PROSPECTUS
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SEGALL BRYANT & HAMILL
GROWTH AND INCOME FUND
Prospectus dated April 30, 1997, as Supplemented July 25, 1997
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TABLE OF CONTENTS
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PAGE
2 Fund Expenses
3 Financial Highlights
4 Investment Objectives and Policies
10 Risk Factors and Special Considerations
12 How to Purchase Shares
14 How to Sell Shares
17 Management
19 Determination of Net Asset Value
20 Distributions to Shareholders and Taxes
21 Investment Performance
22 General Information
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PROSPECTUS
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Segall Bryant & Hamill Growth and Income Fund ("Growth and Income Fund"
or the "Fund") is a series of VAM Institutional Funds, Inc. (the "Company"), an
open-end diversified management investment company commonly referred to as a
mutual fund. The Fund currently offers Class A shares and previously offered
Class B and Class C shares.
The Fund's investment objective is growth of capital with income as a
secondary objective. It invests primarily in a broadly diversified portfolio of
common stocks and other equity-type securities (such as preferred stocks,
securities convertible into or exchangeable for common stocks, and warrants or
rights to purchase common stocks). There is no assurance that the Fund's
investment objective will be achieved. Voyageur Asset Management LLC ("VAM LLC"
or the "Adviser") serves as investment adviser for the Fund. VAM LLC employs
Segall Bryant & Hamill (the "Sub-Adviser"), a Chicago-based investment manager
and an affiliate of VAM LLC, as the Fund's Sub-Adviser.
INVESTORS SHOULD READ AND RETAIN THIS PROSPECTUS FOR FUTURE REFERENCE.
AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL DUE TO FLUCTUATIONS IN THE FUND'S NET ASSET VALUE. SEE "RISK
FACTORS AND SPECIAL CONSIDERATIONS."
This Prospectus sets forth certain information about the Fund that a
prospective investor ought to know before investing. The Fund has filed a
Supplement dated July 25, 1997 to the Statement of Additional Information dated
April 30, 1997, with the Securities and Exchange Commission. The Statement of
Additional Information is available free of charge from the Fund by telephone
and at the mailing address below and is incorporated by reference into this
Prospectus in accordance with the Commission's rules.
SEGALL BRYANT & HAMILL GROWTH AND INCOME FUND
90 SOUTH SEVENTH STREET, SUITE 4400
MINNEAPOLIS, MINNESOTA 55402
612.376.7030 OR 800.277.3862
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 April 30, 1997, as Supplemented July 25, 1997
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<TABLE>
<CAPTION>
FUND EXPENSES
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge imposed on purchases (as a percentage of
offering price).................................................................... None
Maximum Contingent Deferred Sales Charge (as a percentage of
original purchase price or redemption proceeds, as applicable) None
ANNUAL FUND OPERATING EXPENSES (as a percentage of average net assets)
Management Fees........................................................................ .75%
Rule 12b-1 Fees........................................................................ .25%
Other Expenses (after voluntary expense reimbursements) .75%
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Total Fund Operating Expenses (after voluntary expense reimbursements) 1 1.75%
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1 Without voluntary expense reimbursements, Other Expenses would have been
1.97% and Total Fund Operating Expenses would be 2.97%. Such amounts are
based on actual expenses incurred during the fiscal period ended April 30,
1996.
</TABLE>
EXAMPLE
At the end of the periods shown, you would have paid the following
expenses on a $1,000 investment, assuming 5% annual return:
One year..................... $ 18
Three years.................. 55
Five years................... 95
Ten years.................... 206
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The purpose of the above Fund Expenses table is to assist an investor
in understanding the various costs and expenses that investors in the Fund will
bear directly or indirectly. THE EXAMPLES CONTAINED IN THE TABLE SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
GREATER OR LESS THAN THOSE SHOWN.
The information set forth in the table is based on expense limitations
in place for the fiscal year ending April 30, 1998. For such fiscal year, the
Adviser intends to reimburse Fund expenses to the extent that they exceed 1.75%
of average daily net assets (net of any Fund expenses paid by unaffiliated third
parties). After April 30, 1998, such expense reimbursements may be discontinued
or modified by the Adviser in its sole discretion.
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FINANCIAL HIGHLIGHTS
The following table shows certain per share data and selected
information for a share of capital stock outstanding during the indicated
periods for the Fund. This information, except for the six-month period ended
October 31, 1996, has been audited by KPMG Peat Marwick LLP, independent
auditors, and should be read in conjunction with the financial statements of the
Fund contained in its annual report. An annual report is available without
charge by contacting the Fund at 800-227-3862. In addition to financial
statements, the annual report contains further information about performance of
the Fund. Per share data is presented only for Class A shares, the only class of
shares currently offered by the Fund. Effective with the close of business on
April 30, 1997, the Fund acquired the assets and assumed all liabilities of
Voyageur Growth and Income Fund, a series of Voyageur Mutual Funds, Inc., in a
tax-free reorganization by issuing new shares. The Fund had no assets or
liabilities prior to the acquisition. Consequently, the information presented
for the Fund prior to May 1, 1997, represents the history of Voyageur Growth and
Income Fund.
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<CAPTION>
Six months ended Period from
October 31, 1996 September 7, 1995*
(Unaudited) to April 30, 1996
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<S> <C> <C>
Net asset value:
Beginning of period $ 11.24 $ 10.00
Operations:
Net investment income (loss) .02 .02
Net realized and unrealized gain on investments .13 1.24
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Total from operations .15 1.26
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Distributions to shareholders:
From net investment income .00 (.02)
Net asset value:
End of period $ 11.39 $ 11.24
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Total investment return (b) 1.33% 12.64%
Net assets at end of period (000's omitted) $ 4,608 $ 3,962
Ratios:
Expenses to average net assets (c) 2.14%(a) 1.98%(a)
Expenses to average net assets (net of expenses paid indirectly) 1.75%(a) 1.75%(a)
Net investment income (loss) to average net assets .50%(a) .36%(a)
Assuming no voluntary waivers andreimbursements:
Expenses: 2.97%(a) 2.97%(a)
Net investment income (loss) (.33)%(a) (.63)%(a)
Portfolio turnover rate (excluding short-term securities) 60.9% 56.1%
Average commission rate (d) $ 0.05 N/A
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Per share amounts are presented based upon average fund shares outstanding.
