during temporary
defensive periods in taxable investments, the Fund will not at such times be in
a position to achieve its investment objective of tax-exempt income. Short
Government Fund's and Intermediate Government Fund's investments in short-term
money market securities will be limited to obligations of the U.S. Government
and its agencies and instrumentalities. See "Investment Objectives, Policies and
Restrictions" in the Statement of Additional Information.
RISKS AND CHARACTERISTICS OF SECURITIES
AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities
and investment techniques used by the Funds, and discusses certain concepts
relevant to the investment policies of the Funds. Additional information about
the Funds' investments and investment practices may be found in the Statement of
Additional Information.
GENERAL
The different types of securities and investment techniques used by the
Funds all have attendant risks of varying degrees. For example, with respect to
debt securities, including money market instruments, there is the risk that the
issuer of a security may not be able to meet its obligation to make scheduled
interest or principal payments. In addition, the value of debt securities
generally rises and falls inversely with interest rates, and the longer the
maturity or duration of the debt security, the more volatile it may be in terms
of changes in current value. Because each Fund seeks a different investment
objective and has different investment policies, each is subject to varying
degrees of financial, market and credit risks. Therefore, investors should
carefully consider the investment objective, investment policies and potential
risks of any Fund before investing. Certain types of investments and investment
techniques that may be used by the Funds are described in greater detail,
including the risks of each, in this section.
U.S. GOVERNMENT SECURITIES
Each Fund other than Municipal Fund may invest in U.S. Government
Securities. U.S. Government Securities are issued or guaranteed as to payment of
principal and interest by the U.S. Government, its agencies or
instrumentalities. THE CURRENT MARKET PRICES FOR SUCH SECURITIES ARE NOT
GUARANTEED AND WILL FLUCTUATE AS WILL THE NET ASSET VALUE OF THE FUNDS. Some
U.S. Government Securities, such as Treasury bills, notes and bonds and
securities guaranteed by the Government National Mortgage Association ("GNMA"),
are supported by the full faith and credit of the United States; others, such as
those of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury; others, such as those of the Federal National
Mortgage Association ("FNMA"), are supported by the discretionary authority of
the U.S. Government to purchase the agency's obligations, and still others are
supported only by the credit of the instrumentality.
U.S. Government Securities include securities that have no coupons, or
have been stripped of their unmatured interest coupons, individual interest
coupons from such securities that trade separately and evidences of receipt of
such securities. Such securities may pay no cash income and are purchased at a
deep discount from their value at maturity. Because interest on zero coupon
securities is not distributed on a current basis but is, in effect, compounded,
zero coupon securities tend to be subject to greater market risk than
interest-paying securities of similar maturities. Custodial receipts issued in
connection with so called trademark zero coupon securities, such as CATs and
TIGRs, are not issued by the U.S. Treasury, and are therefore not U.S.
Government Securities, although the underlying bond represented by such receipt
is a debt obligation of the U.S. Treasury. Other zero coupon Treasury securities
(STRIPs and CUBEs) are direct obligations of the U.S. Government.
CORPORATE FIXED-INCOME SECURITIES
Short Duration ^Fund, Intermediate Duration Fund and Global Fund may
invest in corporate fixed-income securities, which include corporate bonds,
debentures, notes and other similar corporate debt instruments, including
convertible securities. Fixed-income securities may be acquired with warrants
attached. Corporate income-producing securities may also include forms of
preferred or preference stock. The rate of return or return of principal on some
fixed-income obligations may be linked or indexed to the level of exchange rates
between the U.S. dollar and a foreign currency or currencies. See "Foreign Index
Linked Securities," below.
The Funds' investments in corporate fixed-income securities may also
include zero coupon, pay-in-kind and delayed interest securities. Zero coupon
securities pay no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held to maturity,
their entire return comes from the difference between their purchase price and
their maturity value. Pay-in-kind securities pay interest through the issuance
to the holders of additional securities. Delayed interest securities are
securities that remain zero coupon securities until a predetermined date at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Because interest on zero coupon, pay-in-kind and delayed
interest securities is not paid on a current basis, the values of securities of
this type are subject to greater fluctuations than the values of securities that
distribute income regularly and they may be more speculative than such
securities. Accordingly, the values of these securities may be highly volatile
as interest rates rise or fall. In addition, a Fund's investments in zero
coupon, pay-in-kind and delayed interest securities will result in special tax
consequences. Although zero coupon securities do not make interest payments, for
tax purposes a portion of the difference between a zero coupon security's
maturity value and its purchase price is taxable income of the Fund each year.
MORTGAGE-RELATED SECURITIES
Each Fund's investments in U.S. Government Securities may include
investments in mortgage-related securities. In addition, Government Mortgage
Fund, Short Duration ^Fund, Intermediate Duration Fund and Global Fund may
invest in mortgage-related securities issued by private issuers.
Mortgage-related securities, as the term is used in this Prospectus, include
mortgage pass-through securities, adjustable rate mortgage securities and
derivative mortgage securities such as collateralized mortgage obligations and
stripped mortgage-backed securities. The investment characteristics of
mortgage-related securities differ from those of traditional fixed-income
securities. The major differences include the fact that interest payments and
principal repayments on mortgage-related securities are made more frequently
(usually monthly), and principal may be prepaid at any time because the
underlying mortgage loans or other assets generally may be prepaid at any time.
These differences can result in significantly greater price and yield volatility
than is the case with traditional fixed-income securities. As a result, if a
Fund purchases mortgage-related securities at a premium, a prepayment rate that
is faster than expected will reduce both the market value and the yield to
maturity from that which was anticipated, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity and
market value. Conversely, if a Fund purchases mortgage-related securities at a
discount, faster than expected prepayments will increase, while slower than
expected prepayments will reduce, yield to maturity and market value.
Mortgage pass-through securities are securities representing interests
in "pools" of mortgage loans secured by residential or commercial real property
in which payments of both interest and principal on the securities are generally
made monthly, in effect "passing through" monthly payments made by the
individual borrowers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities).
Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case of
securities guaranteed by GNMA); or guaranteed by agencies or instrumentalities
of the U.S. Government (in the case of securities guaranteed by FNMA or the
Federal Home Loan Mortgage Corporation ("FHLMC"), which guarantees are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations). Mortgage-related securities created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance and letters of credit, which
may be issued by governmental entities, private insurers or the mortgage
poolers.
Adjustable rate mortgage securities ("ARMS") are pass-through mortgage
securities collateralized by mortgages with interest rates that are adjusted
from time to time. The adjustments usually are determined in accordance with a
predetermined interest rate index and may be subject to certain limits. While
values of ARMS, like other fixed-income securities, generally vary inversely
with changes in market interest rates (increasing in value during periods of
declining interest rates and decreasing in value during periods of increasing
interest rates), the values of ARMS should generally be more resistant to price
swings than other fixed-income securities because the interest rates of ARMS
move with market interest rates. The adjustable rate feature of ARMS will not,
however, eliminate fluctuations in the prices of ARMS, particularly during
periods of extreme fluctuations in interest rates. Also, since many adjustable
rate mortgages only reset on an annual basis, it can be expected that the prices
of ARMS will fluctuate to the extent that changes in prevailing interest rates
are not immediately reflected in the interest rates payable on the underlying
adjustable rate mortgages.
Collateralized mortgage obligations ("CMOs") are derivative
mortgage-related instruments. CMOs may be collateralized by whole mortgage loans
but are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured into multiple
classes, with each class bearing a different stated maturity. The principal and
interest payments on the underlying mortgages or mortgage pass-through
securities may be allocated among the several classes of a CMO in many ways. For
example, certain tranches may have variable or floating interest rates and
others may be stripped securities which provide only the principal or interest
feature of the underlying security. Generally, the purpose of the allocation of
the cash flow of a CMO to the various classes is to obtain a more predictable
cash flow to certain of the individual classes than exists with the underlying
collateral of the CMO. As a general rule, the more predictable the cash flow is
on a CMO class, the lower the anticipated yield will be on that tranche at the
time of issuance relative to prevailing market yields on mortgage-related
securities. As part of the process of creating more predictable cash flows on
most of the classes of a CMO, one or more tranches generally must be created
that absorb most of the volatility in the cash flows on the underlying mortgage
loans. The yields on these classes are generally higher than prevailing market
yields on mortgage-related securities with similar maturities. As a result of
the uncertainty of the cash flows of theses classes, the market prices of and
yields on the classes are generally more volatile. The Funds will not invest in
classes that the Adviser believes have risk characteristics greater than those
of the underlying collateral, including any classes that have an imbedded
leverage component. Classes in which the Funds will not invest include
"interest-only" or "IO" tranches, "principal only" or "PO" tranches, "inverse
floaters," "companion bonds," "z-tranches" and "inverse IOs." The Funds also
will not invest in stripped mortgage-backed securities.
CMOs that are issued or guaranteed by the U.S. Government or by any of
its agencies or instrumentalities will be considered U.S. Government Securities
by the Funds, while other CMOs, even if collateralized by U.S. Government
Securities, will have the same status as other privately issued securities for
purposes of applying a Fund's investment policies.
ASSET-BACKED SECURITIES
Short Duration ^Fund, Intermediate Duration Fund and Global Fund may
invest in asset-backed securities. Such securities represent the application of
the securitization techniques used to develop mortgage-related securities to a
broad range of other assets. Through the use of trusts and special purpose
corporations, various types of assets, primarily automobile and credit card
receivables and home equity loans, are being securitized in pass-through
structures similar to the mortgage pass-through structures described above or in
a pay-through structure similar to the CMO structure.
In general, the collateral supporting asset-backed securities is of
shorter maturity than mortgage loans and is less likely to experience
substantial prepayments. As with mortgage-related securities, asset-backed
securities are often backed by a pool of assets representing obligations of a
number of different parties and use various credit enhancement techniques.
Generally, asset-backed securities involve many of the risks associated
with mortgage-related securities; however, asset-backed securities involve
certain risks that are not posed by mortgage-related securities, resulting
mainly from the fact that asset-backed securities do not usually contain the
complete benefit of a security interest in the related collateral. For example,
credit card receivables generally are unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, including
the bankruptcy laws, some of which may reduce the ability to obtain full
payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds for repossessed collateral may not always be
sufficient to support payments on these securities.
FOREIGN SECURITIES
Short Duration ^Fund, Intermediate Duration Fund and Global Fund may
invest in foreign fixed income securities denominated in U.S. ^dollars and
Global Fund may also invest in non-dollar denominated foreign securities.
Investing in the securities of foreign issuers involves special risks and
considerations not typically associated with investing in U.S. companies. These
include differences in accounting, auditing and financial reporting standards;
generally higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory taxation; adverse
changes in investment or exchange control regulations (which may include
suspension of the ability to transfer currency from a country); and political
instability which could affect U.S. investments in foreign countries.
Additionally, foreign securities and dividends and interest payable on those
securities may be subject to foreign taxes, including taxes withheld from
payments on those securities. Foreign securities often trade with less frequency
and volume than domestic securities and therefore may exhibit greater price
volatility. Additional costs associated with an investment in foreign securities
may include higher custodial fees than domestic custodial ^arrangements and
transaction costs of foreign currency conversions. Changes in foreign exchange
rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar.
Depository Receipts and Depository Shares. Short Duration ^Fund,
Intermediate Duration Fund and Global Fund may invest in American Depository
Receipts ("ADRs") or other similar securities, such as American Depository
Shares, convertible into securities of foreign issuers. These securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by a U.S. bank or
trust company evidencing ownership of the underlying securities. Generally,
ADRs, in registered form, are designed for use in U.S. securities markets. As a
result of the absence of established securities markets and publicly owned
corporations in certain foreign countries as well as restrictions on direct
investment by foreign entities, the Funds may be able to invest in such
countries solely or primarily through ADRs or similar securities and government
approved investment vehicles. No more than 5% of a Fund's assets will be
invested in ADRs sponsored by persons other than the underlying issuers. Issuers
of the stock of such unsponsored ADRs are not obligated to disclose material
information in the United States and, therefore, there may not be a correlation
between such information and the market value of such ADRs.
^These Funds may also invest in Global Depository Receipts and Global
Depository Shares which are typically issued in bearer form and are designed for
use in European and other international securities markets.
Supranational Organizations. Short Duration ^Fund, Intermediate
Duration Fund and Global Fund may invest in fixed-income securities issued or
guaranteed by supranational organizations. Such organizations are entities
designated or supported by a government or government entity to promote economic
development, and include, among others, the Asian Development Bank, the European
Coal and Steel Community, the European Economic Community and the World Bank.
These organizations do not have taxing authority and are dependent upon their
members for payments of interest and principal. Each supranational entity's
lending activities are limited to a percentage of its total capital (including
"callable capital" contributed by members at the entity's call), reserves and
net income. Securities issued by supranational organizations may be denominated
in U.S. dollars or in foreign currencies. Short Duration Fund and Intermediate
Duration Fund will invest only in those securities denominated in U.S. dollars.
Global Fund is subject to no such limitation.
Brady Bonds. Short Duration ^Fund, Intermediate Duration Fund and
Global Fund may invest in Brady Bonds, which are created through the exchange of
existing commercial bank loans to foreign entities for new obligations in
connection with debt restructuring under a plan introduced by former U.S.
Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan"). Brady Bonds
have been issued only recently and, accordingly, do not have a long payment
history. They may be collateralized or uncollateralized and issued in various
currencies (although most are dollar-denominated) and they are actively traded
in the over-the-counter secondary market.
FOREIGN INDEX LINKED SECURITIES
Short Duration ^Fund, Intermediate Duration Fund and Global Fund each
may invest up to 10% of its total assets in instruments that return principal
and/or pay interest to investors in amounts which are linked to the level of a
particular foreign index ("Foreign Index Linked Securities"). A foreign index
may be based upon the exchange rate of a particular currency or currencies or
the differential between two currencies, or the level of interest rates in a
particular country or countries or the differential in interest rates between
particular countries. In the case of Foreign Index Linked Securities linking the
principal amount to a foreign index, the amount of principal payable by the
issuer at maturity will increase or decrease in response to changes in the level
of the foreign index during the term of the Foreign Index Linked Securities. In
the case of Foreign Index Linked Securities linking the interest component to a
foreign index, the amount of interest payable will adjust periodically in
response to changes in the level of the foreign index during the term of the
Foreign Index Linked Security. Foreign Index Linked Securities may be issued by
a U.S. or foreign governmental agency or instrumentality or by a private
domestic or foreign issuer. Only Foreign Index Linked Securities issued by
foreign governmental agencies or instrumentalities or by foreign issuers will be
considered foreign securities for purposes of the Funds' investment policies and
restrictions.
Foreign Index Linked Securities may offer higher yields than comparable
securities linked to purely domestic indexes but also may be more volatile.
Foreign Index Linked Securities are relatively recent innovations for which the
market has not yet been fully developed and, accordingly, they typically are
less liquid than comparable securities linked to purely domestic indexes. In
addition, the value of Foreign Index Linked Securities will be affected by
fluctuations in foreign exchange rates or in foreign interest rates. If the
Adviser is incorrect in its prediction as to the movements in the direction of
particular foreign currencies or foreign interest rates, the return realized by
a Fund on Foreign Index Linked Securities may be lower than if the Fund had
invested in a similarly rated domestic security.
MUNICIPAL OBLIGATIONS
Municipal Fund invests substantially all of its total assets in
tax-exempt Municipal Obligations. Municipal Obligations, as the term is used in
this prospectus, include Municipal Debt Securities, Derivative Municipal
Obligations and Municipal Lease Obligations, as defined below.
The yields on Municipal Obligations are dependent on a variety of
factors, including the financial condition of the issuer or other obligor
thereon or the revenue source from which debt service is payable, general
economic and monetary conditions, conditions in the relevant market, the size of
a particular issue, maturity of the obligation and the rating of the issue.
Generally, Municipal Obligations of longer maturity produce higher current
yields than municipal securities with shorter maturities but are subject to
greater price fluctuation due to changes in interest rates, tax laws and other
general market factors. Lower-rated Municipal Obligations generally produce a
higher yield than higher-rated Municipal Obligations due to the perception of a
greater degree of risk as to the payment of principal and interest. Certain
Municipal Obligations held by the Fund may permit the issuer at its option to
"call," or redeem, its securities. If an issuer were to redeem securities held
by the Fund during a time of declining interest rates, the Fund might not be
able to reinvest the proceeds in securities providing the same investment return
as the securities redeemed.
Municipal Obligations are subject to the provisions of bankruptcy,
insolvency, reorganization and other laws affecting the rights and remedies of
creditors, such as the federal Bankruptcy Code, and laws, if any, which may be
enacted by Congress or the applicable state legislature extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations. There is also the possibility that as a result
of litigation or other conditions the power or ability of issuers to meet their
obligations for the payment of interest on and principal of their Municipal
Obligations may be materially affected. THE CURRENT MARKET PRICES FOR SUCH
SECURITIES ARE NOT GUARANTEED AND WILL FLUCTUATE AS WILL THE NET ASSET VALUE OF
THE FUNDS.
Municipal Debt Securities. Municipal Debt Securities include
fixed-income obligations issued by states, cities, local authorities, and
possessions and certain territories of the United States, to obtain funds for
various public purposes, including the construction of such public facilities as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets and water and sewer works. Other public purposes for which Municipal
Debt Securities may be issued include the refinancing of outstanding obligations
and the obtaining of funds for general operating expenses and for loans to other
public institutions and facilities. In addition, certain industrial development,
private activity and pollution control bonds may be included within the term
Municipal Debt Securities if the interest paid thereon qualifies as exempt from
federal income tax. Municipal Debt Securities include long-term obligations,
often called municipal bonds, as well as short-term municipal notes and
tax-exempt commercial paper.
The two principal classifications of municipal bonds are "general
obligations" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full 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 special excise or other specific revenue source. Industrial
development, private activity and pollution control bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of such bonds. There are, of course, variations in the
security of Municipal Debt Securities, both within a particular classification
and between classifications, depending on numerous factors.
Certain Municipal Debt Securities may carry variable or floating rates
of interest whereby the rate of interest is not fixed but varies with changes in
specified market rates or indexes, such as a bank prime rate or a tax-exempt
money market index. Accordingly, the yield on such obligations can be expected
to fluctuate with changes in prevailing interest rates.
Other Municipal Debt Securities are zero coupon securities, which are
debt obligations which do not entitle the holder to any periodic payments prior
to maturity and are issued and traded at a discount from their face amounts. The
discount varies depending on the time remaining until maturity, prevailing
interest rates, liquidity of the security and perceived credit quality of the
issuer. The market prices of zero coupon securities are generally more volatile
than the market prices of securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree than do
securities having similar maturities and credit quality that do pay periodic
interest.
Derivative Municipal Obligations. Municipal Fund may also acquire
Derivative Municipal Obligations, which are custodial receipts or certificates
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain Municipal Debt
Securities. The underwriter of these certificates or receipts typically
purchases Municipal Debt Securities and deposits the securities in an
irrevocable trust or custodial account with a custodian bank, which then issues
receipts or certificates that evidence ownership of the periodic unmatured
coupon payments and the final principal payment on the obligations. Although
under the terms of a custodial receipt Municipal Fund typically would be
authorized to assert its rights directly against the issuer of the underlying
obligation, Municipal Fund could be required to assert through the custodian
bank those rights as may exist against the underlying issuer. Thus, in the event
the underlying issuer fails to pay principal and/or interest when due, Municipal
Fund may be subject to delays, expenses and risks that are greater than those
that would have been involved if Municipal Fund had purchased a direct
obligation of the issuer. In addition, in the event that the trust or custodial
account in which the underlying security had been deposited is determined to be
an association taxable as a corporation, instead of a non-taxable entity, it
would be subject to state income tax (but not federal income tax) on the income
it earned on the underlying security, and the yield on the security paid to
Municipal Fund and its shareholders would be reduced by the amount of taxes
paid. Furthermore, amounts paid by the trust or custodial account to Municipal
Fund would lose their tax-exempt character and become taxable, for federal and
state purposes, in the hands of Municipal Fund and its shareholders. However,
custodial receipts in which Municipal Fund will invest will be accompanied by a
tax opinion stating that interest payable on the receipts is tax exempt. If
Municipal Fund invests in custodial receipts, it is possible that a portion of
the discount at which Municipal Fund purchases the receipts might have to be
accrued as taxable income during the period that Municipal Fund holds the
receipts. See "Taxes -- Municipal Fund" in the Statement of Additional
Information.
The principal and interest payments on the Municipal Debt Securities
underlying custodial receipts may be allocated in a number of ways. For example,
payments may be allocated such that certain custodial receipts may have variable
or floating interest rates and others may be stripped securities which pay only
the principal or interest due on the underlying Municipal Debt Securities.