*Commencement of operations
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NOTES TO FINANCIAL HIGHLIGHTS
(a) Adjusted to an annual basis.
(b) Total investment return is based on the change in net asset value of a
share during the period and assumes reinvestment of distributions at
net asset value and does not reflect the impact of a sales charge.
(c) The expense ratio reflects the effect of gross expenses attributable to
earnings credits on uninvested cash balances received by the Fund.
(d) Beginning in the period ended October 31, 1996, the average commission
rate paid per share for security transactions is a required disclosure.
Prior period average commission rates have not been disclosed.
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INVESTMENT OBJECTIVES AND POLICIES
INVESTMENT OBJECTIVE
The Fund's investment objective is growth of capital with income as a
secondary objective. The Fund attempts to achieve its objectives by investing
primarily in common stocks, convertible securities and other equity type
investments. No assurance can be given that the Fund will be able to achieve its
investment objectives.
INVESTMENT POLICIES
Segall Bryant & Hamill, the Fund's Sub-Adviser, will attempt to achieve
the Fund's investment objectives by investing primarily (at least 65% of its
total assets) in common stocks and other securities convertible into common
stocks (including preferred stocks and debentures). The Fund may also invest up
to 35% of its total assets in debt securities. The Fund's portfolio includes
securities that offer income potential in addition to growth of capital and it
is designed to provide more dividend income than a portfolio focused exclusively
on growth.
Growth and Income Fund invests primarily in well-established companies.
Although the Fund may invest in a broad range of securities, normally it seeks
to limit volatility by investing at least 65% of its total assets in the equity
securities of companies having market capitalizations in excess of $1 billion.
The securities of such companies are believed by the Sub-Adviser to be generally
less volatile than those of companies with smaller capitalizations because
companies with larger capitalizations tend to be more established, with a
reputation for quality management, and tend to have broader, more highly
diversified product lines, broader and deeper resources and easier access to
credit.
The Fund may also invest in securities of foreign issuers in the form
of American Depositary Receipts ("ADRs"), which are U.S. dollar-denominated
receipts, typically issued by domestic banks or trust companies, that represent
the deposit with those entities of securities of a foreign issuer, and Global
Depositary Receipts ("GDRs"), which generally are issued by foreign banks and
evidence ownership of either foreign or domestic securities. ADRs are publicly
traded on exchanges or over-the-counter in the United States and are issued
through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligations and the depositary's transaction fees are
paid directly by the ADR holders. In addition, less information is available in
the United States about an unsponsored ADR than about a sponsored ADR. The Fund
may invest in ADRs through both sponsored and unsponsored arrangements.
INVESTMENT TECHNIQUES AND STRATEGIES
Except as provided below and in the Statement of Additional
Information, the Fund may engage in a number of investment techniques and
strategies. The Fund is under no obligation to
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use any of the techniques or strategies at any given time or under any
particular economic condition. In addition, no assurance can be given that the
use of any practice will have its intended result or that the use of any
practice is, or will be, available to the Fund.
DEBT SECURITIES. In pursuing its investment objective, the Fund may
invest up to 35% of its total assets in debt securities of corporate and
governmental issuers. The risks inherent in debt securities depend primarily on
the term and quality of the obligations in the Fund's portfolio as well as on
market conditions. A decline in the prevailing levels of interest rates
generally increases the value of debt securities, while an increase in rates
usually reduces the value of those securities.
Investments in debt securities are limited to those that are at the
time of investment within the four highest grades (generally referred to as
"investment grade") assigned by a nationally recognized statistical rating
organization or, if unrated, are deemed to be of comparable quality by the
Adviser. If a change in credit quality after acquisition causes a security to no
longer be investment grade, the Fund will dispose of the security, if necessary,
to keep its holdings of below investment grade securities to 5% or less of the
Fund's net assets. See "Investment Policies and Restrictions--Credit Quality" in
the Statement of Additional Information. Debt securities rated Baa by Moody's
Investors Service, Inc. ("Moody's") or BBB by Standard & Poor's Ratings Group
("S&P"), although considered investment grade, have speculative characteristics
and changes in economic circumstances are more likely to lead to a weakened
capacity to make principal and interest payments than is the case with higher
grade bonds.
When the Adviser or Sub-Adviser determines that adverse market or
economic conditions exist and considers a temporary defensive position
advisable, the Fund may invest without limitation in high-quality fixed income
securities or hold assets in cash or cash equivalents.
ILLIQUID SECURITIES. The Fund is authorized to invest up to 15% of its
net assets in illiquid securities, which are securities that cannot be disposed
within seven days in the ordinary course of business at approximately the amount
at which the Fund has valued the securities. The Fund may invest in non-publicly
traded securities (commonly referred to as "restricted securities"), which are
securities that are subject to contractual or legal restrictions on transfer.
Restricted securities include securities that are not registered under the
Securities Act of 1933, as amended (the "1933 Act"), but that can be sold to
"qualified institutional buyers" in accordance with Rule 144A under the 1933 Act
("Rule 144A Securities"). Thus, restricted securities are not necessarily
illiquid. Investments in restricted securities will be considered liquid only if
the Adviser or Sub-Adviser determines that they are liquid under guidelines
established by the Company's Board of Directors.