Municipal Fund currently does not invest in "interest only" or "principal only"
custodial receipts or in "inverse floating obligations." Municipal Fund may
invest in floating rate custodial receipts without limitation.
Derivative Municipal Obligations also include Municipal Debt Securities
that contain embedded instruments such as interest rate swaps, caps or floors
purchased by the issuing municipalities. By combining a fixed-rate, long-term
bond with an interest rate contract, a municipal issuer is able to issue a tax
exempt bond that will provide a partial hedge against interest fluctuations. For
example, if Municipal Fund purchases a Municipal Debt Security containing an
interest rate cap, during the term of the embedded cap Municipal Fund receives
the coupon rate on the underlying long-term bond less the cost of the cap for so
long as interest rates remain below the level of the cap. When interest rates
rise above that level, Municipal Fund receives the long-term bond coupon less
the cost of the cap plus the amount by which an index specified in the cap
agreement exceeds the cap level. This type of instrument would allow Municipal
Fund to hedge against a rise in interest rates. Municipal Fund will purchase
such obligations only if accompanied by a tax opinion stating that the entire
amount of interest payable on the obligation is tax exempt. Because final
Treasury Regulations have not been adopted with respect to these types of hybrid
obligations, however, it is possible that the Internal Revenue Service might
find a portion of the interest to be taxable. In addition, such obligations may
not be readily marketable.
Types of Derivative Municipal Obligations other than those described
above can be expected to be developed and marketed from time to time. Consistent
with its investment limitations, Municipal Fund expects to invest in those new
types of Derivative Municipal Obligations that the Adviser believes may assist
Municipal Fund in achieving its investment objective. Municipal Fund will notify
its shareholders to the extent that it intends to invest more than 5% of its net
assets in such obligations.
Municipal Lease Obligations. Also included within the general category
of Municipal Obligations are lease obligations or installment purchase contract
obligations and participations therein issued by tax-exempt issuers such as
state and local governments and their agencies and instrumentalities to finance
the acquisition of equipment and facilities (hereinafter collectively called
"Municipal Lease Obligations"). Although Municipal Lease Obligations do not
constitute general obligations of the issuer for which such issuer's taxing
power is pledged, a Municipal Lease Obligation is ordinarily backed up by the
issuer's covenant to budget for, appropriate and make the payments due under the
obligation. However, certain Municipal Lease Obligations contain
"non-appropriation" clauses which provide that the issuer has no obligation to
make lease or installment purchase payments in future years unless money is
appropriated for such purpose on a yearly basis. In the case of a
"non-appropriation" lease, Municipal Fund's ability to recover under the lease
in the event of non-appropriation or default will be limited solely to the
repossession of the leased property, without recourse to the general credit of
the lessee, and disposition of the property in the event of foreclosure might
prove difficult. In determining Municipal Lease Obligations in which Municipal
Fund will invest, the Adviser will carefully evaluate the outstanding credit
rating of the issuer (and the probable secondary market acceptance of such
credit rating). Municipal Lease Obligations, except in certain circumstances,
are considered illiquid by the staff of the Securities and Exchange Commission.
Municipal Lease Obligations held by Municipal Fund will be treated as illiquid
unless they are determined to be liquid pursuant to guidelines established by
the Board of Directors. See "Illiquid Securities," below.
HEDGING TECHNIQUES
To the extent permitted by the investment objectives and policies of
the Funds, the Funds may purchase and sell put and call options on securities
and securities indexes and enter into futures contracts and use options on
futures contracts as further described below. Certain Funds also may enter into
swap agreements with respect to interest rates and securities indexes. The Funds
may use these techniques to hedge against changes in interest rates or
securities prices, to generate income, to facilitate allocation of a Fund's
investments among asset classes or otherwise as part of their overall investment
strategies. The Funds will maintain segregated accounts consisting of cash, U.S.
Government Securities, or other high grade liquid debt obligations (or, as
permitted by applicable regulation, enter into certain offsetting positions) to
cover their obligations under options and futures contracts to avoid leveraging
of the Funds. The use of futures and options by Municipal Fund can be expected
to result in taxable income or gain to the Fund.
Options. A Fund may purchase put options on securities to protect
holdings on an underlying or related security against a substantial decline in
market value. A Fund may purchase call options on securities to protect against
substantial increases in prices of securities the Fund intends to purchase
pending its ability to invest in such securities in an orderly manner. A Fund
may sell put or call options it has previously purchased, which could result in
a net gain or loss depending on whether the amount realized on the sale is more
or less than the premium and other transaction costs paid on the put or call
option which is sold. A Fund may write a call or put option only if the option
is "covered" by the Fund holding a position in the underlying securities or by
other means which would permit immediate satisfaction of the Fund's obligation
as writer of the option. Prior to exercise or expiration, an option may be
closed out by an offsetting purchase or sale of an option of the same series.
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase above the
exercise price in the underlying securities, but, as long as its obligation as a
writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot effect
a closing purchase transaction in order to terminate its obligation under the
option and must deliver the underlying securities at the exercise price. If a
put or call option purchased by a Fund is not sold when it has remaining value,
and if the market price of the underlying security, in the case of a put,
remains equal to or greater than the exercise price or, in the case of a call,
remains less than or equal to the exercise price, the Fund will lose its entire
investment in the option. Also, where a put or call option on a particular
security is purchased to hedge against price movements in a related security,
the price of the put or call option may move more or less than the price of the
related security. There can be no assurance that a liquid market will exist when
a Fund seeks to close out an option position. Furthermore, if trading
restrictions or suspensions are imposed on the options markets, a Fund may be
unable to close out a position.
The Funds may purchase and sell both exchange traded options and
over-the-counter options. Over-the-counter options differ from traded options in
that they are two-party contracts with price and other terms negotiated between
buyer and seller and generally do not have as much market liquidity as
exchange-traded options.
Swap Agreements. Short Duration ^Fund, Intermediate Duration Fund and
Global Fund may enter into interest rate and index swap agreements for purposes
of attempting to obtain a particular desired return at a lower cost to such
Funds than if such Funds had invested directly in an instrument that yielded
that desired return. Swap agreements are two-party contracts entered into
primarily by institutional investors for periods ranging from a few weeks to
more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on
particular predetermined investments or instruments. The gross returns to be
exchanged or "swapped" between the parties are calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate or in a "basket" of
securities representing a particular index. Commonly used swap agreements
include interest rate caps, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates exceed a
specified rate, or "cap;" interest rate floors, under which, in return for a
premium, one party agrees to make payments to the other to the extent that
interest rates fall below a specified level, or "floor;" and interest rate
collars, under which a party sells a cap and purchases a floor or vice versa in
an attempt to protect itself against interest rate movements exceeding given
minimum or maximum levels.
The "notional amount" of the swap agreement is only a fictive basis on
which to calculate the obligations which the parties to a swap agreement have
agreed to exchange. Most swap agreements entered into by the Funds would
calculate the obligations of the parties to the agreement on a "net basis."
Consequently, a Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). A Fund's obligations under a swap agreement
will be accrued daily (offset against amounts owed to the Fund) and any accrued
but unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash, U.S. Government
Securities, or high grade debt obligations, to avoid any potential leveraging of
the Fund's portfolio. A Fund will not enter into a swap agreement with any
single party if the net amount owed or to be received under existing contracts
with that party would exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in
furthering its investment objective will depend on the Adviser's ability to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two-party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Adviser will cause a Fund to
enter into swap agreements only with counterparties that would be eligible for
consideration as repurchase agreement counterparties under the Fund's repurchase
agreement guidelines. Certain restrictions imposed on the Funds by the Internal
Revenue Code may limit the Funds' ability to use swap agreements. The swaps
market is a relatively new market and is largely unregulated. It is possible
that developments in the swaps market, including potential government
regulation, could adversely affect a Fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Futures Contracts and Options on Futures Contracts. Certain of the
Funds may invest, as set forth under "Investment Objectives and Policies," in
interest rate futures contracts, stock index futures contracts and options
thereon ("futures options") that are traded on a United States exchange or board
of trade.
There are several risks associated with the use of futures and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the portfolio
securities being hedged. An incorrect correlation could result in a loss on both
the hedged securities in a Fund and the hedging vehicle so that the portfolio
return might have been greater had hedging not been attempted. There can be no
assurance that a liquid market will exist at a time when a Fund seeks to close
out a futures contract or a futures option position. Most futures exchanges and
boards of trade limit the amount of fluctuation permitted in futures contract
prices during a single day; once the daily limit has been reached on a
particular contract, no trades may be made that day at a price beyond that
limit. In addition, certain of these instruments are relatively new and without
a significant trading history. As a result, there is no assurance that an active
secondary market will develop or continue to exist. Lack of a liquid market for
any reason may prevent a Fund from liquidating an unfavorable position and the
Fund would remain obligated to meet margin requirements until the position is
closed.
The Funds will only enter into futures contracts or futures options
which are standardized and traded on a U.S. exchange or board of trade, or
similar entity, or quoted on an automated quotation system. Each Fund will use
financial futures contracts and related options only for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the Commodity
Futures Trading Commission. With respect to positions in financial futures and
related options that do not qualify as "bona fide hedging" positions, each Fund
will enter such non-hedging positions only to the extent that aggregate initial
margin deposits plus premiums paid by it for open futures option positions, less
the amount by which any such positions are "in-the-money," would not exceed 5%
of the Fund's total assets.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments in
different countries, actual or perceived changes in interest rates and other
complex factors, as seen from an international perspective. Currency exchange
rates also can be affected unpredictably by intervention by U.S. or foreign
governments or central banks or the failure to intervene, or by currency
controls or political developments in the U.S. or abroad.
Global Fund may, in addition to buying and selling foreign currency
futures contracts and options on foreign currencies and foreign currency
futures, enter into forward foreign currency exchange contracts to reduce the
risks of adverse changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific currency
at a future date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time of the contract.
By entering into a forward foreign currency contract, the Fund "locks in" the
exchange rate between the currency it will deliver and the currency it will
receive for the duration of the contract. As a result, the Fund reduces its
exposure to changes in the value of the currency it will deliver and increases
its exposure to changes in the value of the currency it will exchange into. The
effect on the value of the Fund is similar to selling securities denominated in
one currency and purchasing securities denominated in another. The Fund may
enter into these contracts for the purpose of hedging against foreign exchange
risk arising from the Fund's investment or anticipated investment in securities
denominated in foreign currencies. Global Fund may also enter into these
contracts for purposes of increasing exposure to a foreign currency or to shift
exposure to foreign currency fluctuations from one country to another. For
additional information, see "Investment Policies and Restrictions -- Foreign
Currency Transactions" in the Statement of Additional Information.
REPURCHASE AGREEMENTS
For the purpose of achieving income, each Fund may enter into
repurchase agreements with respect to any securities which it may acquire
consistent with its investment policies and restrictions. Repurchase agreements
are transactions by which a portfolio purchases a security and simultaneously
commits to resell that security to the seller (a bank or securities dealer) at
an agreed upon price on an agreed upon date (usually within seven days of
purchase). The resale price reflects the purchase price plus an agreed upon
market rate of interest which is unrelated to the coupon rate or date of
maturity of the purchased security. In these transactions, the securities
purchased by the Fund have a total value equal to or in excess of the repurchase
price and are held by the Fund's custodian bank until repurchased. Such
agreements permit the Fund to keep all its assets at work while retaining
"overnight" flexibility in pursuit of investments of a longer term nature. If
the party agreeing to repurchase should default, as a result of bankruptcy or
otherwise, the Fund will seek to sell the securities which it holds, which
action could involve procedural costs or delays in addition to a loss on the
securities if their value should fall below their repurchase price.
REVERSE REPURCHASE AGREEMENTS
Each Fund other than Short Government Fund and Intermediate Government
Fund may engage in "reverse repurchase agreements" with banks and securities
dealers. Reverse repurchase agreements will be used as a means of borrowing for
investment purposes. A reverse repurchase agreement involves the sale of a
security by a Fund and its agreement to repurchase the instrument at a specified
time and price. At the time a Fund enters into a reverse repurchase agreement,
cash, U.S. Government Securities or other liquid high-grade debt obligations
having a value sufficient to make payments for the securities to be repurchased
will be segregated, and will be maintained throughout the period of the
obligation. The use of reverse repurchase agreements by a Fund creates leverage,
which increases a Fund's investment risk. If the income and gains on securities
purchased with the proceeds of reverse repurchase agreements exceed the cost of
the agreements, the Fund's earnings or net asset value will increase faster than
otherwise would be the case; conversely, if the income and gains fail to exceed
the cost, earnings or net asset value would decline faster than otherwise would
be the case.
WHEN-ISSUED SECURITIES
Each Fund may purchase securities on a "when-issued" basis and may
purchase or sell securities on a "forward commitment" basis. When such
transactions are negotiated, the price is fixed at the time the commitment is
made, but delivery and payment for the securities take place at a later date.
The Funds will not accrue income with respect to when-issued or forward
commitment securities prior to their stated delivery date. Pending delivery of
the securities, each Fund maintains in a segregated account cash or liquid
high-grade debt obligations in an amount sufficient to meet its purchase
commitments. The Funds will likewise segregate securities they sell on a forward
commitment basis.
The purchase of securities on a when-issued or forward commitment basis
exposes a Fund to risk because the securities may decrease in value prior to
their delivery. Purchasing securities on a when-issued or forward commitment
basis involves the additional risk that the return available in the market when
the delivery takes place will be higher than that obtained in the transaction
itself. Placing securities rather than cash in the segregated account referred
to in the previous paragraph may have a leveraging effect on a Fund's net asset
value per share; that is, to the extent that a Fund remains substantially fully
invested in securities at the same time that it has committed to purchase
securities on a when-issued or forward commitment basis, greater fluctuations in
its net asset value per share may occur than if it had set aside cash to satisfy
its purchase commitments.
MORTGAGE DOLLAR ROLLS
Consistent with their ability to purchase securities on a when-issued
or forward commitment basis, each Fund other than Municipal Fund may enter into
mortgage "dollar rolls" in which a Fund sells securities for delivery in the
current month and simultaneously contracts with the same counterparty to
repurchase similar (same type, coupon and maturity) but not identical securities
on a specified future date. The Fund entering into the dollar roll gives up the
right to receive principal and interest paid on the securities sold. However,
the Fund would benefit to the extent of any difference between the price
received for the securities sold and the lower forward price for the future
purchase plus any fee income received. Unless such benefits exceed the income,
capital appreciation and gain or loss due to mortgage prepayments that would
have been realized on the securities sold as part of the mortgage dollar roll,
the use of this technique will diminish the investment performance of a Fund
compared with what such performance would have been without the use of mortgage
dollar rolls. Each Fund entering into mortgage dollar roll transactions will
hold and maintain in a segregated account until the settlement date cash or
liquid high-grade debt securities in an amount equal to the forward purchase
price. The benefits derived from the use of mortgage dollar rolls may depend
upon the Adviser's ability to predict correctly mortgage prepayments and
interest rates. There is no assurance that mortgage dollar rolls can be
successfully employed. In addition, as discussed above with respect to
when-issued and forward commitment purchases, the use of mortgage dollar rolls
by a Fund while remaining substantially fully invested in securities may result
in greater fluctuations in the net asset value of a Fund's shares than would
have occurred had the Fund set aside cash to satisfy its purchase commitments.
BORROWING
Each Fund may borrow money from banks for temporary or emergency
purposes in an amount up to 20% of the value of the Fund's total assets. Reverse
repurchase agreements are not included in this limitation. See "Reverse
Repurchase Agreements" above. Interest paid by a Fund on borrowed funds would
decrease the net earnings of that Fund. None of the Funds will purchase
portfolio securities while outstanding borrowings (other than reverse repurchase
agreements) exceed 5% of the value of the Fund's total assets. Each ^Fund may
mortgage, pledge or hypothecate its assets to secure temporary or emergency
borrowing. The policies set forth in this paragraph are fundamental and may not
be changed with respect to a Fund without the approval of a majority of that
Fund's shares.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, each Fund other than Short
Government Fund and Intermediate Government Fund may lend portfolio securities
up to one-third of the value of its total assets to broker-dealers, banks or
other financial borrowers of securities. As with other extensions of credit
there are risks of delay in recovery or even loss of rights in the collateral
should the borrower of the securities fail financially. However, the Funds will
receive collateral in the form of cash, U.S. Government Securities or other
high-grade debt obligations equal to at least 100% of the value of the
securities loaned. The value of the collateral and of the securities loaned will
be marked to market on a daily basis. During the time portfolio securities are
on loan, the borrower pays the Fund an amount equivalent to any dividends or
interest paid on the securities and the Fund may invest the cash collateral and
earn additional income or may receive an agreed upon amount on interest income
from the borrower. However, the amounts received by the Fund may be reduced by
finders' fees paid to broker-dealers and related expenses.
ILLIQUID SECURITIES
Each Fund may invest up to 15% of its net assets in illiquid
securities. Illiquid securities may offer a higher yield than securities which
are more readily marketable but they may not always be marketable on
advantageous terms. "Restricted securities" are securities which were originally
sold in private placements without registration under the Securities Act of 1933
(the "1933 Act"). Such securities will not be subject to the 15% limitation if
they are eligible for resale under Rule 144A of the 1933 Act and if they are
determined to be liquid by the Board of Directors of the Company or by the
Adviser subject to the oversight of and pursuant to procedures adopted by the
Board of Directors. See "Investment Objectives, Policies and Restrictions --
Illiquid Investments" in the Statement of Additional Information. Similar
determinations may be made with respect to privately placed commercial paper and
Municipal Lease Obligations.
The sale of illiquid securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of securities eligible for trading on national securities
exchanges or in the over-the-counter markets. A Fund may be restricted in its
ability to sell such securities at a time when the Adviser deems it advisable to
do so. In addition, in order to meet redemption requests, a Fund may have to
sell other assets, rather than such illiquid securities, at a time which is not
advantageous.
PORTFOLIO TURNOVER
It is anticipated that under normal market conditions, the annual rate
of portfolio turnover will not exceed 100% for Municipal Fund, 150% for
Intermediate Government Fund, Government Mortgage Fund and Intermediate Duration
Fund, 300% for Short Government Fund and Short Duration Fund and ___% for Global
Fund. A 100% portfolio turnover rate would occur, for example, if all of the
securities in a Fund's portfolio (other than short-term securities) were
replaced once during the fiscal year. Portfolio turnover could be greater than
the rates indicated above in periods of unusual market movement and volatility.
A higher portfolio turnover rate would result in higher brokerage commissions or
other transactional expenses, which must be borne, directly or indirectly, by a
Fund and ultimately by the Fund's shareholders. For information on how portfolio
turnover rate is calculated, see "Investment Objectives and Policies -Portfolio
Turnover" in the Statement of Additional Information.
High portfolio turnover may result in a Fund accelerating the
realization of a gain and realizing more short-term capital gains than would be
the case if portfolio turnover were lower. Distributions of short-term capital
gains generally are taxed to shareholders as ordinary income. In addition, in
order for each Fund to maintain its status as a regulated investment company for
federal income tax purposes, it must limit the amount of gains from dispositions
of securities and certain other assets held less than three months to less than
30% of the Fund's gross income for the taxable year. High portfolio turnover may
result in more gains arising from sales of securities held less than three
months than in a situation in which portfolio turnover is lower. Although there
can be no assurance that a Fund will qualify as a regulated investment company
under the Internal Revenue Code of 1986, as amended (the"Code"), each Fund
intends to so qualify.
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment restrictions in addition to
those set forth above, which are set forth in their entirety in the Statement of
Additional Information. Certain of these restrictions are fundamental and cannot
be changed without shareholder approval, including the following: (1) A Fund
will not, with respect to 75% of its total assets, invest more than 5% of its
total assets (taken at market value at the time of such investment) in
securities of any one issuer, except that this restriction does not apply to
U.S. Government Securities. (2) No Fund will concentrate 25% or more of its
total assets in any particular industry, except that this restriction does not
apply to U.S. Government Securities. Each Fund also has a number of
non-fundamental investment restrictions which may be changed by the Fund's Board
of Directors without shareholder approval. These include restrictions providing
that (a) no Fund may invest in the securities of an investment company, except
to the extent permitted by 1940 Act (currently no more than 5% of total assets
in securities of any single investment company or 10% of total assets in
securities of two or more investment companies) and except as part of a merger,
consolidation or acquisition of assets and (b) no Fund will invest more than 5%
of its total assets in the securities of issuers which, with their predecessors,
have a record of less than three years' continuous operation. To the extent that
a Fund invests in the securities of other investment companies, investors will
be subject to duplicate management and other fees and expenses.
Except for each Fund's policy regarding borrowing, if a percentage
restriction is adhered to at the time of an investment, a later increase or
decrease in percentage resulting from changes in values or assets will not
constitute a violation of such restriction.