INVESTMENTS IN OTHER INVESTMENT COMPANIES. As a means of regulating
exposure to the equity markets, the Fund may invest to the extent permitted by
law in securities issued by other registered investment companies, including
those traded on securities exchanges, that invest principally in securities in
which the Fund is authorized to invest. Currently under the Investment Company
Act of 1940, as amended (the "1940 Act"), the Fund may invest a maximum of 10%
of its total assets in the securities of other investment companies. In
addition, under the 1940 Act, not more than 5% of the Fund's total assets may be
invested in the securities of any one investment company, and the Fund may not
own more than 3% of the securities of any investment company.
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REPURCHASE AGREEMENTS. The Fund may engage in repurchase agreement
transactions with respect to instruments in which the Fund is authorized to
invest. Although the amount of assets that may be invested in repurchase
agreements terminable in less than seven days is not limited, repurchase
agreements maturing in more than seven days, together with other illiquid
securities, will not exceed 15% of the Fund's net assets. The Fund will engage
in repurchase agreement transactions, which are in the nature of secured loans
by the Fund, with certain member banks of the Federal Reserve System and with
certain recognized securities dealers. The Fund will only engage in repurchase
agreements with banks and dealers determined to present minimal credit risk by
the Adviser or the Sub-Adviser under the direction and supervision of the Board
of Directors. In addition, the Adviser or the Sub-Adviser will monitor such
creditworthiness on an ongoing basis. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying debt obligation for a relatively
short period (usually not more than seven days) subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Fund's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the securities
underlying a repurchase agreement is monitored on an ongoing basis by the
Adviser or the Sub-Adviser to ensure that the value is at least equal at all
times to the total amount of the repurchase obligation, including interest.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, the Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. The Fund will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by the Fund may
include securities purchased on a "when, as and if issued" basis under which the
issuance of the securities depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring. The
Fund will establish with its custodian, or with a designated sub-custodian, a
segregated account consisting of cash, government securities or other liquid
high-grade debt obligations in an amount equal to the amount of its when-issued
or delayed-delivery purchase commitments.
TEMPORARY INVESTMENTS. The Fund's reserves may be invested in domestic
short-term money market instruments including, but not limited to, U.S.
government and agency obligations, certificates of deposit, bankers'
acceptances, time deposits, commercial paper, short-term corporate debt
securities and repurchase agreements. During temporary defensive periods as
determined by the Adviser or the Sub-Adviser, the Fund may hold up to 100% of
its total assets in short-term obligations of the types described above.
HEDGING TRANSACTIONS. The Fund may write covered call options and
secured put options and purchase call and put options on securities and security
indices. The Fund may also engage in transactions in financial futures contracts
and related options for hedging purposes. These investment techniques and the
related risks are summarized below and are described in more detail in the
Statement of Additional Information.
Writing (Selling) Call and Put Options. A call option on a security,
security index or a foreign currency gives the purchaser of the option, in
return for the premium paid to the writer
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(seller), the right to buy the underlying security, index or foreign currency at
the exercise price at any time during the option period. Upon exercise by the
purchaser, the writer of a call option on an individual security or foreign
currency has the obligation to sell the underlying security or currency at the
exercise price. A call option on a securities index is similar to a call option
on an individual security, except that the value of the option depends on the
weighted value of the group of securities comprising the index and all
settlements are made in cash. A call option may be terminated by the writer
(seller) by entering into a closing purchase transaction in which it purchases
an option of the same series as the option previously written.
A put option on a security, security index, or foreign currency gives
the purchaser of the option, in return for the premium paid to the writer
(seller), the right to sell the underlying security, index, or foreign currency
at the exercise price at any time during the option period.
Upon exercise by the purchaser, the writer of a put option has the
obligation to purchase the underlying security or foreign currency at the
exercise price. A put option on a securities index is similar to a put option on
an individual security, except that the value of the option depends on the
weighted value of the group of securities comprising the index and all
settlements are made in cash.
Call options may be written on portfolio securities, securities
indices, or foreign currencies. Call options on portfolio securities will be
covered since the Fund will own the underlying securities. Call options on
securities indices will be written only to hedge, in an economically appropriate
way, portfolio securities which are not otherwise hedged with options or
financial futures contracts and will be "covered" by identifying the specific
portfolio securities being hedged. Options on foreign currencies will be covered
by securities denominated in that currency. Options on securities indices will
be covered by securities that substantially replicate the movement of the index.
The Fund may not write put options on more than 50% of its total assets. The
Fund presently intends to cease writing options if and as long as 25% of its
total assets are subject to outstanding options contracts.
The Fund may write call and put options in order to obtain a return on
its investments from the premiums received and will retain the premiums whether
or not the options are exercised. The risk involved in writing a put option is
that there could be a decrease in the market value of the underlying security
caused by rising interest rates or other factors. If this occurred, the option
could be exercised and the underlying security would then be sold to the Fund at
a higher price than its current market value. The risk involved in writing a
call option is that there could be an increase in the market value of the
underlying security. If this occurred, the option could be exercised and the
underlying security would then be sold by the Fund at a lower price than its
current market value. These risks could be reduced by entering into a closing
transaction. The Fund retains the premium received from writing a put or call
option whether or not the option is exercised.
The Fund may purchase or write over-the-counter ("OTC") options. OTC
options are purchased or written by the Fund in privately negotiated
transactions. Such OTC options may include options on indices of securities
representing various market segments. Such options are generally considered
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 the Adviser or the Sub-Adviser believes it would be advantageous to do so.
<PAGE>
Participation in the options market involves investment risks and
transaction costs to which the Fund would not be subject absent the use of this
strategy. If predictions of movements in the direction of the securities and
interest rate markets are inaccurate, the adverse consequences to the Fund may
leave the Fund in a worse position than if such strategy was not used. Risks
inherent in the use of options include (i) dependence on the ability of the
Adviser or the Sub-Adviser, as the case may be, to predict correctly movements
in the direction of interest rates and securities prices; (ii) imperfect
correlation between the price of options and movements in the prices of the
securities being hedged; (iii) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities; (iv)
the possible absence of a liquid secondary market for any particular instrument
at any time; and (v) the possible need to defer closing out certain hedged
positions to avoid adverse tax consequences. See "Investment Policies and
Restrictions--Investment Techniques and Strategies" and "Distributions to
Shareholders and Taxes" in the Statement of Additional Information for further
discussion. Because option premiums paid by the Fund are small in relation to
the market value of the investments underlying the options, buying options can
result in large amounts of leverage. The leverage offered by trading in options
could cause the Fund's net asset value to be subject to more frequent and wider
fluctuations than would be the case if the Fund did not invest in options.
Purchasing Call and Put Options, Warrants and Stock Rights. In normal
market conditions, the Fund may invest up to an aggregate of 5% of its total
assets in call and put options on securities and securities indices. Purchases
of such options may be made for the purpose of hedging against changes in the
market value of the underlying securities or foreign currencies. The Fund may
invest in call and put options whenever, in the opinion of the Adviser or the
Sub-Adviser, as the case may be, a hedging transaction is consistent with its
investment objective. The Fund may sell a call option or a put option which it
has previously purchased prior to the purchase (in the case of a call) or the
sale (in the case of a put) of the underlying security or foreign currency. Any
such sale would result in a net gain or loss depending on whether the amount
received on the sale is more or less than the premium and other transaction
costs paid on the call or put which is sold. Purchasing a call or put option
involves the risk that the Fund may lose the premium it paid plus transaction
costs.
Warrants and stock rights are almost identical to call options in their
nature, use and effect except that they are issued by the issuer of the
underlying security rather than an option writer, and they generally have longer
expiration dates than call options. The Fund may invest up to 5% of its net
assets in warrants and stock rights, but no more than 2% of its net assets in
warrants and stock rights not listed on a recognized foreign or domestic stock
exchange.
Financial Futures and Related Options. The Fund may enter into
financial futures contracts and related options as a hedge against anticipated
changes in the market value of its portfolio securities or securities which it
intends to purchase or in the exchange rate of foreign currencies. Hedging is
the initiation of an off-setting position in the futures market which is
intended to minimize the risk associated with a position's underlying securities
in the cash market.
Financial futures contracts consist of interest rate futures contracts
and securities index futures contracts. An interest rate futures contract
obligates the seller of the contract to deliver, and the purchaser to take
delivery of, the interest rate securities called for in the contract at a
specified future time and at a specified price. A securities index assigns
relative values to the
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securities included in the index, and the index fluctuates with changes in the
market values of the securities so included. A securities index futures contract
is a bilateral agreement pursuant to which two parties agree to take or make
delivery of an amount of cash equal to a specified dollar amount times the
difference between the index value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. An
option on a financial futures contract gives the purchaser the right to assume a
position in the contract (a long position if the option is a call and a short
position if the option is a put) at a specified exercise price at any time
during the period of the option.
The Fund may purchase and sell financial futures contracts which are
traded on a recognized exchange or board of trade and may purchase exchange or
board-traded put and call options on financial futures contracts. The Fund will
engage in transactions in financial futures contracts and related options only
for hedging purposes and not for speculation, and will do so in accordance with
the rules and regulations of the Commodity Futures Trading Commission. At the
time of purchase of a futures contract or a call option on a futures contract,
an amount of cash, U.S. Government securities or other appropriate high-grade
debt obligations equal to the market value of the futures contract, minus the
Fund's initial margin deposit with respect thereto, will be deposited in a
segregated account with the Fund's custodian bank to collateralize fully the
position. The extent to which the Fund may enter into financial futures
contracts and related options may also be limited by requirements of the
Internal Revenue Code of 1986 for qualification as a regulated investment
company. See "Distributions to Shareholders and Taxes" in the Statement of
Additional Information.
Engaging in transactions in financial futures contracts involves
certain risks, such as the possibility of an imperfect correlation between
futures market prices and cash market prices and the possibility that the
Adviser or the Sub-Adviser, as the case may be, could be incorrect in its
expectations as to the direction or extent of various interest rate movements,
in which case the Fund's return might have been greater had hedging not taken
place. There is also the risk that a liquid secondary market may not exist. The
risk in purchasing an option on a financial futures contract is that the Fund
will lose the premium it paid. Also, there may be circumstances when the
purchase of an option on a financial futures contract would result in a loss to
the Fund while the purchase or sale of the contract would not have resulted in a
loss.
INVESTMENT RESTRICTIONS
Unless otherwise stated, the investment policies, techniques and
strategies discussed above represent "non-fundamental" policies of the Fund and
may be changed by action of the Board of Directors. The Fund has also adopted
certain fundamental investment restrictions. These fundamental restrictions and
the Fund's investment objectives may be changed only with the approval of a
majority of the Fund's outstanding voting securities, as defined in the 1940
Act. Included among the Fund's fundamental restrictions are the following:
1. The Fund will not borrow money, except that the Fund may borrow from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests and cash payments of dividends and distributions
that might otherwise require the untimely disposition of securities, in an
amount not to exceed 20% of the value of the Fund's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
<PAGE>
borrowed) at the time the borrowing is made. Whenever borrowings exceed 5% of
the value of the total assets of the Fund, the Fund will not make any additional
investments.
2. The Fund will not invest 25% or more of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include the government of any
country other than the United States, but not the U.S.
Government.