PURCHASE OF SHARES
GENERAL
Shares of each Fund may be purchased at their net asset value per share
next determined after receipt of the purchase order, without a sales charge. The
minimum initial investment in each Fund is $100,000 and the minimum additional
investment is $10,000. Purchases of Fund shares will be made in full and
fractional shares. In the interest of economy and convenience, certificates for
shares will generally not be issued.
Shares of the Funds are deemed to be purchased, for the purpose of
determining the time from which interest income accrues, as of the opening of
the New York Stock Exchange (the "Exchange") on the day the purchase order for
such shares is settled. Each Fund reserves the right, in its absolute
discretion, to reject any order for the purchase of its shares.
Purchase orders normally will become effective when a check is received
if the check is drawn upon a member bank of the Federal Reserve System within
the Ninth Federal Reserve District (Michigan's Upper Peninsula, Minnesota,
Montana, North Dakota, South Dakota and northwestern Wisconsin). Otherwise, in
order to reduce losses to the Funds from float, the order will become effective
when the check is converted into "Federal Funds," i.e., monies of member banks
within the Federal Reserve System that are on deposit at a Federal Reserve Bank,
normally within two days after receipt.
An investor who may be interested in having shares redeemed shortly
after purchase should consider making unconditional payment by certified check,
by transmitting Federal Funds by wire or other means approved in advance by the
Underwriter. Payment of redemption proceeds will be delayed as long as necessary
to verify by expeditious means that the purchase payment has been or will be
collected. Such period of time typically will not exceed 15 days.
INSTITUTIONAL SHARES
Institutional Shares of the Funds may be purchased by opening an
account either by mail or by phone.
Purchases by Mail. To open an account by mail, complete the general
authorization form attached to this Prospectus and mail it along with a check
payable to the appropriate Fund, to:
Voyageur Fund Managers, Inc.
90 South Seventh Street, Suite 4400
Minneapolis, Minnesota 55402
Purchases By Telephone. To open an account by telephone, call (612)
376-7014 or (800) 545-3863 to obtain an account number and instructions.
Information concerning the account will be taken over the phone. The investor
must then request a commercial bank with which he or she has an account and
which is a member of the Federal Reserve System to transmit Federal Funds by
wire to the appropriate Fund as follows:
First Bank, N.A., ABA #091000022
For credit of: (insert applicable Fund name)
Checking Account No.:
VAM Short Government Agency Fund 1702-2514-1366
VAM Intermediate Government Agency Fund 1702-2514-3099
VAM Government Mortgage Fund 1702-2514-3107
VAM Short Duration Total Return Fund 1702-2514-3115
VAM Intermediate Duration Total Return Fund 1702-2514-3123
VAM Intermediate Municipal Fund 1702-2514-3131
VAM Global Fixed Income Fund
Account Number: (assigned by telephone)
Information on how to transmit Federal Funds by wire is available at
any national bank or any state bank that is a member of the Federal Reserve
System. The bank may charge the shareholder for the wire transfer. If the phone
order and Federal Funds are received before the primary close of trading on the
Exchange, the order will be deemed to become effective at that time. Otherwise,
the order will be deemed to become effective as of the primary close of trading
on the Exchange on the next day the Exchange is open for trading. The investor
will be required to complete the general authorization form attached to this
Prospectus and mail it to the appropriate Fund after making the initial
telephone purchase.
SERVICE SHARES
Customers of Service Organizations may invest in Service Shares only
through their Service Organizations. (Global Fund does not issue Service
Shares.)
Purchase orders may be made by telephoning the Underwriter at (800)
545-3863 or by a written request addressed to Voyageur Fund Managers, Inc., 90
South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402. It is strongly
recommended that payment be effected by wiring Federal Funds to the appropriate
Fund. For complete wire instructions, see "-- Institutional Shares -- Purchases
by Telephone" above. (Service Organizations should utilize this payment
information also.)
The Service Organizations are responsible for timely transmittal of
purchase orders and Federal Funds. In order to facilitate timely transmittal,
the Service Organizations have established times by which purchase orders and
Federal Funds must be received by them.
Service Organizations may charge other fees to their customers who are
the beneficial owners of Service Shares in connection with their customer
accounts. These fees would be in addition to any amounts received by the Service
Organization pursuant to its Service Agreement with Voyageur.
REDEMPTION OF SHARES
INSTITUTIONAL SHARES
Written Redemptions. Each Fund will redeem its shares in cash at the
net asset value next determined after receipt of a shareholder's written request
for redemption in "good order." "Good order" means that the redemption request
must be executed exactly as the shares are registered. If the redemption
proceeds are to be paid to the registered holder(s), a signature guarantee is
not normally required. A signature guarantee is required ^in certain other
circumstances. See "Redemptions" in the Statement of Additional Information.
Telephone Redemptions. Shareholders of any Fund redeeming at least
$1,000 of shares may do so by telephoning (612) 376-7014 or (800) 545-3863. The
applicable section of the authorization form must have been completed and filed
with the Fund before the telephone request is received. Shares will be redeemed
at their net asset value next determined following a Fund's receipt of the
redemption request. The proceeds of the redemption will be paid by check mailed
to the shareholder's address of record or, if requested at the time of
redemption, by wire to the bank designated on the authorization form.
The Funds will employ reasonable procedures to confirm that telephone
requests are genuine, including requiring that payment be made only to the
address of record or the bank account designated on the authorization form and
requiring certain means of telephonic identification. ^If a Fund follows such
procedures, it will not be liable for following instructions communicated by
telephone that it reasonably believes to be genuine. If a Fund does not employ
such procedures, it may be liable for any losses due to unauthorized or
fraudulent telephone instructions.
Each Fund reserves the right at any time to suspend or terminate
telephone redemptions or to impose a fee for this service. There is currently no
additional charge to the shareholder for use of the telephone redemption
procedure.
SERVICE SHARES
Customers of Service Organizations may redeem Service Shares through
their respective Service Organizations. The Service Organizations are
responsible for the transmittal of redemption requests by their customers to the
Underwriter. In order to facilitate timely transmittal of redemption requests,
Service Organizations have established procedures by which redemption requests
must be made and times by which redemption requests must be received by them.
Additional documentation may be required when deemed appropriate by a Service
Organization.
A Service Organization as the record holder of Service Shares may
redeem such Shares without charge upon request on any Business Day at the net
asset value next determined after receipt by the Underwriter of the redemption
request. Redemption requests may be made using either of the procedures
described above for redemptions of Institutional Shares.
ADDITIONAL REDEMPTION INFORMATION
Shareholders who have submitted a request to one of the Funds for
redemption of their shares will not earn any income on such shares distributed
by the Fund on the redemption date. If shares for which payment has been
collected are redeemed, payment must be made within seven days. Each Fund may
suspend this right of redemption and may postpone payment only when the Exchange
is closed for other than customary weekends or holidays, or if permitted by the
rules of the Securities and Exchange Commission during periods when trading on
the Exchange is restricted or during any emergency which makes it impracticable
for such Fund to dispose of its securities or to determine fairly the value of
its net assets or during any other period permitted by order of the Commission
for the protection of investors.
Each Fund reserves the right and currently plans to redeem Fund shares
and mail the proceeds to the shareholder if at any time the value of Fund shares
in the account falls below a specified value, currently set at $1,000.
Shareholders will be notified and will have 60 days to bring the account up to
the required value before any redemption action will be taken by a Fund.
EXCHANGE PRIVILEGE
Institutional Shares and Service Shares ^may be exchanged for shares of
the same class of any other of the Company's ^Funds which issue such shares,
provided that the shares to be acquired in the exchange are eligible for sale in
the shareholder's state of residence. An exchange must meet the minimum account
size requirement of the Fund; however, if an account is in existence, the
minimum amount which may be exchanged into that account is $1,000. The exchange
will be made on the basis of the relative net asset values next determined after
receipt of the exchange request. The Underwriter reserves the right, upon 60
days' prior notice, to restrict the frequency of, or otherwise modify,
condition, terminate or impose charges upon, exchanges. An exchange is
considered to be a sale of shares on which the investor may realize a capital
gain or loss for income tax purposes. Exchange requests should be placed
directly with the Fund by calling (800) 545-3863.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUNDS
Under the laws of the State of Minnesota, the Board of Directors of the
Company is responsible for managing the business and affairs of the Funds. The
names, addresses, principal occupations and other affiliations of Directors and
executive officers of the Company are set forth in the Statement of Additional
Information.
INVESTMENT ADVISER ^
The Adviser has been retained under an investment advisory agreement
(the "Advisory Agreement") with the Company to act as each Fund's investment
adviser, subject to the authority of the Board of Directors. The Adviser and the
Underwriter are each indirect wholly-owned subsidiaries of Dougherty Dawkins,
Inc. ("Dougherty Dawkins"), which is owned 50% by Michael E. Dougherty and 50%
by Pohlad Companies. Mr. Dougherty co-founded the predecessor of Dougherty
Dawkins in 1977 and has served as Dougherty Dawkins' Chairman of the Board and
Chief Executive officer since inception. Pohlad Companies is a holding company
owned in equal parts by each of James O. Pohlad, Robert C. Pohlad and William M.
Pohlad. As of ^June 30, 1995, the Adviser served as the manager to six
closed-end and nine open-end investment companies (comprising ___ ^separate
investment portfolios), administered numerous private accounts and managed
approximately ___ ^$ billion in assets. The Adviser's principal business address
is 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402.
^The Funds pay the Adviser a monthly investment advisory and management
fee equivalent on an annual basis to ___ ^70% of the average daily net assets of
Global Fund and .50% of the average daily net assets of each of the other Funds.
For the fiscal year ending September 30, 1995, the Adviser intends to limit such
fees to % of the average daily net assets of Global Fund and to .40% of each ^of
the other Fund's average daily net assets.
SUB-ADVISER
Lazard London International Investment Management (the `Sub-Adviser")
is the wholly owned SEC-registered investment advisory subsidiary of Lazard
Brothers & Co., Limited. Founded in 1870, Lazard Brothers & Co., Limited is
based in London and is one of the leading merchant banks in Europe. The address
of the Sub-Adviser is 21 Moorfields, London EC2P 2HT.
The fixed income investment style of Lazard's is that of a "top down"
specialist, with asset allocation refined through the application of
quantitative techniques. Investment policy is based on an examination of long
term global macro-economic fundamentals over a medium term time horizon. The
process seeks to add value from active management of currency exposure, country
allocation and the overall duration decision. The use of currency and interest
derivatives is emphasized in the implementation and control of risk.
The Sub-Advisory Agreement between the Adviser and the Sub-Adviser
provides that the Sub-Adviser is entitled to a fee paid by the Adviser, which is
accrued daily and paid monthly, equal to an annual rate of .35% of Global Fund's
average daily net assets. Global Fund pays no direct fee to the Sub-Adviser.
PORTFOLIO MANAGEMENT
Jane M. Wyatt, Chief Investment Officer of the Adviser, has overall
supervisory responsibility with respect to all open-end and closed-end funds
managed by the Adviser. The day-to-day portfolio manager of ^Short Government
Fund, Intermediate Government Fund, Government Mortgage Fund, Short Duration
Fund and Intermediate Duration Fund since their inception has been Richard L.
Vandenberg. Mr. Vandenberg has been an Executive Vice President of the Adviser
since 1994, prior to which he had been a Portfolio Manager of the Adviser since
October 1992, a Proprietary Trader with Norwest Bank from March 1992 to October
1992 and President of Ravan Corporation, a commodity trading adviser in
Excelsior, Minnesota, from 1990 to March 1992. ^Since its inception, the
day-to-day portfolio manager of Municipal Fund ^has been Christopher R. Dougall.
Mr. Dougall has been a Vice President of the Adviser since December 1993, prior
to which he was portfolio manager with Harris Investment Management, Inc. in
Chicago from December 1991 to December 1993 and an analyst and associate
portfolio manager with Harris from October 1988 to December 1991. The day-to-day
portfolio managers of Global Fund's portfolio have been Patrick Shine, Ian
Donald and Liisa Salojarvi since inception. Mr. Shine is Deputy Head of Fixed
Income Investments of the Sub-Adviser and is the senior fixed income portfolio
manager. He joined Lazard in 1991, prior to which he was with Julius Baer
Investment Management. Mr. Donald has been Fixed Income Portfolio Manager of the
Sub-Adviser since 1987. Ms. Salojarvi has been a Senior Portfolio Manager of the
Sub-Adviser since 1994, prior to which she served with Nomura Research
Institute, UBS Phillips & Drew and Balties Finance in Copenhagen. Ms. Salojarvi
is a Danish national. Since its inception, the day-to-day portfolio manager of
the U.S. securities in Global Fund's portfolio has been Richard L. Vandenberg.
THE UNDERWRITER
The Institutional Shares of the Funds are distributed through Voyageur
Fund Distributors, Inc. (the "Underwriter") pursuant to a Distribution Agreement
between the Underwriter and the Company. No compensation is paid by the Funds
under the Distribution Agreement.
CUSTODIAN
First Trust National Association serves as the custodian of each Fund's
portfolio securities and cash.
DIVIDEND DISBURSING, TRANSFER, ADMINISTRATIVE AND ACCOUNTING SERVICES AGENT
The Adviser acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent to perform dividend-paying
functions, to calculate each Fund's daily share price, to maintain shareholder
records and to perform certain regulatory reporting and compliance related
services for the Funds. The fees paid for these services are based on each
Fund's assets and include reimbursement of out-of-pocket expenses. The Adviser
receives a monthly fee from each Fund equal on an annual basis to ___% of Global
Fund's average daily net assets and .10% of each of the other Fund's average
daily net assets. See "The Investment Adviser and Underwriter -- Expenses of the
Funds" in the Statement of Additional Information.
SERVICE ORGANIZATIONS
The Company, on behalf of each Fund other than Global Fund, has adopted
a Service Plan for Service Shares under which each Fund is authorized to
compensate Service Organizations to provide additional administrative,
recordkeeping and other shareholder services to their customers who are
beneficial owners of Service Shares. Pursuant to this Service Plan, the Company,
on behalf of each Fund, will enter into agreements with Service Organizations
which purchase Service Shares on behalf of their customers ("Service
Agreements"). The Service Agreements will provide for compensation to the
Service Organizations in an amount up to .25% (on an annualized basis) of the
average daily net assets of the Service Shares of the applicable Fund
attributable to or held in the name of the Service Organization for its
customers. The services provided by a Service Organization may include various
types of account administration and shareholder liaison services such as:
providing shareholder sub-accounting; receiving, aggregating and processing
shareholder orders; processing and maintaining separate records for employee
benefit plans; providing additional levels of shareholder communications; and
other services that augment the basic services provided by the Company to its
Funds under the Administrative Services Agreement.
Holders of Service Shares of a Fund will bear all expenses and fees
paid to Service Organizations for their services with respect to such Shares as
well as any other expenses which are directly attributable to such Shares.
Service Organizations (other than broker-dealers) may charge other fees to their
customers who are the beneficial owners of Service Shares in connection with
their customer accounts. These fees would be in addition to any amounts received
by the Service Organization under a Service Agreement and may affect the yield
earned on an investment in a Fund.
EXPENSES OF THE FUNDS
The Adviser and the Underwriter reserve the right to voluntarily waive
their fees in whole or part and to voluntarily absorb certain other of the
Funds' expenses. The Adviser and the Underwriter have agreed to waive fees or
absorb expenses for the fiscal year ending September 30, 1995, in such a manner
as will result in each Fund being charged total operating fees and expenses that
approximate those set forth in the section "Fund Expenses." After September 30,
1995, such voluntary fee and expense waivers may be discontinued or modified by
the Adviser and the Underwriter in their sole discretion.
Each Fund's expenses include, among others, fees of Directors, expenses
of Directors' and shareholders' meetings, insurance premiums, expenses of
redemption of shares, expenses of the issue and sale of shares (to the extent
not otherwise borne by the Underwriter), expenses of printing and mailing and
shareholder statements, association membership dues, charges of the Fund's
custodian, bookkeeping, auditing and legal expenses, the fees and expenses of
registering the Fund and its shares with the Securities and Exchange Commission
and registering or qualifying its shares under state securities laws, and
expenses of preparing and mailing prospectuses and reports to existing
shareholders.
PORTFOLIO TRANSACTIONS
No Fund will effect any brokerage transactions in its portfolio
securities with any broker-dealer affiliated directly or indirectly with the
Adviser unless such transactions, including the frequency thereof, the receipt
of commissions payable in connection therewith and the selection of the
affiliated broker-dealer effecting such transactions, are not unfair or
unreasonable to the shareholders of such Fund. It is not anticipated that any
Fund will effect any brokerage transactions with any affiliated broker-dealer,
including the Underwriter, unless such use would be to such Fund's advantage.
The Adviser may consider sales of shares of the Funds as a factor in the
selection of broker-dealers to execute the Funds' securities transactions.
DETERMINATION OF NET ASSET VALUE
The net asset value of Fund shares is determined once daily, Monday
through Friday, as of 3:00 p.m., Minneapolis time (the regular close of trading
on the Exchange) on each business day the Exchange is open for trading, except
on (i) days on which changes in the value of a Fund's portfolio securities will
not materially affect the current net asset value of the Fund's shares, (ii)
days during which no Fund shares are tendered for redemption and no order to
purchase or sell Fund shares is received by the Fund or (iii) customary national
business holidays on which the Exchange is closed for trading (as of the date
hereof, New Year's Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day).
For each Fund, the net asset value per share is determined by dividing
the value of the securities, cash and other assets of the Fund less all
liabilities by the total number of shares outstanding. A security listed or
traded on an exchange is valued at its last sale price (prior to the time as of
which assets are valued) on the exchange where it is principally traded.
Securities which are primarily traded on foreign securities exchanges are
generally valued at the preceding closing values of such securities on their
respective exchanges. Lacking any sales on the exchange where it is principally
traded on the day of valuation, prior to the time as of which assets are valued,
the security generally is valued at the last bid price on that exchange. All
other securities for which over-the-counter quotations are readily available are
valued on the basis of the last current bid price. When market quotations are
not readily available, such securities are valued at fair value as determined in
good faith by the Board of Directors. However, debt securities may be valued on
the basis of valuations furnished by a pricing service which utilizes electronic
data processing techniques to determine valuations without regard to sale or bid
prices, when such valuations are believed by the Fund's officers, under the
supervision of the Board of Directors, to more accurately reflect the fair
market value of such securities. Short-term investments in debt securities with
maturities of less than 60 days when acquired, or which subsequently are within
60 days of maturity, are valued at amortized cost. While this method provides
certainty in valuation, it may result in periods during which the value, due to
changes in interest rates or other factors, of such short term investments is
higher or lower than the value the Fund would receive if it sold the security.
All assets and liabilities initially expressed in foreign currency values will
be converted into U.S. dollars as last quoted by any recognized dealer.
Generally, trading in foreign securities and in certain other
securities such as tax-exempt securities, corporate bonds, U.S. Government
Securities and money market instruments is substantially completed each day at
various times prior to the primary close of trading on the Exchange. The values
of such securities used in determining the net asset value of Fund shares are
computed as of such times. Occasionally events affecting the value of such
securities may occur between such times and the primary close of trading on the
Exchange which are not reflected in the computation of a Fund's net asset value.
If events materially affecting the value of such securities occur during such
period, then these securities are valued at their fair market value as
determined in good faith by the Adviser in accordance with procedures adopted by
the Board of Directors.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
The present policy of each Fund is to declare a distribution from the
net investment income of the Fund on each day that the Fund is open for
business. Net investment income consists of interest accrued on portfolio
investments of a Fund, less accrued expenses, computed in each case since the
most recent determination of net asset value. Short-term capital gain
distributions, if any, are taxable to shareholders as ordinary income. Net
realized long term capital gains, if any, are distributed annually, after
utilization of any available capital loss carryovers.
Shareholders of each Fund receive distributions from investment income
and capital gains in additional shares of the Fund at net asset value, without
any sales charge, unless they elect otherwise. Each Fund sends to its
shareholders monthly statements with details of any reinvested dividends.
FEDERAL INCOME TAXATION
Each Fund is treated as a separate entity for federal income tax
purposes. Each Fund intends to qualify during its current taxable year as a
regulated investment company under the Internal Revenue Code of 1986, as amended
(the "Code"). So long as a Fund so qualifies, it will not be liable for federal
income taxes to the extent it distributes its taxable income to its
shareholders. The following discussion of the federal income tax consequences of
investing in the Funds is based upon tax laws and regulations in effect on the
date of this Prospectus and is subject to change by legislative or
administrative action. For additional information, see "Taxes" in the Statement
of Additional Information. Prospective investors are advised to consult with
their tax advisers concerning the application of state and local tax laws to
investments in and distributions by the Funds. Shareholders will be notified
annually as to the amount, nature and federal income tax status of dividends and
distributions.