Certain other fundamental and non-fundamental investment restrictions
adopted by the Fund are described in the Statement of Additional Information.
The Fund intends to operate as a "diversified" management investment
company, as defined in the 1940 Act, which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables),
government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
the Fund and to not more than 10% of the outstanding voting securities of such
issuer.
Except for the Fund's policies regarding borrowing and illiquid
securities, 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.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investing in the Fund involves risks and special considerations, such
as described below:
GENERAL
An investment in shares of the Fund should not be considered to be a
complete investment program. The value of the Fund's investments, and as a
result the net asset value of the Fund's shares, will fluctuate in response to
changes in the market and economic conditions as well as the financial condition
and prospects of issuers in which the Fund invests. Because of the risks
associated with the Fund's investments, the Fund is intended to be a long term
investment vehicle and is not designed to provide investors with a means of
speculating on short-term stock market movements.
WARRANTS
Because a warrant, which is a security permitting, but not obligating,
its holder to subscribe for another security, does not carry with it the right
to dividends or voting rights with respect to the securities that the warrant
holder is entitled to purchase, and because a warrant does not represent any
rights to the assets of the issuer, a warrant may be considered more speculative
than certain other types of investments. In addition, the value of a warrant
does not necessarily change with the value of the underlying security and a
warrant ceases to have value if it is not exercised prior to its expiration
date.
<PAGE>
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES
Non-publicly traded securities may be less liquid than publicly traded
securities. Although these securities may be resold in privately negotiated
transactions, the prices realized from these sales could be less than those
originally paid by the Fund. In addition, companies whose securities are not
publicly traded are not subject to the disclosure and other investor protection
requirements that may be applicable if their securities were publicly traded.
The Fund's investments in illiquid securities are subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price representative of their value, the value of the Fund's net
assets could be adversely affected.
RULE 144A SECURITIES
Certain Rule 144A Securities may be considered illiquid and, therefore,
subject to the Fund's limitation on the purchase of illiquid securities, unless
the Adviser or a Sub-Adviser, as the case may be, subject to the supervision of
the Board of Directors, determines on an ongoing basis that an adequate trading
market exists for the Rule 144A Securities. The Fund's purchase of Rule 144A
Securities could have the effect of increasing the level of illiquidity in the
Fund to the extent that qualified institutional buyers become uninterested for a
time in purchasing Rule 144A Securities held by the Fund. The Board of Directors
will establish standards and procedures for determining the liquidity of a Rule
144A Security and will monitor implementation of the standards and procedures.
INVESTMENTS IN OTHER INVESTMENT COMPANIES
To the extent the Fund invests in other investment companies,
shareholders will incur certain duplicate fees and expenses, including
investment adviser fees. Exchange traded investment company securities typically
trade at prices that differ from the company's net asset value per share and
often trade at a discount to net asset value. The Fund will purchase exchange
traded investment company securities only in the secondary market and not in an
initial offering.
REPURCHASE AGREEMENTS
In entering into a repurchase agreement, the Fund bears a risk of loss
in the event that the other party to the transaction defaults on its obligations
and the Fund is delayed or prevented from exercising its rights to dispose of
the underlying securities, including the risk of a possible decline in the value
of the underlying securities during the period in which the Fund seeks to assert
its rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or a part of the income from the
agreement.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Securities purchased on a when-issued or delayed-delivery basis may
expose the Fund to risk because the securities may experience fluctuations in
value prior to their actual delivery. Purchasing securities on a when-issued or
delayed-delivery basis can involve the additional risk that the return available
in the market when the delivery takes place may be higher than that
<PAGE>
applicable at the time of the purchase. This characteristic of when-issued and
delayed-delivery securities could result in exaggerated movements in the Fund's
net asset value.
FOREIGN SECURITIES RISKS
The Fund may invest up to 10% of its total assets in foreign
securities. Foreign securities may include ADRs and GDRs as described above
under "Investment Objectives and Policies-- Investment Policies." There are
substantial and different risks involved in investing in foreign securities. An
investor should consider these risks carefully. For example, there is generally
less publicly available information about foreign companies than is available
about companies in the U.S. Foreign companies are not subject to uniform audit
and financial reporting standards, practices and requirements comparable to
those in the U.S.
Foreign securities involve currency risks. The U.S. dollar value of a
foreign security tends to decrease when the value of the dollar rises against
the foreign currency in which the security is denominated and tends to increase
when the value of the dollar falls against such currency. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign
entity issuing the security. Dividend and interest payments may be returned to
the country of origin, based on the exchange rate at the time of disbursement,
and restrictions on capital flows may be imposed. Losses and other expenses may
be incurred in converting between various currencies in connection with
purchases and sales of foreign securities.
Foreign stock markets are generally not as developed or efficient as
those in the U.S. In most foreign markets volume and liquidity are less than in
the U.S. and, at times, volatility of price can be greater than that in the U.S.
Fixed commissions on foreign stock exchanges are generally higher than the
negotiated commissions on U.S. exchanges. There is generally less government
supervision and regulation of foreign stock exchanges, brokers and companies
than in the U.S.
There is also the possibility of adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation,
limitations on the removal of funds or other assets, political or social
instability, or diplomatic developments which could adversely affect
investments, assets or securities transactions of the Fund in some foreign
countries. The Fund is not aware of any investment or exchange control
regulations which might substantially impair its operations as described,
although this could change at any time.
The dividends and interest payable on certain foreign securities may be
subject to foreign withholding taxes, thus reducing the net amount available for
distribution to the Fund's shareholders.
HOW TO PURCHASE SHARES
GENERAL PURCHASE INFORMATION
The Fund currently offers investors only Class A shares. The Fund
previously offered Class B and Class C shares; however, the issuance of such
shares has been discontinued.