If shares of any Fund are sold or otherwise disposed of, the
shareholder will realize a capital gain or loss equal to the difference between
the purchase price and the sales price of the shares disposed of, if, as is
usually the case, the shares are a capital asset in the hands of the
shareholder. If the sale or other disposition occurs more than one year after
the shares were acquired, the resulting capital gain or loss will be long-term.
A special provision of the Code pertaining to regulated investment companies
states that, if a Fund's shares with respect to which a long-term capital gain
distribution has been made are held for six months or less, any loss on the sale
or other disposition of those shares will be a long-term capital loss to the
extent of such long-term capital gain distribution, unless such sale or other
disposition is made pursuant to a plan that provides for the periodic
liquidation of an investment in the Fund.
A Fund investing in foreign securities may be required to pay
withholding and other taxes imposed by foreign countries, generally at rates
from 10% to 40%, which would reduce the Fund's net investment income. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If at the end of Short Duration ^Fund's, Intermediate
Duration Fund's or Global Fund's taxable year more than 50% of that Fund's total
assets consist of securities of foreign corporations, it will be eligible to
file an election with the Internal Revenue Service pursuant to which
shareholders of the Fund will be required to include their respective pro rata
portions of such foreign taxes in gross income, treat such amounts as foreign
taxes paid by them, and deduct such amounts in computing their taxable income
or, alternatively, use them as foreign tax credits against their federal income
taxes.
Municipal Fund. Municipal Fund also intends to take all other action
required to ensure that no federal income taxes will be payable by the Fund and
that the Fund can pay exempt-interest dividends. Distributions of net interest
income from tax-exempt obligations that are designated by Municipal Fund as
exempt-interest dividends are excludable from the gross income of such Fund's
shareholders. Municipal Fund's present policy is to designate exempt-interest
dividends at each daily distribution of net interest income. Shareholders are
required for information purposes to report exempt-interest dividends and other
tax-exempt interest on their tax returns. Distributions paid from other interest
income and from any net realized short-term capital gains will be taxable to
shareholders as ordinary income, whether received in cash or in additional
shares. Distributions paid from long-term capital gains (and designated as such)
are taxable as long-term capital gains for federal income tax purposes, whether
received in cash or shares, regardless of how long a shareholder has held shares
in Municipal Fund.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Liability for AMT will
depend on each shareholder's individual tax situation. Municipal Fund may invest
without limitation in obligations the interest on which is treated as an item of
tax preference for purposes of the AMT.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by Municipal Fund. Municipal Fund will avoid investment in bonds
which, in the opinion of the investment adviser, pose a material risk of the
loss of tax exemption. Further, if a bond in Municipal Fund's portfolio lost its
exempt status, Municipal Fund would make every effort to dispose of such
investment on terms that are not detrimental to such Fund.
Other Funds. Distributions by the Funds other than Municipal Fund are
generally taxable to shareholders, whether received in cash or in additional
shares of the Fund. Distributions from a Fund's net investment income and net
short-term capital gains are taxable to shareholders as ordinary income.
Distributions from a Fund designated as long-term capital gain distributions
will be reportable by the shareholder as long-term capital gains irrespective of
how long the shareholder has held the shares. Shareholders not subject to
federal income taxation will not be taxed on distributions by the Funds.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Funds may refer to
"yield," "average annual total return," "cumulative total return," "current
distribution rate" and, with respect to Municipal Fund, "taxable equivalent
yield," and may compare such performance quotations with published indices and
comparable quotations of other funds. Performance quotations are computed
separately for Institutional Shares and Service Shares of the Funds. When a Fund
advertises any performance information, it also will advertise its average
annual total return as required by the rules of the Securities and Exchange
Commission and will include performance data for Institutional Shares and
Service Shares. All such figures are based on historical earnings and
performance and are not intended to be indicative of future performance.
Additionally, performance information may not provide a basis for comparison
with other investments or other mutual funds using a different method of
calculating performance. The investment return on and principal value of an
investment in any Fund will fluctuate, so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
The advertised "yield" of a Fund will be based on a 30-day period in
the advertisement. Yield is calculated by dividing the net investment income per
share deemed earned during the period by the maximum offering price per share on
the last day of the period. The result is then "annualized" using a formula that
provides for semi-annual compounding of income.
"Taxable equivalent yield" is calculated by applying the stated income
tax rate only to that portion of the yield that is exempt from taxation. The tax
exempt portion of the yield is divided by the number 1 minus the stated income
tax rate (e.g., 1-28% = 72%). The result is then added to that portion of the
yield, if any, that is not tax exempt.
The "average annual total return" is the average annual compounded rate
of return based upon a hypothetical $1,000 investment made at the beginning of
the advertised period. In calculating average annual total return, the maximum
sales charge is deducted from the hypothetical investment and all dividends and
distributions are assumed to be reinvested.
"Cumulative total return" is calculated by subtracting a hypothetical
$1,000 payment to a Fund from the ending redeemable value of such payment (at
the end of the relevant advertised period), dividing such difference by $1,000
and multiplying the quotient by 100. In calculating ending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales charge is deducted.
Each Fund, from time to time, may also quote a "current distribution
rate" to shareholders. A current distribution rate as of a date is calculated by
determining the amount of distributions that would have been paid over the
twelve-month period ending on such date to the holder of one hypothetical Fund
share purchased at the beginning of such period, and dividing such amount by the
current maximum offering price per share (the net asset value per Fund share
plus the maximum sales charge).
In addition to advertising total return and yield, comparative
performance information may be used from time to time in advertising the Funds'
shares, including data from Lipper Analytical Services, Inc., Morningstar and
other entities or organizations which track the performance of investment
companies. Performance information for the Funds may also be compared to various
unmanaged indices, such as the Lehman Brothers Government and Corporate Bond
Index, the Merrill Lynch 1 to 3 Year and 3 to 7 Year Treasury Indices, the
Merrill Lynch 1 to 3 Year Government Bond Index, the Merrill Lynch 15 Year GNMA
Index, the Salomon Brothers World Government Benchmark Bond Index, the Merrill
Lynch 1 to 10 Year Intermediate Term High Quality Corporate Bond Index and the
Lehman Brothers G7 Global Bond Index. Unmanaged indices generally do not reflect
deductions for administrative and management costs and expenses. For Fund
performance information and daily net asset value quotations, investors may call
(612) 376-7010 or (800) 525-6584.
For additional information regarding the calculation of each Fund's
yield, average annual total return, cumulative total return and current
distribution rate, see "Calculation of Performance Data" in the Statement of
Additional Information.
GENERAL INFORMATION
Each Fund sends to its shareholders six-month unaudited and annual
audited financial statements which include a list of investment securities held
by the Fund.
^Global Fund was established in 1995 and each of the other Funds were
established in 1994, each as a separate series of VAM Institutional Funds, Inc.,
a Minnesota corporation incorporated in January 1985. The Articles of
Incorporation limit the liability of the Directors to the fullest extent
permitted by law. The Articles of Incorporation currently permit the Directors
to issue an unlimited number of full and fractional shares of seven distinct
series, each of which evidences an interest in a separate portfolio of
investments with its own investment objective, policies and restrictions. The
Articles of Incorporation also permit the Directors, without shareholder
approval, to create additional series of shares and to subdivide any series into
various classes of shares with such dividend preferences and other rights as the
Directors may designate. The Funds currently offer their shares in two classes:
Institutional Shares and Service Shares.
It is contemplated that most Service Shares will be held in accounts
of which the record owner is a bank or other institution acting, directly or
through an agent, as nominee for its customers who are the beneficial owners of
the shares or another organization designated by such bank or institution.
Service Shares will be marketed only to such institutional investors, at net
asset value with no sales load. Institutional Shares may be purchased for
accounts in the name of an investor or institution that is not compensated by
the Fund for services provided to the institution's investors. Service Shares
may be purchased for accounts held in the name of an institution that is
compensated for providing certain account administration and shareholder liaison
services to its customers, including providing shareholder sub-accounting;
receiving, aggregating and processing shareholder orders; processing and
maintaining separate records for employee benefit plans; providing additional
levels of shareholder communications; and other services that augment the basic
services provided to the Company and its Funds under the Administrative Services
Agreement. Service Shares bear the cost of service fees at the annual rate of up
to .25 of 1% of the average daily net assets of such Shares.
Each Institutional Share and Service Share of a Fund represents an
equal proportionate interest in the assets belonging to the Fund and have
identical voting, dividend, liquidation and other rights on the same terms and
conditions except that the service fees relating to the Service Shares will be
borne exclusively by that class. In addition, each class of shares has exclusive
voting rights with respect to any other matters for which separate class voting
is appropriate under applicable law.
It is possible that an investor may be offered different classes of
shares and thus indirectly bear different expenses with respect to different
classes of the same Fund, although the Funds intend to limit the availability of
shares of the different classes to different types of investors.
Fund shares are freely transferable, are entitled to dividends as
declared by the Directors, and, in liquidation of a Fund, are entitled to
receive the net assets of such Fund. The Funds do not generally hold annual
meetings of shareholders and will do so only when required by law. Shareholders
may remove Directors from office by votes cast in person or by proxy at a
meeting of shareholders or by written consent and, in accordance with Section
16(c) of the 1940 Act, the Directors shall promptly call a meeting of
shareholders for the purpose of voting upon the question of removal of any
Director when requested to do so by the record holders of not less than 10% of
the outstanding shares.
Each share of a series has one vote irrespective of the relative net
asset value of the series' shares. On some issues, such as the election of
Directors, all shares of the Company vote together as one series. On an issue
affecting only a particular series, the shares of the affected series vote as a
separate series. An example of such an issue would be a fundamental investment
restriction pertaining to only one series. In voting on the Investment Advisory
Agreements, approval by the shareholders of a particular series is necessary to
make such agreement effective as to that series.
The assets received by the Company for the issue or sale of shares of
each series or class thereof, and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors, are allocated to such series,
and in the case of a class, allocated to such class, and constitute the
underlying assets of such series or class. The underlying assets of each series
or class thereof are required to be segregated on the books of account, and are
to be charged with the expenses in respect to such series or class and with a
share of the general expenses of the Company. Any general expenses of the
Company not readily identifiable as belonging to a particular series or class
shall be allocated among the series or classes thereof, based upon the relative
net assets of the series or class at the time such expenses were accrued.
For a further discussion of the above matters, see "Additional
Information" in the Statement of Additional Information.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS (AND/OR IN THE
STATEMENT OF ADDITIONAL INFORMATION REFERRED TO ON THE COVER PAGE OF THIS
PROSPECTUS), AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUNDS OR VOYAGEUR FUND
DISTRIBUTORS, INC. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION
BY ANYONE IN THE STATE IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR
IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
PART B
VAM SHORT GOVERNMENT AGENCY FUND
VAM INTERMEDIATE GOVERNMENT AGENCY FUND
VAM GOVERNMENT MORTGAGE FUND
VAM SHORT DURATION TOTAL RETURN FUND
VAM INTERMEDIATE DURATION TOTAL RETURN FUND
VAM INTERMEDIATE MUNICIPAL FUND
VAM GLOBAL FIXED INCOME FUND
SEPARATELY MANAGED SERIES OF VAM INSTITUTIONAL FUNDS, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED ^____________, 1995
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus of the Funds dated
^_______________, 1995. A copy of the Prospectus or this Statement of Additional
Information may be obtained free of charge by contacting the Funds at 90 South
Seventh Street, Suite 4400, Minneapolis, Minnesota 55402. Telephone: (612)
376-7000 or Toll Free (800) 553-2143.
Each Fund (other than VAM Global Fixed Income Fund) offers two classes
of shares -- the Institutional Class Shares ("Institutional Shares) and the
Institutional Service Class Shares ("Service Shares"). Both classes of shares
are primarily designed to provide pension and profit sharing plans, employee
benefit trusts, endowments, foundations, corporations, other institutions and
high net worth individuals access to the professional investment management
services offered by Voyageur Fund Managers, Inc. (the "Adviser"). VAM Global
Fixed Income Fund offers only Institutional Shares.
TABLE OF CONTENTS
<TABLE>
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Page
<S> <C>
Investment Policies and Restrictions.................................................................... 2
Directors and Executive Officers........................................................................ ^14
The Investment Adviser, Sub-Adviser, Administrative Services, Expenses and Brokerage.................... ^16
Net Asset Value and Public Offering Price............................................................... ^20
Taxes ................................................................................................. ^20
Calculation of Performance Data......................................................................... ^22
Redemptions............................................................................................. 24
Additional Information.................................................................................. ^24
Financial Statements.................................................................................... F-1
Appendix A -- Description of Securities Ratings......................................................... A-1
</TABLE>
No person has been authorized to give any information or to make any
representations other than those contained in this Statement of Additional
Information or the Prospectus dated ^__________________, 1995, and, if given or
made, such information or representations may not be relied upon as having been
authorized by the Funds. This Statement of Additional Information does not
constitute an offer to sell securities in any state or jurisdiction in which
such offering may not lawfully be made. The delivery of this Statement of
Additional Information at any time shall not imply that there has been no change
in the affairs of the Funds since the date hereof.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives, policies and restrictions of VAM Short
Government Agency Fund ("Short Government Fund"), VAM Intermediate Government
Agency Fund ("Intermediate Government Fund"), VAM Government Mortgage Fund
("Government Mortgage Fund"), VAM Short Duration Total Return Fund ("Short
Duration Fund"), VAM Intermediate Duration Total Return Fund ("Intermediate
Duration ^Fund"), VAM Intermediate Municipal Fund ("Municipal Fund") and VAM
Global Fixed Income Fund ("Global Fund") (collectively, the "Funds") are set
forth in the Prospectus. Certain additional investment information is set forth
below. All capitalized terms not defined herein have the same meanings as set
forth in the Prospectus.
MORTGAGE-RELATED SECURITIES
As discussed in the Prospectus, each Fund may invest in
mortgage-related securities. Certain of the Funds may invest only in
mortgage-related securities which are issued or guaranteed by the U.S.
Government or one of its agencies or instrumentalities, whereas other Funds may
also invest in mortgage-related securities issued by private issuers. The
mortgage-related securities in which the Funds may invest include mortgage
pass-through securities, adjustable rate mortgage securities and derivative
mortgage securities such as collateralized mortgage obligations. There are
currently three basic types of mortgage-related securities: (a) those issued or
guaranteed by the U.S. Government or one of its agencies or instrumentalities,
such as GNMA, FNMA and FHLMC; (b) those issued by non-governmental issuers that
represent interests in, or are collateralized by, mortgage-related securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (c) those issued by non-governmental issuers that
represent an interest in, or are collateralized by, whole mortgage loans or
mortgage-related securities without a government guarantee but usually with
over-collateralization or some other form of private credit enhancement.
Non-governmental issuers referred to in (b) and (c) above include originators of
and investors in mortgage loans, including savings and loan associations,
mortgage bankers, commercial banks, investment banks and special purpose
subsidiaries of the foregoing.
The government guaranteed mortgage pass-through securities in which the
Funds may invest will include certificates issued or guaranteed by GNMA, FNMA
and FHLMC, which represent interests in underlying residential mortgage loans.
These mortgage pass-through securities provide for the pass-through to investors
of their pro-rata share of monthly payments (including any prepayments) made by
the individual borrowers on the pooled mortgage loans, net of any fees paid to
the guarantor of such securities and the servicer of the underlying mortgage
loans. Each of GNMA, FNMA and FHLMC guarantee timely distributions of interest
to certificate holders. GNMA and FNMA guarantee timely distributions of
scheduled principal. FHLMC generally guarantees only ultimate collection of
principal of the underlying mortgage loans.
Private mortgage pass-through securities ("Private Pass-Throughs") are
structured similarly to GNMA, FNMA and FHLMC mortgage pass-through securities
and are issued by originators of and investors in mortgage loans, including
savings and loan associations, mortgage bankers, commercial banks, investment
banks and special purpose subsidiaries of the foregoing. Since Private
Pass-Throughs typically are not guaranteed by an entity having the credit status
of GNMA, FNMA or FHLMC, such securities generally are structured with one or
more types of credit enhancement.
Collateralized mortgage obligations ("CMOs") are debt instruments
issued by special purpose entities which are secured by pools of mortgage loans
or other mortgage-related securities. Multi-class pass-through securities are
equity interests in a trust composed of mortgage loans or other mortgage-related
securities. Payments of principal and interest on underlying collateral provide
the funds to pay debt service on the CMO or make scheduled distributions on the
multi-class pass-through security. CMOs and multi-class pass-through securities
(collectively CMOs unless the context indicates otherwise) may be issued by
agencies or instrumentalities of the United States Government or by private
organizations.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements. The Funds' custodian
will hold the securities underlying any repurchase agreement or such securities
will be part of the Federal Reserve Book Entry System. The market value of the
collateral underlying the repurchase agreement will be determined on each
business day. If at any time the market value of the collateral falls below the
repurchase price of the repurchase agreement (including any accrued interest)
the applicable Fund will promptly receive additional collateral (so that the
total collateral has a market value at least equal to the repurchase price plus
accrued interest).
HIGH YIELD SECURITIES
Short Duration Fund, Intermediate Duration ^Fund, Municipal Fund and
Global Fund may each invest up to 5% of their net assets in fixed-income
securities rated lower than Baa by Moody's or lower than BBB by S&P but rated at
least B by Moody's or S&P. Securities rated lower than Baa by Moody's or lower
than BBB by S&P are sometimes referred to as "high yield" or "junk" bonds. In
addition, securities rated Baa are considered by Moody's to have some
speculative characteristics.
Investing in high yield securities involves special risks in addition
to the risks associated with investments in higher rated fixed-income
securities. High yield securities may be regarded as predominately speculative
with respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality fixed-income securities,
and the ability of the Funds to achieve their investment objectives may, to the
extent of their investments in high yield securities, be more dependent upon
such creditworthiness analysis than would be the case if the Funds were
investing in higher quality securities.
High yield securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher grade
securities. The prices of high yield securities have been found to be less
sensitive to interest rate changes than more highly rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could cause a decline in high yield security prices because the advent
of a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of high
yield securities defaults, the Funds may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected to
a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be
less liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations in
the daily net asset value of the Fund's shares. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of high yield securities, especially in a thinly traded
market.
There may be special tax considerations associated with investing in
high yield securities structured as zero coupon or payment-in-kind securities. A
Fund records the interest on these securities as income even though it receives
no cash interest until the security's maturity or payment date. The Funds will
be required to distribute all or substantially all such amounts annually and may
have to obtain the cash to do so by selling securities which otherwise would
continue to be held. Shareholders will be taxed on these distributions.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated. The
Adviser does not rely solely on credit ratings when selecting securities for the
Funds and develops its own independent analysis of issuer credit quality. If a
credit rating agency changes the rating of a portfolio security held by a Fund,
the Fund may retain the portfolio security if the Adviser deems it in the best
interest of the Fund's shareholders.
The market for high yield securities may be thinner and less active
than that for higher rated fixed-income securities, which can adversely affect
the prices at which the former are sold. If market quotations are not available,
high yield securities will be valued in accordance with procedures established
by the Board of Directors, including the use of outside pricing services.
Judgment plays a greater role in valuing high yield debt securities than is the
case for securities for which more external sources for quotations and last sale
information is available. Adverse publicity and changing investor perception may
affect the ability of outside pricing services to value high yield securities
and the Funds' ability to dispose of these securities.
Since the risk of default is high for high yield securities, research
and credit analysis are an especially important part of managing securities of
this type. The Adviser will attempt to identify those issuers of high yielding
debt securities whose financial condition is adequate to meet future
obligations, has improved or is expected to improve in the future. The Adviser's
analysis will focus on relative values based on such factors as interest in
dividend coverage, asset coverage, earnings prospects and the experience and
managerial strength of the issuer.
OPTIONS AND FUTURES TRANSACTIONS
To the extent set forth in the Prospectus and herein, certain Funds may
buy and sell put and call options, futures contracts and options on futures
contracts with respect to financial instruments and stock and interest rate
indexes. Futures and options will be used to facilitate allocation of a Fund's
investments among asset classes, to generate income or to hedge against changes
in interest rates or declines in securities prices or increases in prices of
securities proposed to be purchased. Different uses of futures and options have
different risk and return characteristics. Generally, selling futures contracts,
purchasing put options and writing (i.e., selling) call options are strategies
designed to protect against falling securities prices and can limit potential
gains if prices rise. Purchasing futures contracts, purchasing call options and
writing put options are strategies whose returns tend to rise and fall together
with securities prices and can cause losses if prices fall. If securities prices
remain unchanged over time option writing strategies tend to be profitable,
while option buying strategies tend to decline in value.