Dougherty Dawkins LLC, the Fund's principal underwriter (the
"Distributor"), from time to time pays certain additional cash incentives of up
to $100 and/or non cash incentives such as vacations
<PAGE>
or merchandise to its investment executives and other broker-dealers and
financial institutions in consideration of their sales of Fund shares. In some
instances, the Distributor pays amounts not to exceed 1.25% of the Fund's net
assets (such as payments related to retention of shares sold by a particular
broker-dealer or financial institution for a specified period of time) to
broker-dealers and financial institutions who meet certain objective standards
developed by the Distributor.
The minimum initial investment is $1,000 and the minimum additional
investment is $100. The Fund's shares may be purchased at the public offering
price from the Distributor, from other broker-dealers who are members of the
National Association of Securities Dealers, Inc. and who have selling agreements
with the Distributor, and from certain financial institutions that have selling
agreements with the Distributor.
When orders are placed for shares of the Fund, the public offering
price used for the purchase will be the net asset value per share next
determined. If an order is placed with the Distributor or other broker-dealer,
the broker-dealer is responsible for promptly transmitting the order to the
Fund. The Fund reserves the right, in its absolute discretion, to reject any
order for the purchase of its shares.
Shares of the Fund may be purchased by opening an account either by
mail or by phone. Dividend income begins to accrue as of the opening of the New
York Stock Exchange (the "Exchange") on the day that payment is received. If
payment is made by check, payment is considered received on the day the 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). In
the case of other checks, payment is considered received 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. Payments made by wire transfer of Federal Funds are
considered received when the Federal Funds are received.
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
Distributor. 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.
PURCHASES BY MAIL. To open an account by mail, complete the general
authorization form attached to this Prospectus, designate an investment dealer
or other financial institution on the form, and mail it along with a check
payable to the Fund to:
NW 9369
P.O. BOX 1450
MINNEAPOLIS, MN 55485-9369
PURCHASES BY TELEPHONE. To open an account by telephone, call
612-376-7000 or 800-553-2143 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
<PAGE>
which he or she has an account and which is a member of the Federal Reserve
System to transmit Federal Funds by wire as follows:
NORWEST BANK MINNESOTA, N.A., ABA #091000019
FOR CREDIT OF: GROWTH AND INCOME FUND
CHECKING ACCOUNT NO.: 872-458
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 close of trading on the Exchange
(4:00 p.m. Eastern time), the order will be deemed to become effective at that
time. Otherwise, the order will be deemed to become effective as of the 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 Fund after making the initial telephone
purchase.
RULE 12B-1 FEES. Class A shares are subject to a Rule 12b-1 fee payable
at an annual rate of .25% of the average daily net assets of the Fund
attributable to Class A shares. All or a portion of such fee is paid to
financial institutions and service providers with respect to average daily net
assets of the Fund attributable to shares sold or serviced by such institutions
and service providers beginning the 13th month after the date of purchase. For
additional information about this fee, see "Management--Plan of Distribution"
below.
RETIREMENT PLANS
Shares of the Fund may be an appropriate investment medium for
retirement plans, including: (a) Keogh (HR-10) plans (for self-employed
individuals); (b) qualified corporate pension and profit sharing plans (for
employees); (c) Individual Retirement Accounts (IRAs) (for employees and their
spouses); and (d) tax-deferred investment plans (for employees of public school
systems and certain types of charitable organizations).
Persons desiring information about such plans, including their
availability, should contact the Fund. All retirement plans summarized above
involve a long-term commitment of assets and are subject to various legal
requirements and restrictions. The legal and tax implications may vary according
to the circumstances of the individual investor. Therefore, the investor is
urged to consult with an attorney or tax adviser prior to the establishment of
such a plan.
HOW TO SELL SHARES
The 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 (see below). If shares for which payment has been collected are
redeemed, payment must be made within seven days. The 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
<PAGE>
Securities and Exchange Commission during periods when trading on the Exchange
is restricted or during any emergency which makes it impracticable for the 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.
The Fund reserves the right and currently plans to redeem 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 $250. 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 the Fund.
EXPEDITED REDEMPTIONS
The Fund offers several expedited redemption procedures, described
below, which allow a shareholder to redeem Fund shares at net asset value
determined on the same day that the shareholder places the request for
redemption of those shares. Pursuant to these expedited redemption procedures,
the Fund will redeem its shares at their net asset value next determined
following the Fund's receipt of the redemption request. The Fund reserves the
right at any time to suspend or terminate the expedited redemption procedures or
to impose a fee for this service. There is currently no additional charge to the
shareholder for use of the Fund's expedited redemption procedures.
EXPEDITED TELEPHONE REDEMPTION. Shareholders redeeming at least $1,000
and no more than $50,000 of shares (for which certificates have not been issued)
may redeem by telephoning the Fund directly at 612-376-7030 or 800-277-3862. The
applicable section of the general authorization form must have been completed by
the shareholder and filed with the Fund before the telephone request is
received. 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 general authorization form. The Fund will
employ reasonable procedures to confirm that telephone instructions are genuine,
including requiring that payment be made only to the shareholder's address of
record or to the bank account designated on the authorization form and requiring
certain means of telephonic identification. The Adviser and Distributor will not
be liable for following instructions which are reasonably believed to be
genuine.
EXPEDITED REDEMPTIONS THROUGH CERTAIN BROKER DEALERS. Certain
broker-dealers who have sales agreements with the Distributor may allow their
customers to effect a redemption of shares of the Fund purchased through such
broker-dealer by notifying the broker-dealer of the amount of shares to be
redeemed. The broker-dealer is then responsible for promptly placing the
redemption request with the Fund on the customer's behalf. Payment will be made
to the shareholder by check or wire sent to the broker-dealer. Broker-dealers
offering this service may impose a fee or additional requirements for such
redemptions.