Writing Options. Certain Funds may write (i.e., sell) covered put and
call options with respect to the securities in which they may invest. By writing
a call option, a Fund becomes obligated during the term of the option to deliver
the securities underlying the option upon payment of the exercise price if the
option is exercised. By writing a put option, a Fund becomes obligated during
the term of the option to purchase the securities underlying the option at the
exercise price if the option is exercised. With respect to put options written
by any Fund, there will have been a predetermination that acquisition of the
underlying security is in accordance with the investment objective of such Fund.
"Covered options" means that so long as a Fund is obligated as the
writer of a call option, it will own the underlying securities subject to the
option (or comparable securities satisfying the cover requirements of securities
exchanges). A Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it deposits
and maintains with its custodian cash, U.S. Government securities or other
liquid high-grade debt obligations having a value equal to or greater than the
exercise price of the option.
Through the writing of call or put options, a Fund may obtain a greater
current return than would be realized on the underlying securities alone. A Fund
receives premiums from writing call or put options, which it retains whether or
not the options are exercised. By writing a call option, a Fund might lose the
potential for gain on the underlying security while the option is open, and by
writing a put option, a Fund might become obligated to purchase the underlying
security for more than its current market price upon exercise.
Purchasing Options. Certain Funds may purchase put options in order to
protect portfolio holdings in an underlying security against a decline in the
market value of such holdings. Such protection is provided during the life of
the put because a Fund may sell the underlying security at the put exercise
price, regardless of a decline in the underlying security's market price. Any
loss to a Fund is limited to the premium paid for, and transaction costs paid in
connection with, the put plus the initial excess, if any, of the market price of
the underlying security over the exercise price. However, if the market price of
such security increases, the profit a Fund realizes on the sale of the security
will be reduced by the premium paid for the put option less any amount for which
the put is sold.
A Fund may wish to protect certain portfolio securities against a
decline in market value at a time when no put options on those particular
securities are available for purchase. The Fund may therefore purchase a put
option on securities other than those it wishes to protect even though it does
not hold such other securities in its portfolio.
Each Fund may also purchase call options. During the life of the call
option, the Fund may buy the underlying security at the call exercise price
regardless of any increase in the underlying security's market price. In order
for a call option to be profitable, the market price of the underlying security
must rise sufficiently above the exercise price to cover the premium and
transaction costs. By using call options in this manner, a Fund will reduce any
profit it might have realized had it bought the underlying security at the time
it purchased the call option by the premium paid for the call option and by
transaction costs.
The securities exchanges have established limitations governing the
maximum number of options which may be written by an investor or group of
investors acting in concert. These position limits may restrict a Fund's ability
to purchase or sell options on a particular security. It is possible that with
respect to a Fund, the Fund and other clients of the Adviser may be considered
to be a group of investors acting in concert. Thus, the number of options which
a Fund may write may be affected by options written by other investment advisory
clients of the Adviser.
Securities Index Option Trading. Certain Funds may purchase and write
put and call options on securities indexes. Options on securities indexes are
similar to options on securities except that, rather than the right to take or
make delivery of a security at a specified price, an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the exercise
price of the option. The writer of the option is obligated to make delivery of
this amount.
The effectiveness of purchasing or writing index options as a hedging
technique depends upon the extent to which price movements in a Fund's portfolio
correlate with price movements of the index selected. Because the value of an
index option depends upon movements in the level of the index rather than the
price of a particular security, whether a Fund will realize a gain or loss from
the purchase or writing of options on an index depends upon movements in the
level of prices in the stock or bond markets generally or, in the case of
certain indexes, in an industry market segment, rather than movements in the
price of a particular security. Accordingly, successful use by a Fund of options
on security indexes will be subject to the Adviser's ability to predict
correctly movements in the direction of the stock market or interest rates
market generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual securities. In the
event the Adviser is unsuccessful in predicting the movements of an index, a
Fund could be in a worse position than had no hedge been attempted.
Because exercises of index options are settled in cash, a Fund cannot
determine the amount of its settlement obligations in advance and, with respect
to call writing, cannot provide in advance for its potential settlement
obligations by acquiring and holding the underlying securities. When a Fund
writes an option on an index, the Fund will segregate or put into escrow with
its custodian or pledge to a broker as collateral for the option, cash,
high-grade liquid debt securities or "qualified securities" with a market value
determined on a daily basis of not less than 100% of the current market value of
the option.
Options purchased and written by a Fund may be exchange traded or may
be options entered into by the Fund in negotiated transactions with investment
dealers and other financial institutions (over-the-counter or "OTC" options)
(such as commercial banks or savings and loan associations) deemed creditworthy
by the Adviser. OTC options are illiquid and it may not be possible for the Fund
to dispose of options it has purchased or to terminate its obligations under an
option it has written at a time when the Adviser believes it would be
advantageous to do so.
Futures Contracts and Options on Futures Contracts. Certain Funds may
enter into futures contracts and purchase and write options on these contracts,
including but not limited to interest rate, securities index and foreign
currency futures contracts and put and call options on these futures contracts.
These contracts will be entered into on domestic and foreign exchanges and
boards of trade, subject to applicable regulations of the Commodity Futures
Trading Commission. These transactions may be entered into for bona fide hedging
and other permissible risk management purposes.
In connection with transactions in futures contracts and writing
related options, each Fund will be required to deposit as "initial margin" a
specified amount of cash or short-term, U.S. Government securities. The initial
margin required for a futures contract is set by the exchange on which the
contract is traded. It is expected that the initial margin would be
approximately 1-1/2% to 5% of a contract's face value. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the futures contract. No Fund will purchase or
sell futures contracts or related options if, as a result, the sum of the
initial margin deposit on that Fund's existing futures and related options
positions and premiums paid for options or futures contracts entered into for
other than bona fide hedging purposes would exceed 5% of the liquidation value
of the Fund's portfolio.
Although futures contracts by their terms call for the actual delivery
or acquisition of securities, in most cases the contractual obligation is
fulfilled before the date of the contract without having to make or take
delivery of the securities. The offsetting of a contractual obligation is
accomplished by buying (or selling, as the case may be) on a commodities
exchange an identical futures contract calling for delivery in the same month.
Such a transaction, which is effected through a member of an exchange, cancels
the obligation to make or take delivery of the securities. Since all
transactions in the futures market are made, offset or fulfilled through a
clearing house associated with the exchange on which the contracts are traded, a
Fund will incur brokerage fees when it purchases or sells futures contracts.
Risks of Transactions in Futures Contracts and Options.
Hedging Risks in Futures Contracts Transactions. There are several
risks in using stock index or interest rate futures contracts as hedging
devices. One risk arises because the prices of futures contracts may not
correlate perfectly with movements in the underlying index or financial
instrument due to certain market distortions. First, all participants in the
futures market are subject to initial margin and variation margin requirements.
Rather than making additional variation margin payments, investors may close the
contracts through offsetting transactions which could distort the normal
relationship between the index or security and the futures market. Second, the
margin requirements in the futures market are lower than margin requirements in
the securities market, and as a result the futures market may attract more
speculators than does the securities market. Increased participation by
speculators in the futures market may also cause temporary price distortions.
Because of possible price distortion in the futures market and because of
imperfect correlation between movements in stock indexes of securities and
movements in the prices of futures contracts, even a correct forecast of general
market trends may not result in a successful hedging transaction over a very
short period.
Another risk arises because of imperfect correlation between movements
in the value of the futures contracts and movements in the value of securities
subject to the hedge. With respect to index futures contracts, the risk of
imperfect correlation increases as the composition of a Fund's portfolio
diverges from the financial instruments included in the applicable index.
Successful use of futures contracts by a Fund is subject to the ability
of the Adviser to predict correctly movements in the direction of interest rates
or the stock market. If a Fund has hedged against the possibility of a decline
in the value of the stocks held in its portfolio or an increase in interest
rates adversely affecting the value of fixed-income securities held in its
portfolio and stock prices increase or interest rates decrease instead, the Fund
will lose part or all of the benefit of the increased value of its security
which it has hedged because it will have offsetting losses in its futures
positions. In addition, in such situations, if the Fund has insufficient cash,
it may have to sell securities to meet daily variation margin requirements. Such
sales of securities may, but will not necessarily, be at increased prices which
reflect the rising market or decline in interest rates. The Fund may have to
sell securities at a time when it may be disadvantageous to do so.
Liquidity of Futures Contracts. A Fund may elect to close some or all
of its contracts prior to expiration. The purpose of making such a move would be
to reduce or eliminate the hedge position held by the Fund. A Fund may close its
positions by taking opposite positions. Final determinations of variation margin
are then made, additional cash as required is paid by or to the Fund, and the
Fund realizes a loss or a gain.
Positions in futures contracts may be closed only on an exchange or
board of trade providing a secondary market for such futures contracts. Although
the Funds intend to enter into futures contracts only on exchanges or boards of
trade where there appears to be an active secondary market, there is no
assurance that a liquid secondary market will exist for any particular contract
at any particular time.
In addition, most domestic futures exchanges and boards of trade limit
the amount of fluctuation permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum amount that the price of a
futures contract may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has been reached in
a particular contract, no trades may be made that day at a price beyond that
limit. The daily limit governs only price movement during a particular trading
day and therefore does not limit potential losses because the limit may prevent
the liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures positions
and subjecting some futures traders to substantial losses. In such event, it
will not be possible to close a futures position and, in the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the value of the portion
of the portfolio being hedged, if any, may partially or completely offset losses
on the futures contract. However, as described above, there is no guarantee that
the price of the securities being hedged will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.
Risks of Options. The use of options on financial instruments and
indexes and on interest rate and stock index futures contracts also involves
additional risk. Compared to the purchase or sale of futures contracts, the
purchase of call or put options involves less potential risk to a Fund because
the maximum amount at risk is the premium paid for the options (plus
transactions costs). The writing of a call option generates a premium which may
partially offset a decline in the value of a Fund's portfolio assets. By writing
a call option, the Fund becomes obligated to sell an underlying instrument or a
futures contract, which may have a value higher than the exercise price.
Conversely, the writing of a put option generates a premium, but the Fund
becomes obligated to purchase the underlying instrument or futures contract,
which may have a value lower than the exercise price. Thus, the loss incurred by
a Fund in writing options may exceed the amount of the premium received.
The effective use of options strategies is dependent, among other
things, on a Fund's ability to terminate options positions at a time when the
Adviser deems it desirable to do so. Although a Fund will enter into an option
position only if the Adviser believes that a liquid secondary market exists for
such option, there is no assurance that the Fund will be able to effect closing
transactions at any particular time or at an acceptable price. The Funds'
transactions involving options on futures contracts will be conducted only on
recognized exchanges.
A Fund's purchase or sale of put or call options will be based upon
predictions as to anticipated interest rates or market trends by the Adviser,
which could prove to be inaccurate. Even if the expectations of the Adviser are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Fund's portfolio securities.
The writer of an option may have no control over when the underlying
securities must be sold, in the case of a call option, or purchased, in the case
of a put option; the writer may be assigned an exercise notice at any time prior
to the termination of the obligation. Whether or not an option expires
unexercised, the writer retains the amount of the premium. This amount, of
course, may, in the case of a covered call option, be offset by a decline in the
market value of the underlying security during the option period. If a call
option is exercised, the writer experiences a profit or loss from the sale of
the underlying security. If a put option is exercised, the writer must fulfill
the obligation to purchase the underlying security at the exercise price which
will usually exceed the then market value of the underlying security .
The writer of an option that wishes to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit a Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option will permit a Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
A Fund will realize a profit from a closing transaction if the price of
the transaction is less than the premium received from writing the option or is
more than the premium paid to purchase the option; a Fund will realize a loss
from a closing transaction if the price of the transaction is more than the
premium received from writing the option or is less than the premium paid to
purchase the option. Because increases in the market price of a call option will
generally reflect increases in the market price of the underlying security, any
loss resulting from the repurchase of a call option is likely to be offset in
whole or in part by appreciation of the underlying security owned by the Fund.
An option position may be closed out only where there exists a
secondary market for an option of the same series. If a secondary market does
not exist, it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise the options in
order to realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options,
(ii) restrictions may be imposed by a national securities exchange ("Exchange")
on opening transactions or closing transactions or both, (iii) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities, (iv) unusual or
unforeseen circumstances may interrupt normal operations on an Exchange, (v) the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume, or (vi) one or more
Exchanges could, for economic or other reasons, decide or be compelled at some
future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that Exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that Exchange that had been issued by the Options Clearing
Corporation as a result of trades on that Exchange would continue to be
exercisable in accordance with their terms.
Certain Funds may purchase put options to hedge against a decline in
the value of their portfolios. By using put options in this way, such Funds will
reduce any profit they might otherwise have realized in the underlying security
by the amount of the premium paid for the put option and by transaction costs.
Certain Funds may purchase call options to hedge against an increase in
the price of securities that the Funds anticipate purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by a Fund upon exercise of the option, and, unless the
price of the underlying security rises sufficiently, the option may expire
worthless to the Fund.
As discussed above, options may be traded over-the-counter ("OTC
options"). In an over-the-counter trading environment, many of the protections
afforded to exchange participants will not be available. For example, there are
no daily price fluctuation limits, and adverse market movements could therefore
continue to an unlimited extent over a period of time. OTC options are illiquid
and it may not be possible for the Funds to dispose of options they have
purchased or terminate their obligations under an option they have written at a
time when the Adviser believes it would be advantageous to do so. Accordingly,
OTC options are subject to each Fund's limitation that a maximum of 15% of its
net assets be invested in illiquid securities. In the event of the bankruptcy of
the writer of an OTC option, a Fund could experience a loss of all or part of
the value of the option.
Foreign Transactions. Transactions in options and futures contracts by
Funds investing in foreign securities may be conducted outside of the United
States. Such transactions are subject to the risk of governmental actions
affecting trading in or the prices of foreign currencies or securities. The
value of such positions also could be adversely affected by (a) other complex
foreign political and economic factors; (b) lesser availability than in the
United States of data on which to make trading decisions; (c) delays in a Fund's
ability to act upon economic events occurring in foreign during nonbusiness
hours in the United States; (d) the imposition of different exercise and
settlement terms and procedures and margin requirements than in the United
States; and (e) lesser trading volume. In addition, such transactions may not
involve a clearing mechanism and related guarantee.
FOREIGN CURRENCY TRANSACTIONS
As discussed in the Prospectus, Global Fund may engage in currency
exchange transactions in connection with the purchase and sale of its
investments. A forward foreign currency exchange contract involves an obligation
to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract as agreed by the parties, at a
price set at the time of the contract. In the case of a cancelable forward
contract, the holder has the unilateral right to cancel the contract at maturity
by paying a specified fee. The contracts are traded in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
Forward foreign currency exchange contracts differ from foreign
currency futures contracts in certain respects. For example, the maturity date
of a forward contract may be any fixed number of days from the date of the
contract agreed upon by the parties, rather than a predetermined date in any
given month. Forward contracts may be in any amounts agreed upon by the parties
rather than predetermined amounts. Also, forward foreign exchange contracts are
traded directly between currency traders so that no intermediary is required. A
forward contract generally requires no margin or other deposit.
At the maturity of a forward or futures contract, the Fund may either
accept or make delivery of the currency specified in the contract, or, at or
prior to maturity, enter into a closing transaction involving the purchase or
sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency trader who is a party to the
original forward contract. Closing transactions with respect to futures
contracts are affected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such
contracts.
Options on foreign currencies operate similarly to options on
securities (discussed above), and are traded primarily on the over-the-counter
market, although options on foreign currencies have recently been listed on
several exchanges. Options traded on the over-the-counter market are illiquid
and it may not be possible for the Fund to dispose of an option it has purchased
or terminate its obligations under an option it has written at a time when
Voyageur believes it would be advantageous to do so. Options on foreign
currencies are affected by all of those factors which influence foreign exchange
rates and investments generally.
The value of a foreign currency option is dependent upon the value of
the foreign currency and the U.S. dollar, and may have no relationship to the
investment merits of a foreign debt security. Because foreign currency
transactions occurring in the interbank market involve substantially larger
amounts than those that may be involved in the use of foreign currency options,
investors may be disadvantaged by having to deal in an odd-lot market (generally
consisting of transactions, of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots. These is no
systematic reporting of last sale information for foreign currencies and there
is no regulatory requirement that quotations available through dealers or other
market sources be provided on a timely basis. Available quotation information is
generally representative of very large transactions in the interbank market and
thus may not reflect relatively smaller transactions (less than $1 million)
where rates may be less favorable. The interbank market in foreign currencies in
a global, around-the-clock market. To the extent that the U.S. options markets
are closed while the markets for the underlying currencies remain open,
significant price and rate movements may take place in the underlying markets
that cannot be reflected in the options markets.
Although foreign exchange dealers do not charge a fee for currency
conversion, they do realize a profit based upon the difference between prices at
which they are buying and selling various currencies. Thus, a dealer may offer
to sell a foreign currency to Global Fund at one rate, while offering a lesser
rate of exchange should the Fund desire to resell that currency to the dealer.
ILLIQUID INVESTMENTS
As a non-fundamental policy, each Fund is permitted to invest up to 15%
of its net assets in illiquid investments. An investment is generally deemed to
be "illiquid" if it cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the investment company
is valuing the investment. "Restricted securities" are securities which were
originally sold in private placements and which have not been registered under
the Securities Act of 1933 ( the "1933 Act"). Such securities generally have
been considered illiquid by the staff of the Securities and Exchange Commission
(the "SEC"), since such securities may be resold only subject to statutory
restrictions and delays or if registered under the 1933 Act. However, the SEC
has recently acknowledged that a market exists for certain restricted securities
and other securities previously deemed illiquid by the SEC (for example,
securities qualifying for resale to certain "qualified institutional buyers"
pursuant to Rule 144A under the 1933 Act ("Rule 144A Securities"), commercial
paper issued pursuant to the private placement exemption of Section 4(2) of the
1933 Act, and certain municipal lease obligations). As set forth in the
Prospectus, the Funds may invest in Rule 144A securities, commercial paper
issued pursuant to Rule 4(2) under the Securities Act of 1933, and municipal
lease obligations, and treat such securities as liquid if such securities are
deemed by the Adviser to be liquid in accordance with standards established by
the Company's Board of Directors. Under these guidelines, the Adviser must
consider, among other things, (a) the frequency of trades and quotes for the
security, (b) the number of dealers willing to purchase or sell the security and
the number of other potential purchasers, (c) dealer undertakings to make a
market in the security, and (d) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of transfer).
At the present time, it is not possible to predict with accuracy how
the markets for certain restricted securities will develop. Investing in
restricted securities could have the effect of increasing the level of a Fund's
illiquidity to the extent that qualified purchasers of the securities become,
for a time, uninterested in purchasing these securities.
TEMPORARY INVESTMENTS
To the extent set forth in the Prospectus, the Funds may invest in
short-term money market securities, including obligations of the U.S. Government
and its agencies and instrumentalities, bank certificates of deposit, bankers'
acceptances, high-grade commercial paper and other money market instruments.
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities include Treasury securities, which differ only in their
interest rates, maturities and times of issuance. Treasury bills have initial
maturities of one year or less; Treasury notes have initial maturities of one to
ten years; and Treasury bonds generally have initial maturities of greater than
ten years. Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, for example, GNMA pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal Home Loan Banks, by the right of the issuer to borrow from the Treasury;
others, such as those issued by the Federal National Mortgage Association, by
discretionary authority of the U.S. Government to purchase certain obligations
of the agency or instrumentality; and others, such as those issued by the
Student Loan Marketing Association, only by the credit of the agency or
instrumentality. While the U.S. Government provides financial support to such
U.S. Government-sponsored agencies or instrumentalities, no assurance can be
given that it will always do so, since it is not so obligated by law. Securities
issued or guaranteed by the U.S. Government or its agencies or instrumentalities
that mature within 397 days are considered money market securities for purposes
of the Funds' investment policies.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits are not transferable and are therefore illiquid prior to their
maturity. No Fund will invest more than 15% of its net assets in time deposits
and other illiquid securities. See "Investment ^Restrictions" below.
Certificates of deposit are certificates evidencing the obligation of a bank to
repay funds deposited with it for a specified period of time. Bankers'
acceptances are credit instruments evidencing the obligation of a bank to pay a
draft drawn on it by a customer. These instruments reflect the obligation both
of the bank and of the drawer to pay the full amount of the instrument upon
maturity.
Commercial paper consists of short-term, unsecured promissory notes
issued to finance short-term credit needs. The commercial paper purchased by the
Funds will consist only of direct obligations which, at the time of their
purchase, are (a) rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P (or
comparably rated by any other nationally recognized statistical rating
organization), (b) issued by companies having an outstanding unsecured debt
issue currently rated at least Aa by Moody's or at least AA by S&P (or
comparably rated by any other nationally recognized statistical rating
organization), or (c) if unrated, determined by the Adviser to be of comparable
quality to those rated obligations which may be purchased by the Funds.