GOOD ORDER
"Good order" means that stock certificates, if issued, must accompany
the written request for redemption and must be duly
<PAGE>
endorsed for transfer, or must be accompanied by a duly executed stock power. If
no stock certificates have been issued, a written request to redeem must be
made. In any case, the shareholder must execute the redemption request 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 othercircumstances, for example, to
redeem more than $50,000 or to have a check mailed other than to the
shareholder's address of record. See "Other Information" in the Statement of
Additional Information. The Adviser 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 Adviser to subject
the Fund to an unusual degree of risk.
MONTHLY CASH WITHDRAWAL PLAN
An investor who owns or buys shares valued at $10,000 or more at the
current offering price may open a Withdrawal Plan and have a designated sum of
money paid monthly to the investor or another person. See "Monthly Cash
Withdrawal Plan" in the Statement of Additional Information and the general
authorization form.
REINSTATEMENT PRIVILEGE
An investor whose shares have been redeemed and who has not previously
exercised the Reinstatement Privilege may reinvest the proceeds of such
redemption in Fund shares of the same class by exercise of the Reinstatement
Privilege. Reinvestment will be at the net asset value of Fund shares next
determined after the Distributor receives a check along with a letter requesting
reinstatement. The Distributor must receive the letter requesting reinstatement
within 365 days following the redemption. Investors who desire to exercise the
Privilege should contact their broker-dealer or the Fund.
Exercise of the Reinstatement Privilege does not alter the income tax
treatment of any capital gains realized on a sale of shares of the Fund, but to
the extent that any shares are sold at a loss and the proceeds are reinvested
within 30 days in shares of the same Fund, some or all of the loss may not be
allowed as a deduction, depending upon the number of shares reacquired.
EXCHANGE PRIVILEGE
Shares may be exchanged for shares of any money market fund available
through the Adviser that is eligible for sale in the shareholder's state of
residence. The minimum amount which may be exchanged 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. For a discussion of issues relating to the
contingent deferred sales charge upon such exchanges, see "How to Sell
Shares--Contingent Deferred Sales Charge." There is no specific limit on
exchange frequency; however, the Fund is intended for long term investment and
not as a trading vehicle. The Adviser reserves the right to prohibit excessive
exchanges (more than four per quarter). The Adviser also 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 a sale of shares on which the investor may realize a capital gain or
loss for income tax purposes. Exchange requests may be placed directly with the
Fund in which the investor owns shares, through the Distributor or through other
broker-dealers. An investor considering an
<PAGE>
exchange should obtain a prospectus of the acquired Fund and should read such
prospectus carefully. Contact the Fund, the Distributor or any of such other
broker-dealers for further information about the exchange privilege.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE FUND
Under the laws of the State of Minnesota, the Board of Directors is
responsible for managing the business and affairs of the Company. The names,
addresses, principal occupations and other affiliations of the Directors and
executive officers of the Company are set forth in the Statement of Additional
Information.
INVESTMENT ADVISER
Voyageur Asset Management LLC ("VAM LLC") has been retained under an
investment advisory agreement (the "Advisory Agreement") with the Company to act
as the Fund's investment adviser, subject to the authority of the Board of
Directors. The Adviser and the Distributor are each indirect wholly-owned
subsidiaries of Dougherty Financial Group LLC ("DFG"), which is owned 50% by
Michael E. Dougherty and 50% equally by James A. Pohlad, Robert C. Pohlad and
William M. Pohlad (the "Pohlads"). Mr. Dougherty co-founded the predecessor of
DFG in 1977 and has served as DFG's Chairman of the Board and Chief Executive
Officer since inception. As of April 30, 1997, the Adviser served as the adviser
or sub-adviser to three series of the Company, administered numerous private
accounts and together with its affiliates managed approximately $8 billion in
assets. The Adviser's principal business address is 90 South Seventh Street,
Suite 4400, Minneapolis, Minnesota 55402.
The Fund pays VAM LLC a monthly investment advisory fee equivalent on
an annual basis to 0.75% of its average daily net assets.
SUB-ADVISER--PORTFOLIO MANAGEMENT
Segall Bryant & Hamill ("Segall Bryant") is the Sub-Adviser to Growth
and Income Fund. Its business office is located at 10 South Wacker Drive, Suite
2150, Chicago, IL 60606. Segall Bryant is a Minnesota partnership which is 50%
owned by Voyageur Advisory Services LLC, an affiliate of the Adviser, and 50%
owned by SBGP Holdings, Inc., an Illinois corporation. The Sub-Adviser manages
the investment and reinvestment of the assets of the Fund, although the Adviser
monitors and evaluates the performance and investment style of the Sub-Adviser.
The Sub-Advisory Agreement between VAM LLC and Segall Bryant provides
that Segall Bryant is entitled to a sub-advisory fee of .75% of Growth and
Income Fund's average daily net assets. The Sub-Adviser's fee is paid by the
Adviser, not the Fund.
Investment selections for the Fund are made by the Sub-Adviser. Ralph
M. Segall, Managing Director of Segall Bryant & Hamill, is primarily responsible
for the day-to-day management of Growth and Income Fund's portfolio and was
primarily responsible for the management of the predecessor Fund, Voyageur
Growth and Income Fund, from its inception in
<PAGE>
1995. Mr. Segall became a founding member of Segall Bryant in October 1994.
Prior to October 1994, Mr. Segall had been a senior portfolio manager with Stein
Roe & Farnham Incorporated where he had over 18 years experience.