Money market instruments in which the Funds may invest also include
non-convertible corporate debt securities (for example, bonds and debentures)
with no more than 397 days remaining to maturity, provided such obligations are
rated Aa or better by Moody's, AA or better by S&P (or comparably rated by any
other nationally recognized statistical rating organization) or, if unrated,
determined to be of comparable quality by the Adviser.
Municipal Fund's investments in short-term money market securities may
include both short-term tax-exempt securities in the rating categories set forth
above or if such securities are not available or, in the Adviser's judgment, do
not afford sufficient protection against adverse market conditions, the taxable
money market securities set forth above.
INVESTMENT RESTRICTIONS
Each Fund has adopted the following investment restrictions which,
together with the investment objective of such Fund, cannot be changed without
approval by holders of a majority of the outstanding voting shares of such Fund.
As defined in the 1940 Act, this means the lesser of the vote of (a) 67% of the
shares of such Fund at a meeting where more than 50% of the outstanding shares
of such Fund are present in person or by proxy or (b) more than 50% of the
outstanding shares of such Fund. No Fund will:
1. Operate in such a manner that it would no longer
qualify as a "diversified" management investment company, as
defined under Section 5 of 1940 Act. In connection therewith,
no Fund will, with respect to 75% of its total assets,
purchase any securities (other than obligations issued or
guaranteed by the U.S. Government or its agencies and
instrumentalities) if, as a result, more than 5% of the Fund's
total assets would then be invested in the securities of a
single issuer or if, as a result, the Fund would hold more
than 10% of the outstanding voting securities of any single
issuer, or each Fund will otherwise limit its investment as
required in order to qualify as a "diversified" management
investment company as defined under Section 5 of the 1940 Act.
2. Concentrate 25% or more of the value of its assets
in any one industry; provided, however, that there is no
limitation with respect to investments in obligations issued
or guaranteed by the U.S. Government or its agencies and
instrumentalities and repurchase agreements secured thereby.
3. Make loans, except through the purchase of
fixed-income obligations in which such Fund may invest
consistent with its investment objective and policies and
through repurchase agreements, and except that each Fund other
than Short Government Fund and Intermediate Government Fund
may loan its portfolio securities.
4. Underwrite the securities of other issuers except
to the extent that, in connection with the disposition of its
portfolio securities, the Fund may be deemed to be an
underwriter.
5. Borrow money (provided that the Funds other than
Short Government Fund and Intermediate Government Fund may
enter into reverse repurchase agreements) except from banks
for temporary or emergency purposes and then only in an amount
not exceeding 20% of the value of such Fund's total assets. No
Fund will purchase portfolio securities while outstanding
borrowings (other than reverse repurchase agreements) exceed
5% of the value of the Fund's total assets. In order to secure
any permitted borrowings under this section, each Fund may
pledge, mortgage or hypothecate its assets.
6. Issue any senior securities (as defined in the
1940 Act), except as set forth in investment restriction
number 5 above, and except to the extent that using options,
futures contracts and options on futures contracts, or
purchasing or selling securities on a when-issued or forward
commitment basis, or using similar investment strategies may
be deemed to constitute issuing a senior security.
7. Invest in commodities, commodities futures
contracts or real estate, although it may invest in securities
which are secured by real estate or real estate mortgages and
securities of issuers which invest or deal in commodities,
commodity futures, real estate or real estate mortgages and
provided that it may purchase or sell stock index futures,
foreign currency futures, interest rate futures and options
thereon.
For purposes of fundamental restriction (1) above, the identification
of the issuer of a Municipal Obligation depends on the terms and conditions of
the obligation. If the assets and revenues of an agency, authority,
instrumentality or other political subdivision are separate from those of the
government creating the subdivision, and the obligation is backed only by the
assets and revenues of the subdivision, such subdivision will be regarded as the
sole issuer. 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 non-governmental user will be deemed to be the sole issuer. If in
either case the creating government or another entity guarantees an obligation,
and the value of all securities issued or guaranteed by the guarantor and owned
by Municipal Fund exceeds 10% of the value of such Fund's total assets, the
guarantee will be regarded as a separate security and treated as an issue of
such government or entity.
For purposes of the Funds' concentration policy contained in
fundamental restriction (2) above, the applicable Funds intend to comply with
the SEC staff position that securities issued or guaranteed as to principal and
interest by any single foreign government are considered to be securities of
issuers in the same industry. Municipal Fund does not intend to invest more than
25% of its total assets in securities of governmental units located in any one
state, territory or possession of the United States. In addition, Municipal Fund
will not invest more than 25% of its total assets in limited obligation bonds
payable only from revenues derived from facilities or projects with a single
industry. As to utility companies, gas, electric, water and telephone companies
will be considered as separate industries.
Each Fund has adopted the following operating (i.e., non-fundamental)
investment restrictions which may be changed by the Board of Directors at any
time without shareholder approval. No Fund will:
1. Purchase the securities of any issuer with less
than three years' continuous operation if, as a result, more
than 5% of the value of its total assets would be invested in
securities of such issuers.
2. Purchase illiquid securities if more than 15% of
the value of the Fund's net assets would be invested in such
securities. Short Duration ^Fund, Intermediate Duration Fund
and Global Fund may buy and sell securities outside the U.S.
that are not registered with the SEC or marketable in the
United States.
3. Purchase or retain securities of any issuer if the
officers and directors of the Fund or the Adviser, owning
beneficially more than 1/2 or 1% of the securities of such
issuer, together own beneficially more than 5% or such
issuer's securities.
4. Invest in warrants if more than 5% of the value of
the Fund's net assets would be invested in such securities.
5. Invest in interests in oil, gas or other mineral
exploration or development programs or leases although it may
invest in securities of issuers which invest in or sponsor
such programs.
6. Invest in the securities of an investment company,
except to the extent permitted by the 1940 Act and except as
part of a merger, consolidation or acquisition of assets.
7. Purchase any securities on margin except that each
Fund may obtain such short-term credits as may be necessary
for the clearance of purchases and sales of securities. The
deposit or payment by a Fund of initial or maintenance margin
in connection with financial futures contracts or related
transactions is not considered the purchase of a security on
margin.
8. Invest for the purpose of exercising control or
management of another issuer.
9. Make short sales of securities or maintain a short
position for the account of the Fund unless at all times when
a short position is open it owns an equal amount of such
securities or owns securities which, without payment of any
further consideration, are convertible into or exchangeable
for securities of the same issue as, and equal in amount to,
the securities sold short.
Any investment restriction or limitation which involves a maximum
percentage of securities or assets shall not be considered to be violated unless
an excess over the percentage occurs immediately after an acquisition of
securities or a utilization of assets and such excess results therefrom.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities by a Fund to the average monthly value of
portfolio securities owned by the Fund, not including securities maturing in
less than 12 months. A 100% portfolio turnover rate would occur, for example, if
the lesser of the value of purchases or sales of a Fund's portfolio securities
for a particular year were equal to the average monthly value of the portfolio
securities owned by the Fund during the year. Each Fund will dispose of
securities without regard to the time they have been held when such action
appears advisable to the Adviser. Frequent portfolio trades may result in higher
transaction and other costs for a Fund.
DIRECTORS AND EXECUTIVE OFFICERS
The Directors and officers of the Company, their position with the
Company and their principal occupations during the past five years are set forth
below. In addition to the occupations set forth below, the directors and
officers also serve as directors and trustees or officers of various closed-end
and open-end investment companies managed by the Adviser.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME AND ADDRESS POSITION PAST FIVE YEARS AND OTHER AFFILIATIONS
<S> <C> <C>
Clarence G. Frame Director Of counsel, Briggs & Morgan law firm.
W-875
First National Bank Building
332 Minnesota Street
St. Paul, Minnesota 55101
Richard F. McNamara Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle, #200 Minneapolis-based holding company consisting of seventeen
Minneapolis, Minnesota 55439 companies in industrial plastics, sheet metal, automotive
aftermarket, construction supply, electronics and
financial services, since 1966.
Thomas F. Madison * Director Vice Chairman-Office of the CEO, Minnesota Mutual Life
200 South Fifth Street Insurance Company since February 1994; President and CEO
Suite 2100 of MLM Partners, Inc. since January 1993; previously,
Minneapolis, Minnesota 55402 President of U.S. WEST Communications-Markets from 1988 to
1993; Mr. Madison currently serves on the board of
directors of Minnesota Mutual Life Insurance Company,
Valmont Industries, Inc., Eltrax Systems, Inc. and various
civic and educational organizations.
James W. Nelson Director Chairman and Chief Executive Officer of Eberhardt Holding
81 South Ninth Street Company and its subsidiaries since 1990.
Suite 400
Minneapolis, Minnesota 55402
Robert J. Odegard Director Special Assistant to the President of the University of
University of Minnesota Minnesota from August 1984 to April 1989 and from May 1990
Foundation Foundation to present; Associate Vice President for Alumni
1300 South Second Street Relations 1300 South Second Street and Development of the
Minneapolis, Minnesota 55454 University of Minnesota from 1970 Minneapolis, Minnesota 55454
to August 1984 and from April 1989 to May 1990.
John G. Taft President Chief Executive Officer of the Adviser and of the Underwriter since
90 South Seventh Street 1994; President of the Adviser and of the Underwriter since 1991;
Suite 4400 Director of the Adviser and the Underwriter since 1993; Management
Minneapolis, Minnesota 55402 committee member of the Adviser from 1991 to 1993; previously,
President Managing Director at Piper, Jaffray & Hopwood Incorporated from 1986
to 1991.
Jane M. Wyatt Executive Director and Chief Investment Officer of the Adviser since 1993; Director
90 South Seventh Street Vice of the Underwriter since 1993; Executive Vice President and
Suite 4400 President Portfolio Manager of the Adviser from 1992 to 1993; Vice President and
Minneapolis, Minnesota 55402 Portfolio Manager from 1989 to 1992.
Andrew M. McCullagh, Jr. Executive Director of the Adviser and the Underwriter since
717 Seventeenth Street Vice 1993; Executive Vice President of the Adviser since
Denver, Colorado 80202 President 1990.
Elizabeth H. Howell Vice Vice President of the Adviser since 1993 and Senior Tax Exempt
90 South Seventh Street President Portfolio Manager since 1991; previously, portfolio manager for
Suite 4400 Windsor Financial Group, Minneapolis, from 1988 to 1991.
Minneapolis, Minnesota 55402
James C. King Vice Director of the Adviser and the Underwriter since 1993;
90 South Seventh Street President Executive Vice President and Senior Equity Portfolio Manager
Suite 4400 of the Adviser since 1990.
Minneapolis, Minnesota 55402
Richard Vandenberg Vice Executive Vice President of the Adviser since 1994;
90 South Seventh Street President Portfolio Manager of the Adviser since October 1992;
Suite 4400 previously, Proprietary Trader with Norwest Bank from March
Minneapolis, Minnesota 55402 1992 to October 1992; President of Ravan Corporation, a
commodity trading adviser in Excelsior, Minnesota, from 1990
to March 1992.
Kenneth R. Larsen Treasurer Chief Financial Officer of the Adviser since 1990 and
90 South Seventh Street Treasurer since 1994; Chief Financial Officer of the
Suite 4400 Underwriter since 1994; Director of the Adviser and the
Minneapolis, Minnesota 55402 Underwriter since 1993; Secretary and Treasurer of the
Adviser and the Underwriter from 1990 to 1993.
Thomas J. Abood Secretary Vice President and General Counsel of the Adviser and the
90 South Seventh Street Underwriter since October 1994. Prior to October 1994, Mr.
Suite 4400 Abood was associated with the law firm of Skadden, Arps,
Minneapolis, Minnesota 55402 Slate, Meagher & Flom, Chicago, Illinois.
</TABLE>
* Denotes a director of the Company who is an interested person of the Company,
the Adviser and/or the Underwriter.
As of ^________________, 1995, the officers and directors of the
Company as a group did not own any shares of the Funds.
The Company does not compensate its officers. Each director (who is not
an employee of the Adviser or any of its affiliates) receives a total annual fee
of $24,000 for serving as a director or trustee for each of the open-end and
closed-end investment companies (the "Fund Complex") for which the Adviser acts
as investment adviser, plus a $500 fee for each special in-person meeting
attended by such director. These fees are allocated among each series or fund in
the Fund Complex based on the relative average net asset value of each series or
fund. Currently the Fund Complex consists of ten open-end investment companies
comprising twenty-nine series or funds and six closed-end investment companies.
In addition, each director who is not an employee of the Adviser or any of its
affiliates is reimbursed for expenses incurred in connection with attending
meetings. As of __________________^, 1995, the Company had not paid any
compensation to directors. As of December 31, 1994, the Fund Complex paid total
compensation of $22,500 to each of Messrs. Frame, McNamara, Nelson and Odegard
and $16,000 to Mr. Madison.
Voyageur Fund Distributors, Inc. (the "Underwriter") is the principal
distributor of each Fund's shares. With regard to the Underwriter, Mr. Taft is
the President and a director and Messrs. McCullagh, King and Larsen and Ms.
Wyatt are each directors.
THE INVESTMENT ADVISER, SUB-ADVISER, ADMINISTRATIVE
SERVICES, EXPENSES AND BROKERAGE
GENERAL
The Adviser, a Minnesota corporation, has been retained under an
investment advisory agreement (the "Advisory Agreement") with the Company to act
as the Funds' investment adviser, subject to the authority of the Board of
Directors. the Adviser and the Underwriter are each indirect wholly-owned
subsidiaries of Dougherty Dawkins, Inc. ("Dougherty Dawkins"), which is owned
50% by Michael E. Dougherty and 50% by Pohlad Companies. Mr. Dougherty
co-founded the predecessor of Dougherty Dawkins in 1977 and has served as
Dougherty Dawkins' Chairman of the Board and Chief Executive Officer since
inception. Pohlad Companies is a holding company owned in equal parts by each of
James O. Pohlad, Robert C. Pohlad and William M. Pohlad. The principal executive
offices of the Adviser are located at 90 South Seventh Street, Suite 4400,
Minneapolis, Minnesota 55402.
INVESTMENT ADVISORY AGREEMENT
The Funds do not maintain their own research department. The Company,
on behalf of each Fund, has contracted with the Adviser for investment advice,
research and management. Pursuant to the Investment Advisory Agreement, the
Adviser has the sole and exclusive responsibility for the management of each
Fund's portfolio and the making and execution of all investment decisions for
the Fund subject to the objectives and investment policies and restrictions of
the Fund and subject to the supervision of the Company's Board of Directors. The
Adviser also furnishes, at its own expense, office facilities, equipment and
personnel for servicing the investments of each Fund. The Adviser has agreed to
arrange for officers and employees of the Adviser to serve without compensation
from the Funds as directors, officers or employees of the Company if duly
elected to such positions by the shareholders or directors.
As compensation for the Adviser's services, ^Global Fund is obligated
to pay to the Adviser a monthly investment advisory fee equivalent on an annual
basis to .70% of its average daily net assets and each of the other Funds are
obligated to pay a monthly fee equivalent on an annual basis to .50% of ^each
such Fund's average daily net assets. The percentage fee is based on the average
daily value of each Fund's net assets at the close of each business day. For
purposes of calculating average daily net assets, as such term is used in the
Investment Advisory Agreements, each Fund's net assets equal its total assets
minus its total liabilities.
The Investment Advisory Agreement continues from year to year only if
approved annually (a) by the Board of Directors of the Company or by vote of a
majority of the outstanding voting securities of each Fund and (b) by vote of a
majority of Directors of the Company who are not parties to such Investment
Advisory Agreement or interested persons (as defined in the 1940 Act) of any
such party, cast in person at a meeting of the Board of Directors called for the
purpose of voting on such approval. The Investment Advisory Agreement may be
terminated by either party on 60 days' notice to the other party and terminates
automatically upon its assignment. The Investment Advisory Agreement also
provides that amendments to the Agreement may be effected if approved by the
Board of Directors of the Company (including a majority of the directors who are
not interested persons of the Adviser or the Company), unless the 1940 Act
requires that any such amendment must be submitted for approval by the
shareholders and that all proposed assignments of such agreement are subject to
approval by the Company's Board of Directors (unless the 1940 Act otherwise
requires shareholder approval thereof).
THE SUB-ADVISER
Global Fund's Sub-Adviser is Lazard London International Investment
Management Limited (the "Sub-Adviser"). Pursuant to a Sub-Advisory Agreement
with the Adviser, the Sub-Adviser provides Global Fund with investment advice
and portfolio management relating to the Fund's investments in foreign
securities. Under the Sub-Advisory Agreement, the Sub-Adviser is required, among
other things, to report to the Adviser or the Board of Directors regularly at
such times and in such detail as the Adviser or the Board of Directors may from
time to time request in order to permit the Adviser and the Board of Directors
to determine the adherence of the Fund to its investment objective, policies and
restrictions. The Sub-Advisory Agreement also requires the Sub-Adviser to
provide all office space, personnel and facilities necessary and incident to the
Sub-Adviser's performance of its services under the Sub-Advisory Agreement. For
its services, the Sub-Adviser receives a monthly sub-advisory fee from the
Adviser equivalent on an annual basis to .35% of the average daily net assets of
the Fund.
ADMINISTRATIVE SERVICES AGREEMENT
The Adviser also acts as each Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement (the "Administrative Services Agreement") between the Adviser
and the Company. Pursuant to the Administrative Services Agreement, the Adviser
provides each Fund all dividend disbursing, transfer agency, administrative and
accounting services required by such Fund including, without limitation, the
following: (i) the calculation of net asset value per share (including the
pricing of each Fund's portfolio of securities) at such times and in such manner
as is specified in the Fund's current Prospectus and Statement of Additional
Information, (ii) upon the receipt of funds for the purchase of such Fund's
shares or the receipt of redemption requests with respect to such Fund's shares
outstanding, the calculation of the number of shares to be purchased or
redeemed, respectively, (iii) upon such Fund's distribution of dividends, the
calculation of the amount of such dividends to be received per share, the
calculation of the number of additional shares of such Fund to be received by
each shareholder of such Fund (other than any shareholder who has elected to
receive such dividends in cash) and the mailing of payments with respect to such
dividends to shareholders who have elected to receive such dividends in cash,
(iv) the provision of transfer agency services, (v) the creation and maintenance
of such records relating to the business of such Fund as such Fund may from time
to time reasonably request, (vi) the preparation of tax forms, reports, notices,
proxy statements, proxies and other shareholder communications, and the mailing
thereof to shareholders of such Fund, and (vii) the provision of such other
dividend disbursing, transfer agency, administrative and accounting services as
such Fund and the Adviser may from time to time agree upon. Pursuant to the
Administrative Services Agreement, the Adviser also provides such regulatory
reporting and compliance related services and tasks for the Company or any Fund
as the Company may reasonably request.
As compensation for these services, ^Global Fund pays the Adviser a
monthly fee equivalent on an annual basis to ___ % of the Fund's average daily
net assets and each of the other Funds pay the Adviser a monthly fee of .10% of
^each such Fund's average daily net assets. For purposes of calculating average
daily net assets, as such term is used in the Administrative Services
Agreements, each Fund's net assets equals its total assets minus its total
liabilities. Each Fund also reimburses the Adviser for its out-of-pocket
expenses in connection with the Adviser's provision of services under such
Fund's Administrative Services Agreement.
A majority of the disinterested directors of the Company specifically
found, in the course of their review of each Fund's Administrative Services
Agreement, that such agreement is in the best interests of the Fund and its
shareholders, the services to be performed pursuant to such agreement are
services required for the operation of the Fund, the Adviser can provide
services the nature and quality of which are at least equal to those provided by
others offering the same or similar services, and the fees for such services are
fair and reasonable in light of the usual and customary charges made by others
for services of the same nature and quality. The Administrative Services
Agreement is renewable from year to year if the Company's directors (including a
majority of the Company's disinterested directors) approve the continuance of
the Agreement. Each Fund or the Adviser can terminate such Fund's Administrative
Services Agreement on 60 days' notice to the other party. The Administrative
Services Agreement also provides that amendments to the Agreement may be
effected if approved by the Board of Directors of the Company (including a
majority of the directors who are not interested persons of the Adviser or the
Fund), unless the 1940 Act requires that any such amendment must be submitted
for approval by the Fund's shareholders, and that all proposed assignments of
such agreement are subject to approval by the Company's Board of Directors
(unless the 1940 Act otherwise requires shareholder approval thereof).
EXPENSES OF THE FUNDS
The Adviser reserves the right to voluntarily waive its fees in whole
or part and to voluntarily absorb certain other of the Fund's expenses. Any such
waiver or absorption, however, is in the Adviser's sole discretion and may be
lifted or reinstated at any time. The Adviser and the Underwriter have agreed to
voluntarily limit the operating expenses of the Institutional Shares and the
Service Shares of each Fund to the amounts set forth in the Prospectus under
"Fund Expenses." Such waivers are for the fiscal year ended September 30, 1995,
after which such waivers may be discontinued or modified by the Adviser and the
Underwriter in their sole discretion.
All costs and expenses (other than those specifically referred to as
being borne by the Adviser or the Underwriter) incurred in the operation of each
Fund are borne by such Fund. These expenses include, among others, fees of the
directors who are not employees of the Adviser or any of its affiliates,
expenses of directors' and shareholders' meetings, including the cost of
printing and mailing proxies, expenses of insurance premiums for fidelity and
other coverage, expenses of redemption of shares, expenses of issue and sale of
shares (to the extent not borne by the Underwriter under its agreement with such
Fund), expenses of printing and mailing stock certificates representing shares
of such Fund, association membership dues, charges of such Fund's custodian, and
bookkeeping, auditing and legal expenses. Each Fund will also pay the fees and
bear the expense of registering and maintaining the registration of such Fund
and its shares with the Securities and Exchange Commission and registering or
qualifying its shares under state or other securities laws and the expense of
preparing and mailing prospectuses, reports and statements to shareholders.
PORTFOLIO TRANSACTIONS AND ALLOCATION OF BROKERAGE
As the Funds' portfolios are composed exclusively of debt, rather than
equity securities, most of the Funds' portfolio transactions are effected with
dealers without the payment of brokerage commissions, but rather at net prices
which usually include a spread or markup. In effecting such portfolio
transactions on behalf of the Funds, the ^Adviser, and with respect to Global
Fund, the Sub-Adviser, seek the most favorable net price consistent with the
best execution. However, frequently, the Adviser or Sub-Adviser selects a dealer
to effect a particular transaction without contacting all dealers who might be
able to effect such transaction, because of the volatility of the bond market
and the desire of the Adviser or Sub-Adviser to accept a particular price for a
security because the price offered by the dealer meets its guidelines for
profit, yield or both. No brokerage commissions are expected to be paid by the
Funds.
Decisions with respect to placement of the Funds' portfolio
transactions are made by the ^Adviser and, with respect to Global Fund, the
Sub-Adviser. The primary consideration in making these decisions is efficiency
in the execution of orders and obtaining the most favorable net prices for the
Funds. When consistent with these objectives, business may be placed with
broker-dealers who furnish investment research services to the ^Adviser or
Sub-Adviser. Such research services include advice, both directly and in
writing, as to the value of securities; the advisability of investing in,
purchasing or selling securities; and the availability of securities, or
purchasers or sellers of securities; as well as analyses and reports concerning
issues, industries, securities, economic factors and trends, portfolio strategy
and the performance of accounts. This allows the Adviser and Sub-Adviser to
supplement ^their own investment research activities and enables the Adviser and
Sub-Adviser to obtain the views and information of individuals and research
staffs of many different securities firms prior to making investment decisions
for the Funds. To the extent portfolio transactions are effected with
broker-dealers who furnish research services to the ^Adviser and/or Sub-Adviser,
the Adviser ^and/or Sub-Adviser receive a benefit, not capable of evaluation in
dollar amounts, without providing any direct monetary benefit to the Funds from
these transactions.
The Adviser ^and Sub-Adviser have not entered into any formal or
informal agreements with any broker-dealers, nor ^do they maintain any "formula"
which must be followed in connection with the placement of the Funds' portfolio
transactions in exchange for research services provided the ^Adviser or
Sub-Adviser, except as noted below. However, each of the Adviser ^and
Sub-Adviser maintains informal ^lists of broker-dealers, which is used from time
to time as a general guide in the placement of the Funds' business, in order to
encourage certain broker-dealers to provide the Adviser and Sub-Adviser with
research services which the Adviser ^and Sub-Adviser anticipate will be useful
to ^them. Because the list is merely a general guide, which is to be used only
after the primary criterion for the selection of broker-dealers (discussed
above) has been met, substantial deviations from the list are permissible and
may be expected to occur. The Adviser and Sub-Adviser will authorize the Funds
to pay an amount of commission for effecting a securities transaction in excess
of the amount of commission another broker-dealer would have charged only if the
Adviser or Sub-Adviser determines in good faith that such amount of commission
is reasonable in relation to the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either that particular
transaction or the Adviser's or Sub-Adviser's overall responsibilities with
respect to the accounts as to which it exercises investment discretion.
The Funds will not effect any brokerage transactions in their portfolio
securities with any broker-dealer affiliated directly or indirectly with the
^Adviser or Sub-Adviser, unless such transactions, including the frequency
thereof, the receipt of commissions payable in connection therewith and the
selection of the affiliated broker-dealer effecting such transactions are not
unfair or unreasonable to the shareholders of the Funds. In the event any
transactions are executed on an agency basis, the Adviser or Sub-Adviser will
authorize the Funds to pay an amount of commission for effecting a securities
transaction in excess of the amount of commission another broker-dealer would
have charged only if the Adviser or Sub-Adviser determines in good faith that
such amount of commission is reasonable in relation to the value of the
brokerage and research services provided by such broker-dealer, viewed in terms
of either that particular transaction or the Adviser's or Sub-Adviser's overall
responsibilities with respect to the Funds as to which it exercises investment
discretion. If the Funds execute any transactions on an agency basis, they will
generally pay higher than the lowest commission rates available.
In determining the commissions to be paid to a broker-dealer affiliated
with the ^Adviser or Sub-Adviser, it is the policy of the Funds that such
commissions will, in the judgment of the ^Adviser or Sub-Adviser, subject to
review by the Board of Directors, be both (a) at least as favorable as those
which would be charged by other qualified brokers in connection with comparable
transactions involving similar securities being purchased or sold on an exchange
during a comparable period of time, and (b) at least as favorable as commissions
contemporaneously charged by such affiliated broker-dealers on comparable
transactions for their most favored comparable unaffiliated customers. While
each Fund does not deem it practicable and in its best interest to solicit
competitive bids for commission rates on each transaction, consideration will
regularly be given to posted commission rates as well as to other information
concerning the level of commissions charged on comparable transactions by other
qualified brokers.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Funds may purchase securities from an underwriting
syndicate of which an affiliated broker-dealer is a member (but not directly
from such affiliated broker-dealer itself). Such conditions relate to the price
and amount of the securities purchased, the commission or spread paid and the
quality of the issuer. The rules further require that such purchases take place
in accordance with procedures adopted and reviewed periodically by the Board of
Directors of the Funds, particularly those directors who are not interested
persons of the Funds.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth in the
preceding paragraphs and such other policies as the Company's directors may
determine, the Adviser and Sub-Adviser may consider sales of shares of the Funds
as a factor in the selection of broker-dealers to execute the Funds' securities
transactions.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
The method for determining the public offering price of Fund shares,
which is equal to the net asset value per share, is summarized in the
Prospectus. The portfolio securities in which the Funds invest fluctuate in
value and hence the net asset value per share of each Fund also fluctuates. The
net asset value of each Fund's shares is determined on each day on which the New
York Stock Exchange is open, provided that the net asset value need not be
determined on days when no Fund shares are tendered for redemption and no order
for Fund shares is received. The New York Stock Exchange is not open for
business on the following holidays (or on the nearest Monday or Friday if the
holiday falls on a weekend): New Year's Day, President's Day, Good Friday,
Memorial Day, July 4th, Labor Day, Thanksgiving and Christmas.
TAXES
GENERAL INFORMATION
To qualify under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code") for tax treatment as a regulated investment company, each
Fund must, among other things: (a) distribute to its shareholders at least 90%
of its investment company taxable income (as that term is defined in the Code
determined without regard to the deduction for dividends paid); (b) derive less
than 30% of its annual gross income from the sale or other disposition of stock,
securities, options, futures, or forward contracts held for less than three
months; and (c) diversify its holdings so that, at the end of each fiscal
quarter of the Fund, (i) at least 50% of the market value of the Fund's assets
is represented by cash, cash items, U.S. Government securities and securities of
other regulated investment companies, and other securities, with these other
securities limited, with respect to any one issuer, to an amount no greater than
5% of the Fund's total assets and no greater than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the market value of the
Fund's total assets is invested in the securities of any one issuer (other than
U.S. Government securities or securities of other regulated investment
companies).
Each Fund will be subject to a nondeductible excise tax equal to 4% of
the excess, if any, of the taxable amount required to be distributed for each
calendar year over the amount actually distributed. In order to avoid this
excise tax, each Fund must declare dividends by the end of the calendar year
representing 98% of the Fund's ordinary income for the calendar year and 98% of
its capital gain net income (both long-term and short-term gains) for the
12-month period ending on October 31 of such year. For purposes of this
requirement, any income on which a Fund has paid corporate income tax is deemed
to have been distributed. Each Fund intends to make sufficient distributions
each year to avoid the payment of the excise tax.
When shares of a Fund are sold or otherwise disposed of, the Fund
shareholder will realize a capital gain or loss equal to the difference between
the purchase price and the sale price of the shares disposed of, if, as is
usually the case, the Fund shares are a capital asset in the hands of the Fund
shareholder. In addition, pursuant to a special provision in the Code, if Fund
shares with respect to which a long-term capital gain distribution has been made
are held for six months or less, any loss on the sale or other disposition of
such shares will be a long-term capital loss to the extent of such long-term
capital gain distribution. Certain deductions otherwise allowable to financial
institutions and property and casualty insurance companies will be eliminated or
reduced by reason of the receipt of certain exempt-interest dividends.
Any loss on the sale or exchange of shares of a Fund generally will be
disallowed to the extent that a shareholder acquires or contracts to acquire
shares of the same Fund within 30 days before or after such sale or exchange.
Pursuant to the Code, distributions of net investment income by a Fund
to a shareholder who, as to the U.S., is a nonresident alien individual,
nonresident alien fiduciary of a trust or estate, foreign corporation, or
foreign partnership (a "foreign shareholder") will generally be subject to U.S.
withholding tax (at a rate of 30% or lower treaty rate). Withholding will not
apply if a dividend paid by the Fund to a foreign shareholder is "effectively
connected" with a U.S. trade or business of such shareholder, in which case the
reporting and withholding requirements applicable to U.S. citizens or domestic
corporations will apply. Distributions of net long-term capital gains are not
subject to tax withholding but, in the case of a foreign shareholder who is a
nonresident alien individual, such distributions ordinarily will be subject to
U.S. income tax at a rate of 30% if the individual is physically present in the
U.S. for more than 182 days during the taxable year. Each Fund will report
annually to its shareholders the amount of any withholding. It is expected that
dividends paid by the Funds will not be eligible for the 70% deduction for
dividends received by corporations because the Funds' income will not consist of
dividends paid by U.S. corporations.
The Funds will recognize gain or loss on futures contracts, options,
and forward currency contracts when realized by entering into a closing
transaction or by exercise. In addition, if a Fund holds such contracts and
options at the end of its taxable year, unrealized gain or loss on such
contracts is taken into account at the then current fair market value thereof
under a special "marked-to-market, 60/40 system," and such gain or loss is
recognized for tax purposes. The gain or loss from such contracts and options
(including premiums on certain options that expire unexercised) is treated as
60% long-term and 40% short-term capital gain or loss, regardless of their
holding period. The amount of any capital gain or loss actually realized by a
Fund in a subsequent sale or other disposition of such contracts will be
adjusted to reflect any capital gain or loss taken into account by the Fund in a
prior year as a result of the constructive sale under the "marked-to-market,
60/40 system." Notwithstanding the rules described above, with respect to
certain futures or forward currency contracts, a Fund may make an election that
will have the effect of exempting all or a part of those identified contracts
from being treated for federal income tax purposes as sold on the last business
day of the Fund's taxable year. All or part of any loss realized by a Fund on
any closing of a contract may be deferred until all of the Fund's offsetting
positions with respect to the futures contract are closed.
Code Section 988 may also apply for forward currency contracts. Under
Section 988, each foreign currency gain or loss is generally computed separately
and treated as ordinary income or loss. In the case of overlap between Sections
1256 and 988, special provisions determine the character and timing of any
income, gain or loss. The Funds engaging in forward currency contracts will
attempt to monitor Section 988 transactions to avoid an adverse tax impact.
Sales of forward currency contracts which are intended to hedge against
a change in the value of securities or currencies held by a Fund may affect the
holding period of such securities or currencies and, consequently, the nature of
the gain or loss on such securities or currencies upon distribution.
It is expected that any net gain realized from the closing out of
forward currency contracts will be considered gain from the sale of securities
or currencies and therefore be qualifying income for purposes of the 90% of
gross income from qualified sources requirement, as discussed above. In order to
avoid realizing excessive gains on securities or currencies held less than three
months, a Fund may be required to defer the closing out of forward currency
contracts beyond the time when it would otherwise be advantageous to do so. It
is expected that unrealized gains on forward currency contracts, which have been
open for less than three months as of the end of a Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on securities or
currencies held less than three months for purposes of the 30% test, as
discussed above.
Under the Code, a Fund's taxable income for each year will be computed
without regard to any net foreign currency loss attributable to transactions
after October 31, and any such net foreign currency loss will be treated as
arising on the first day of the following taxable year.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of securities held
less than three months. This restriction may limit the extent to which any Fund
enter into options transactions and futures and forward contracts . To the
extent a Fund engages in short-term trading and enters into options transactions
and futures and forward contracts, the likelihood of violating this 30%
requirement is increased.
MUNICIPAL FUND
Under the Code, interest on indebtedness incurred or continued to
purchase or carry shares of an investment company paying exempt-interest
dividends, such as Municipal Fund, will not be deductible by a shareholder in
proportion to the ratio of the Fund's exempt-interest income to its total gross
income, excluding its net income from capital gains. Indebtedness may be
allocated to shares of the Fund even though not directly traceable to the
purchase of such shares.
For shareholders who are recipients of Social Security benefits,
exempt-interest dividends are includable in computing "modified adjusted gross
income" for purposes of determining the amount of Social Security benefits, if
any, that is required to be included in gross income. The maximum amount of
Social Security benefits that may be included in gross income is 85%.
Any loss on the sale or exchange of shares of Municipal Fund held for
six months or less (although regulations may reduce this time period to 31 days)
will be disallowed for federal income tax purposes to the extent of the amount
of any exempt-interest dividend received with respect to such shares.
For federal income tax purposes, an alternative minimum tax ("AMT") is
imposed on taxpayers to the extent that such tax, if any, exceeds a taxpayer's
regular income tax liability (with certain adjustments). Exempt-interest
dividends attributable to interest income on certain tax-exempt obligations
issued after August 7, 1986 to finance private activities are treated as an item
of tax preference that is included in alternative minimum taxable income for
purposes of computing the federal AMT for all taxpayers and the federal
environmental tax on corporations. In addition, all other tax-exempt interest
received by a corporation, including exempt-interest dividends, will be included
in adjusted current earnings for purposes of determining the federal corporate
AMT and the environmental tax imposed on corporations by Section 59A of the
Code. Liability for AMT will depend on each shareholder's individual tax
situation.
The Code imposes requirements on certain tax-exempt bonds which, if not
satisfied, could result in loss of tax exemption for interest on such bonds,
even retroactively to the date of issuance of the bonds. Proposals may be
introduced before Congress in the future, the purpose of which will be to
further restrict or eliminate the federal income tax exemption for tax-exempt
bonds held by the Funds. The Funds will avoid investment in bonds which, in the
opinion of the investment adviser, pose a material risk of the loss of tax
exemption. Further, if a bond in any Fund's portfolio lost its exempt status,
such Fund would make every effort to dispose of such investment on terms that
are not detrimental to the Fund.
If Municipal Fund invests in custodial receipts (see "Risks and
Characteristics of Securities and Investment Techniques -- Municipal Obligations
- -- Derivative Municipal Obligations" in the Prospectus), it is possible that a
portion of the discount at which the Fund purchases the receipts might have to
be accrued as taxable income during the period that the Fund holds the receipts.
Because of the requirement that Municipal Fund distribute 90% of its net
investment income to maintain its status as a regulated investment company, the
Fund would be obligated to distribute taxable income to shareholders in the
amount of its accrued taxable income.
The foregoing relates only to federal income taxation and is a general
summary of the federal tax law in effect as of the date of this Statement of
Additional Information.
CALCULATION OF PERFORMANCE DATA
Advertisements and other sales literature for the Funds may refer to
"yield," "taxable equivalent yield" (with respect to Municipal Fund only),
"average annual total return," "cumulative total return" and "current
distribution rate." These amounts are calculated as described below. No
performance information is provided for the Funds because these Funds had not
commenced operations as of the date of this Statement of Additional Information.
YIELD
Yield is computed by dividing the net investment income per share
deemed earned during the computation period by the maximum offering price per
share on the last day of the period, according to the following formula:
( a-b )
6
YIELD = 2[( ---- + 1) -1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the period.
TAXABLE EQUIVALENT YIELD
Taxable equivalent yield is computed by dividing that portion of the
yield of a Fund (as computed above) which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is computed by finding the average annual
compounded rates of return over the periods indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
ERV = ending redeemable value at the end of
the period of a hypothetical $1,000 payment made
at the beginning of such period.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
CUMULATIVE TOTAL RETURN
Cumulative total return is computed by finding the cumulative
compounded rate of return over the period indicated in the advertisement that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:
ERV-P
CTR = ( -------- )100
P
Where: CTR = Cumulative total return;
ERV = ending redeemable value at the end of the period of a
hypothetical $1,000 payment made at the beginning of such period;
and
P = initial payment of $1,000.
This calculation deducts the maximum sales charge from the initial hypothetical
$1,000 investment, assumes all dividends and capital gain distributions are
reinvested at net asset value on the appropriate reinvestment dates as described
in the Prospectus, and includes all recurring fees, such as investment advisory
and management fees, charged as expenses to all shareholder accounts.
DISTRIBUTION RATE
A Fund's current distribution rate as of a specified date is calculated
by determining the amount of distributions that would have been paid over the
twelve-month period ending on such date to the holder of one hypothetical Fund
share purchased at the beginning of such period, and dividing such amount by the
current offering price per share.
REDEMPTIONS
A signature guarantee is required if a redemption: (1) exceeds $50,000 (unless
it is being wired to a pre-authorized bank account, in which case a guarantee is
not required), (2) is to be paid to someone other than the registered
shareholder or (3) is to be mailed to an address other than the address of
record or wired to an account other than the pre-authorized bank or brokerage
account. On joint account redemptions, each signature must be guaranteed. A
signature guarantee may not be provided by a notary public. Please contact the
Adviser for instructions as to what institutions constitute eligible signature
guarantors. The Underwriter may waive certain of these redemption requirements
at its own risk, but also reserves the right to require signature guarantees on
all redemptions, in contexts perceived by the Underwriter to subject a Fund to
an unusual degree of risk.
ADDITIONAL INFORMATION
Organizational costs incurred by the Company in connection with its
start-up and initial registration will be amortized over 60 months on an inverse
acceleration (sum-of-the-years-digits) basis beginning on the date of each
Fund's initial effective date. If the Adviser redeems any or all of its shares
of any Fund prior to the end of such Fund's 60-month amortization period, the
redemption proceeds will be reduced by its pro rata portion of such Fund's
unamortized organizational costs. If a Fund liquidates prior to the date such
costs are fully amortized, the Adviser will bear all unamortized organizational
costs of such Fund.
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
First Trust National Association, 180 East Fifth Street, St. Paul,
Minnesota 55101, acts as custodian of the Funds' assets and portfolio
securities.
Dorsey & Whitney P.L.L.P., 220 South Sixth Street, Minneapolis,
Minnesota 55402, serves as general counsel for the Funds.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as the Funds' independent auditors.
SHAREHOLDER MEETINGS
The Company is not required under Minnesota law or under the Company's
Articles of Incorporation to hold annual or periodically scheduled regular
meetings of shareholders. Regular and special shareholder meetings are held only
at such times and with such frequency as required by law. Minnesota law and the
Company's Articles of Incorporation provide for the Board of Directors to
convene shareholder meetings when it deems appropriate. Additionally, the 1940
Act requires shareholder votes for all amendments to fundamental investment
policies and restrictions and for all investment advisory contracts and
amendments thereto.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director of the Company owes certain
fiduciary duties to each Fund and to its shareholders. Minnesota law provides
that a director "shall discharge the duties of the position of director in good
faith, in a manner the director reasonably believes to be in the best interest
of the corporation, and with the care an ordinarily prudent person in a like
position would exercise under similar circumstances." Fiduciary duties of a
director of a Minnesota corporation include, therefore, both a duty of "loyalty"
(to act in good faith and act in a manner reasonably believed to be in the best
interests of the corporation) and a duty of "care" (to act with the care an
ordinarily prudent person in a like position would exercise under similar
circumstances). Minnesota corporations are authorized to eliminate or limit the
personal liability of a director to the corporation or its shareholders for
monetary damages for breach of the fiduciary duty of "care". Minnesota law does
not, however, permit a corporation to eliminate or limit the liability of
directors (i) for any breach of the directors' duty of "loyalty" to the
corporation or its shareholders, (ii) for acts or omissions not in good faith or
that involve intentional misconduct or a knowing violation of law, (iii) for
authorizing a dividend, stock repurchase or redemption or other distribution in
violation of Minnesota law or for violation of certain provisions of Minnesota
securities law, or (iv) for any transaction from which the directors derived an
improper personal benefit. The Articles of Incorporation of each of the Funds
limits the liability of such Funds' directors to the fullest extent permitted by
Minnesota statutes, except to the extent that such liability cannot be limited
as provided in the 1940 Act (which Act prohibits any provisions which purport to
limit the liability of directors arising from such directors' willful
misfeasance, bath faith, gross negligence, or reckless disregard of the duties
involved in the conduct of their role as directors).
Minnesota law does not eliminate the duty of "care" imposed upon a
director. It only authorizes a corporation to eliminate monetary liability for
violations of that duty. Minnesota law, further, does not permit elimination or
limitation of liability of "officers" to the corporation for breach of their
duties as officers). Minnesota law does not permit elimination or limitation of
the availability of equitable relief, such as injunctive or rescissionary
relief. Further, Minnesota law does not permit elimination or limitation of a
director's liability under the1933 Act or the Securities Exchange Act of 1934,
and it is uncertain whether and to what extent the elimination of monetary
liability would extend to violations of duties imposed on directors by the 1940
Act and the rules and regulations adopted thereunder.
ORGANIZATION AND CAPITALIZATION OF THE FUNDS
The Company's (and, therefore, each Fund's) fiscal year ends on
September 30 of each year.
The Articles of Incorporation of the Company were amended and restated
on November 23, 1993 to, among other things, change the name of the Company from
Voyageur Money Market Fund, Inc. to Voyageur Mutual Funds IV, Inc. and on
January 20, 1995 to change the Company name to VAM Institutional Funds, Inc.
As described in the text of the Prospectus following the caption
"General Information," shares of the Funds are entitled to one vote per share
(with proportional voting for fractional shares) on such matters as shareholders
are entitled to vote. There will normally be no meetings of shareholders for the
purpose of electing directors, except insofar as elections are required under
the 1940 Act in the event that (i) less than a majority of the directors have
been elected by shareholders, or (ii) if, as a result of a vacancy, less than
two-thirds of the directors have been elected by the shareholders, the vacancy
will be filled only by a vote of the shareholders. In addition, the directors
may be removed from office by a written consent signed by the holders of
two-thirds of the outstanding shares of the Funds and filed with the Funds'
custodian or by a vote of the holders of two-thirds of the outstanding shares of
the Funds at a meeting duly called for the purpose, which meeting shall be held
upon the written request of the holders of not less than 10% of the outstanding
shares. Upon written request by ten or more shareholders, who have been such for
at least six months, and who in the aggregate hold shares having a net asset
value of at least $25,000 or constituting 1% of the outstanding shares, stating
that such shareholders wish to communicate with the other shareholders for the
purpose of obtaining the signatures necessary to demand a meeting to consider
removal of a director, the Funds have undertaken to provide a list of
shareholders or to disseminate appropriate materials (at the expense of the
requesting shareholders). Except as set forth above, each director shall
continue to hold office and may appoint a successor.
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S CORPORATION -- A brief description of the applicable
Standard & Poor's Corporation (S&P) rating symbols and their meanings (as
published by S&P) follows:
An S&P corporate or municipal debt rating is a current
assessment of the creditworthiness of an obligor with respect to a
specific obligation. This assessment may take into consideration
obligors such as guarantors, insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or
hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor.
The ratings are based on current information furnished by the
issuer or obtained by S&P from other sources it considers reliable. S&P
does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of default -- capacity and willingness of the
obligor as to the timely payment of interest and repayment
of principal in accordance with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the
obligation in the event of bankruptcy, reorganization, or
other arrangement under the laws of bankruptcy and other
laws affecting creditors' rights.
1. Long-term bonds.
AAA Debt rated 'AAA' has the highest rating assigned by S&P.
Capacity to pay interest and repay principal is extremely
strong.
AA Debt rated 'AA' has a very strong capacity to pay interest
and repay principal and differs from the highest rated
issues only in small degree.
A Debt rated 'A' has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than debt in higher-rated categories.
BBB Debt rated 'BBB' is regarded as having an adequate capacity
to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead
to a weakened capacity to pay interest and repay principal
for debt in this category than in higher-rated categories.
BB Debt rated 'BB,' 'B,' 'CCC,' 'CC' and 'C' is regarded, on
B balance, as predominantly speculative with respect to
CCC capacity to pay interest and repay principal in accordance
CC with the terms of the obligation. 'BB' indicates the
C lowest degree of speculation and 'C' the highest degree
of speculation. While such debt will likely have some
quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
BB Debt rated 'BB' has less near-term vulnerability to default
than other speculative issues. However, it faces major
ongoing uncertainties of exposure to adverse business,
financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal
payments. The 'BB' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or
economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The 'B'
rating category is also used for debt subordinated to senior
debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability
to default, and is dependent upon favorable business,
financial, and economic conditions to meet timely payment of
interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not
likely to have the capacity to pay interest and repay
principal. The 'CCC' rating category is also used for debt
subordinated to senior debt that is assigned an actual or
implied 'B' or 'B-' rating.
CC The rating 'CC' is typically applied to debt subordinated to
senior debt that is assigned an actual or implied 'CCC'
rating.
C The rating 'C' is typically applied to debt subordinated to
senior debt which is assigned an actual or implied 'CCC-'
debt rating. The 'C' rating may be used to cover a situation
where a bankruptcy petition has been filed, but debt service
payments are continued.
CI The rating 'CI' is reserved for income bonds on which no
interest is being paid.
D Debt rated 'D' is in payment default. The 'D' rating
category is used when interest payments or principal
payments are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy
petition if debt service payments are jeopardized.
PLUS (+) or MINUS (-): The ratings from 'AA' to 'B' may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
NR Indicates no rating has been requested, that there is
insufficient information on which to base a rating, or that
S&P does not rate a particular type of obligation as a
matter of policy.
2. Short-term tax-exempt notes.
S&P's tax-exempt note ratings are generally given to such notes that
mature in three years or less. The three rating categories are as follows:
SP-1 Very strong or strong capacity to pay principal and interest. These issues
determined to possess overwhelming safety characteristics will be given a
plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Satisfactory capacity to pay principal and interest.
3. Commercial Paper.
An S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
165 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The categories are as
follows:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are
further refined with the designation 1, 2, and 3 to indicate the
relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong. Those issues determined to possess
overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as overwhelming as for
issues designated "A-1."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used
when interest payments or principal payments are not made on the date
due even if the applicable grace period has not expired, unless S&P
believes that such payments will be made during such grace period.
The commercial paper rating is not a recommendation to purchase or
sell a security. The ratings are based on current information
furnished to S&P by the issuer or obtained from other sources it
considers reliable. The ratings may be changed, suspended or withdrawn
as a result of changes in or unavailability of such information.
MOODY'S INVESTORS SERVICE -- A brief description of the applicable Moody's
Investors Service, Inc. ("Moody's") rating symbols and their meanings (as
published by Moody's) follows:
1. Long-term bonds.
Aaa Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge." Interest payments are
protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such
issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa Bonds which are rated Baa are considered as medium-grade
obligations, i.e. they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements;
their future can be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterizes
bonds in this class.
B Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over
any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.
Ca Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or
have other marked shortcomings.
C Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor
prospects of ever attaining any real investment standing.
Con(..) Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of
projects under construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals which begin when facilities
are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis
of condition.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1, and B1.
2. Short-term exempt notes.
Moody's ratings for state and municipal short-term obligations will be
designed Moody's Investment Grade or (MIG). A short-term rating may also be
assigned on an issue having a demand feature-variable rate demand obligation.
Such ratings will be designated as VMIG or, if the demand feature is not rated,
as NR.
Moody's short-term ratings are designated Moody's Investment Grade as MIG 1
or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's assigns a
MIG or VMIG rating, all categories define an investment grade situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of protection
are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of the
preceding grades. Liquidity and cash flow protection may be narrow and market
access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and although
not distinctly or predominantly speculative, there is specific risk.
3. Commercial paper.
Moody's commercial paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories, and are not judged to be investment grade.
PART C
VAM INSTITUTIONAL FUNDS, INC.
VAM Short Government Agency Fund
VAM Intermediate Government Agency Fund
VAM Government Mortgage Fund
VAM Short Duration Total Return Fund
VAM Intermediate Duration Total Return Fund
VAM Intermediate Municipal Fund
VAM Global Fixed Income Fund
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial statements ^- to be provided by amendment
(b) Exhibits
1 Amended and Restated Articles of Incorporation ^*
2 Bylaws, as amended ^*
3 Not applicable
4 Not applicable
^5.1 Investment Advisory Agreement ^*
5.2 Sub-Advisory Agreement *
6.1 Distribution Agreement ^*
6.2 Form of Dealer Agreement ^*
7 Not applicable
8 Custodian Agreement ^*
9.1 Administrative Services Agreement ^*
9.2 Service Plan ^*
10 Opinion and Consent of Dorsey & Whitney P.L.L.P. ^*
11 Consent of KPMG Peat Marwick LLP ^*
12 Not applicable
13 Letter of Investment Intent ^*
14 Not applicable
15 Not applicable
16 Calculations of Yield ^*
^17 Master Power of Attorney ^*
- ----------------
* To be provided by amendment
Item 25. Persons Controlled by or Under Common Control with Registrant
Voyageur serves as investment manager to the following closed-end and
open-end management investment companies:
CLOSED-END INVESTMENT COMPANIES
Voyageur Arizona Municipal Income Fund, Inc.
Voyageur Colorado Insured Municipal Income Fund, Inc.
Voyageur Florida Insured Municipal Income Fund
Voyageur Minnesota Municipal Income Fund, Inc.
Voyageur Minnesota Municipal Income Fund II, Inc.
Voyageur Minnesota Municipal Income Fund III, Inc.
OPEN-END INVESTMENT COMPANIES AND SERIES THEREOF
Voyageur Funds, Inc.
Voyageur U.S. Government Securities Fund
Voyageur Insured Funds, Inc.
Voyageur Minnesota Insured Fund
Voyageur Arizona Insured Tax Free Fund
Voyageur National Insured Tax Free Fund
Voyageur Colorado Insured Tax Free Fund
Voyageur Intermediate Tax Free Funds, Inc.
Voyageur Minnesota Limited Term Tax Free Fund
Voyageur National Limited Term Tax Free Fund
Voyageur Arizona Limited Term Tax Free Fund
Voyageur Colorado Limited Term Tax Free Fund
Voyageur California Limited Term Tax Free Fund
Voyageur Investment Trust
Voyageur Florida Insured Tax Free Fund
Voyageur California Insured Tax Free Fund ^
Voyageur Kansas Tax Free Fund
Voyageur Missouri Insured Tax Free Fund
Voyageur New Mexico Tax Free Fund
Voyageur Oregon Insured Tax Free Fund
Voyageur Utah Tax Free Fund
Voyageur Washington Insured Tax Free Fund
Voyageur Florida Tax Free Fund
Voyageur Investment Trust II
Voyageur Florida Limited Term Tax Free Fund
Voyageur Tax Free Funds, Inc.
Voyageur Minnesota Tax Free Fund
Voyageur North Dakota Tax Free Fund
Voyageur Mutual Funds, Inc.
Voyageur Iowa Tax Free Fund
Voyageur Wisconsin Tax Free Fund
Voyageur Idaho Tax Free Fund
Voyageur Arizona Tax Free Fund
Voyageur California Tax Free Fund
Voyageur National Tax Free Fund
Voyageur Mutual Funds II, Inc.
Voyageur Colorado Tax Free Fund
Voyageur Mutual Funds III , Inc.
Voyageur Growth Stock Fund
Voyageur International Equity Fund
Voyageur Aggressive Growth Fund
VAM Institutional Funds, Inc.
VAM Short Government Agency Fund
VAM Intermediate Government Agency Fund
VAM Government Mortgage Fund
VAM Short Duration Total Return Fund
VAM Intermediate Duration Total Return Fund
VAM Intermediate Municipal Fund
VAM Global Fixed Income Fund
Item 26. Number of Holders of Securities
No information is presented for the Funds because no shares have been
issued.
Item 27. Indemnification
The Registrant's Articles of Incorporation and Bylaws provide that the
Registrant shall indemnify such persons, for such expenses and liabilities, in
such manner, under such circumstances, and to such extent as permitted by
Section 302A.521 of the Minnesota Statutes, as now enacted or hereafter amended;
provided, however, that no such indemnification may be made if it would be in
violation of Section 17(h) of the Investment Company Act of 1940, as now enacted
or hereinafter amended, and any rules, regulations or releases promulgated
thereunder.
The Registrant may indemnify its officers and directors and other
"persons" acting in an "official capacity" (as such terms are defined in Section
302A.521) pursuant to a determination by the board of directors or shareholders
of the Registrant as set forth in Section 302A.521, by special legal counsel
selected by the board or a committee thereof for the purpose of making such a
determination, or by a Minnesota court upon application of the person seeking
indemnification. If a director is seeking indemnification for conduct in the
capacity of director or officer of the Registrant, then such director generally
may not be counted for the purpose of determining either the presence of a
quorum or such director's eligibility to be indemnified.
In any case, indemnification is proper only if the eligibility
determining body decides that the person seeking indemnification has (a) not
received indemnification for the same conduct from any other party or
organization; (b) acted in good faith; (c) received no improper personal
benefit; (d) in the case of criminal proceedings, had no reasonable cause to
believe the conduct was unlawful; (e) reasonably believed that the conduct was
in the best interest of the Registrant, or in certain contexts, was not opposed
to the best interest of the Registrant; and (f) had not otherwise engaged in
conduct which precludes indemnification under either Minnesota or Federal law
(including, but not limited to, conduct constituting willful misfeasance, bad
faith, gross negligence, or reckless disregard of duties as set forth in Section
17(h) and (i) of the Investment Company Act of 1940).
If a person is made or threatened to be made a party to a proceeding,
the person is entitled, upon written request to the Registrant, to payment or
reimbursement by the Registrant of reasonable expenses, including attorneys'
fees and disbursements, incurred by the person in advance of the final
disposition of the proceeding, (a) upon receipt by the Registrant of a written
affirmation by the person of a good faith belief that the criteria for
indemnification set forth in Section 302A.521 have been satisfied and a written
undertaking by the person to repay all amounts so paid or reimbursed by the
Registrant, if it is ultimately determined that the criteria for indemnification
have not been satisfied, and (b) after a determination that the facts then known
to those making the determination would not preclude indemnification under
Section 302A.521. The written undertaking required by clause (a) is an unlimited
general obligation of the person making it, but need not be secured and shall be
accepted without reference to financial ability to make the repayment.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless, in the opinion of its counsel, the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The Registrant undertakes to comply with the indemnification
requirements of Investment Company Release 7221 (June 9, 1972) and Investment
Company Release 11330 (September 2, 1980).
Item 28. Business and Other Connections of Investment Adviser
The name and principal occupations(s) during the past two fiscal years
of each director and the executive officer of the Adviser are set forth below.
The business address of each is 90 South Seventh Street, Suite 4400,
Minneapolis, Minnesota 55402, except that the principal business address of Mr.
McCullagh is 717 Seventeenth Street, Denver, Colorado 80202.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH ADVISER PRINCIPAL OCCUPATION(S)
<S> <C> <C>
Michael E. Dougherty Chairman Chairman of the Board, President and Chief
Executive Officer of Dougherty Dawkins, Inc. and
Chairman of Voyageur, the Underwriter and
Dougherty, Dawkins, Strand & Bigelow, Inc.
John G. Taft President and Director See biographical information in Part B of the
Registration Statement.
Jane M. Wyatt Director and Chief See biographical information in Part B of the
Investment Officer Registration Statement.
James C. King Director and Executive See biographical information in Part B of the
Vice President Registration Statement.
Edward J. Kohler Director and Executive (to be provided)
Vice President
Andrew M. McCullagh Director and Executive See biographical information in Part B of the
Vice President Registration Statement.
Frank C. Tonnemaker Director and Executive Director of Voyageur and the Underwriter since
Vice President 1993; Executive Vice President of the Voyageur
since 1994; Vice President of Voyageur from 1990
to 1994.
Theodore E. Jessen Director and Vice Director of Voyageur and the Underwriter since
President 1993; Chief Administrative Officer of Voyageur
since 1992; Vice President of Voyageur since 1990;
Operations Manager for Voyageur from 1989 to 1990.
Dale L. Kurtz Director Director and Vice President of Voyageur since
1993; Director of the Underwriter since 1993;
director of research and product development for
Voyageur since 1993; director of marketing for
Voyageur from 1990 to 1993.
Kenneth R. Larsen Director and Chief See biographical information in Part B of the
Financial Officer Registration Statement.
Thomas J. Abood General Counsel See biographical information in Part B of the
Registration Statement.
Steven B. Johansen Secretary and Treasurer Secretary and Treasurer of Dougherty Dawkins, Inc.
since July 1990 and Secretary of the Underwriter
since 1993; Vice President, Secretary and
Treasurer of Dougherty, Dawkins, Strand & Bigelow,
Inc. since July 1990.
Information on the business of Registrants' Adviser is contained in the
section of the Prospectus entitled "Management" and in the section of the
Statement of Additional Information entitled "The Investment ^Adviser,
Sub-Adviser, Administrative Services, Expenses and Brokerage" filed as part of
this Registration Statement.
Item 29. Principal Underwriters
(a) Voyageur Fund Distributors, Inc., the underwriter of the
Registrant's shares, is principal underwriter for the shares of Voyageur Tax
Free Funds, Inc., Voyageur Insured Funds, Inc., Voyageur Intermediate Tax Free
Funds, Inc., Voyageur Investment Trust, Voyageur Investment Trust II, Voyageur
Mutual Funds, Inc., Voyageur Mutual Funds II, Inc., Voyageur Mutual Funds III,
Inc. and VAM Institutional Funds, Inc., affiliated open-end management
investment companies.
(b) The directors of the Underwriter are the same as the directors of
the Adviser as set forth above in Item 28. The executive officers of the
Underwriter and the positions of these individuals with respect to the
Registrant are:
</TABLE>
<TABLE>
<CAPTION>
POSITIONS AND OFFICES POSITIONS AND OFFICES
NAME WITH UNDERWRITER WITH REGISTRANT
<S> <C> <C>
Michael E. Dougherty Chairman None
John G. Taft President & Director & CEO President & Director
Steven B. Johansen Secretary None
Kenneth R. Larsen Treasurer & CFO Treasurer
Thomas J. Abood ^General Counsel Secretary
</TABLE>
The address of each of the executive officers is 90 South Seventh Street, Suite
4400, Minneapolis, Minnesota 55402.
(c) Not applicable.
Item 30. Location of Accounts and Records
The custodian for Registrant is ^First Trust, National Association,
180 East Fifth Street, St. Paul, Minnesota 55101. The dividend disbursing,
administrative and accounting services agent of Registrant is Voyageur Fund
Managers, Inc. The address of Voyageur Fund Managers, Inc. and the Registrant is
90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402.
Item 31. Management Services
Not applicable.
Item 32. Undertakings
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment,
using financial statements which need not be certified, within four to six
months from the effective date of the 1933 Act registration statement.
(c) Each recipient of a prospectus of any series of the Registrant may
request the latest Annual Report of such series, and such Annual Report will be
furnished by the Registrant without charge.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the Investment Company Act of 1940, the Registrant has duly
caused this Amendment to the Registration Statement on Form N-1A
to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Minneapolis, and State of Minnesota,
on the 15th day of May, 1995.
VAM INSTITUTIONAL FUNDS, INC.
By /s/John G. Taft
John G. Taft, President
Pursuant to the requirements of the Securities Act of 1933,
this Registration Statement has been signed below by the
following persons in the capacities and on the date indicated.
Signature Title Date
/s/John G. Taft President (Principal May 15, 1995
John G. Taft Executive Officer)
/s/Kenneth R. Larsen Treasurer (Principal May 15, 1995
Kenneth R. Larsen Financial and Accounting
Officer)
James W. Nelson* Director
Clarence G. Frame* Director
Robert J. Odegard* Director
Richard F. McNamara* Director
Thomas F. Madison** Director
/s/John G. Taft Attorney-in-Fact May 15, 1995
John G. Taft
(Pursuant to Power of Attorney dated January 24, 1995*)