Although investment decisions for the Fund are made independently from
those of the other accounts managed by the Adviser and each Sub-Adviser,
investments of the type the Fund may make also may be made by those other
accounts. When the Fund and one or more other accounts managed by the Adviser or
a Sub-Adviser, as the case may be, are prepared to invest in, or desire to
dispose of, the same security, available investments or opportunities for sales
are allocated in a manner believed by the Adviser or a Sub-Adviser, as the case
may be, to be equitable to the Fund. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the position
obtained or disposed of by the Fund.
PLAN OF DISTRIBUTION
The Fund has adopted a Plan of Distribution under the 1940 Act (the
"Plan") and has entered into a Distribution Agreement with the Distributor.
Pursuant to the Plan, the Fund pays the Distributor a Rule 12b-1 fee, at an
annual rate of .25% of the Fund's average daily net assets attributable to Class
A shares for servicing of shareholder accounts. Payments made under the Plan are
not tied exclusively to expenses actually incurred by the Distributor and may
exceed or be less than expenses actually incurred by the Distributor.
All of the Rule 12b-1 fee attributable to Class A shares constitutes a
shareholder servicing fee designed to compensate the Distributor for the
provision of certain services to the shareholders. The services provided may
include personal services provided to shareholders, such as answering
shareholder inquiries regarding the Fund and providing reports and other
information, and services related to the maintenance of shareholder accounts.
The Distributor may use such Rule 12b-1 fee or portion thereof to make payments
to qualifying broker-dealers and financial institutions that provide such
services.
CUSTODIAN; DIVIDEND DISBURSING, TRANSFER, ADMINISTRATIVE AND ACCOUNT SERVICES
AGENT
Norwest Bank Minnesota, N.A. ("Norwest") serves as the custodian of the
Fund's portfolio securities and cash.
Norwest has entered into a Sub-Custodian Agreement with Morgan Stanley
Trust Company with respect to the Company's foreign portfolio securities and
related cash. Rule 17f-5 adopted under the 1940 Act permits the Company to
maintain such securities and cash in the custody of certain eligible foreign
banks and foreign securities depositories. The Fund's foreign securities are
held by such entities who are approved by the Board of Directors in accordance
with such rules. Determinations are made pursuant to such rules following
consideration of a number of factors including, but not limited to, the
reliability and financial stability of the institutions; the ability of the
institutions to perform custodial services for the Fund; the reputation of the
institutions in national markets; the countries in which the institutions are
located and the risks of potential nationalization or expropriation of assets of
the Fund.
<PAGE>
VAM LLC acts as the Fund's dividend disbursing, transfer,
administrative and account services agent to perform dividend-paying functions,
to calculate the Fund's daily share price and to maintain shareholder records.
The fees paid for these services are based on each Fund's assets and include
reimbursement of out-of-pocket expenses. VAM LLC receives a monthly fee from the
Fund equal to the sum of (1) $1.25 per shareholder account per month, (2) a
monthly fee ranging from $1,000 to $1,500 based on the average daily net assets
of the Fund and (3) a percentage of average daily net assets which ranges from
0.11% to 0.035% based on the average daily net assets of the Fund. See "The
Distributor; Advisory, Sub-Advisory and Administrative Services Agreements;
Expenses; Distribution Expenses; and Brokerage" in the Statement of Additional
Information.
Certain institutions may act as sub-administrators for the Fund
pursuant to contracts with VAM LLC, whereby the institutions will provide
shareholder services to their customers. VAM LLC will pay the
sub-administrators' fees out of its own assets. The fee paid by VAM LLC to any
sub-administrator will be a matter of negotiation between the institution and
VAM LLC based on the extent and quality of the services provided.
EXPENSES OF THE FUNDS
The 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 Distributor), expenses of printing and mailing stock
certificates 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.
The Adviser and the Distributor reserve the right to voluntarily waive
their fees in whole or part and to voluntarily absorb certain other of the
Fund's expenses. The Adviser and the Distributor have agreed to reimburse
certain expenses with respect to the Fund for the fiscal year ending April 30,
1998, in such a manner as will result in the Fund being charged fees and
expenses that approximate those set forth in the section "Fees and Fund
Expenses." After April 30, 1998, such voluntary expense reimbursements may be
discontinued or modified by the Adviser and the Distributor in their sole
discretion.
PORTFOLIO TRANSACTIONS
The Fund will not effect 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 the Fund. It is not anticipated that the
Fund will effect any brokerage transactions with any affiliated broker-dealer,
including the Distributor, unless it would be to the Fund's advantage. The
Adviser may consider sales of shares of the Fund or other VAM Institutional
Funds as a factor in the selection of broker-dealers to execute the Fund's
securities transactions.
<PAGE>
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 primary 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 the 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).
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. Other securities
and assets also 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.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
DISTRIBUTIONS
The Fund's present policy is to make annual dividend distributions from
net investment income, if and when available, and annual distributions of any
net realized capital gains. However, provisions of the Internal Revenue Code of
1986, as amended (the "Code") may result in additional capital gains
distributions. Net investment income includes dividends and interest accrued
less accrued expenses.
Shareholders receive distributions from investment income and capital
gains distributions in additional shares of the Fund and class owned by such
shareholders at net asset value, without any sales charge, unless they elect
otherwise. If cash payment is requested, a check will be mailed within three
business days after the payment date.
<PAGE>
TAXES
The Fund intends to qualify as a regulated investment company under
Subchapter M of the Code in order to be relieved of payment of federal income
taxes to the extent it distributes its taxable income to shareholders.
Distributions by the Fund are generally taxable to the shareholders,
whether received in cash or additional shares. Dividends paid from the net
investment income will be taxable to shareholders as ordinary income. Individual
shareholders may not exclude from gross income any distributions by the Fund
which are attributable to dividends. Such dividend distributions generally are
eligible for the 70% dividends-received deduction for corporations to the extent
they are paid from dividends paid to the Fund by domestic corporations.
Dividends paid from the net capital gains of the Fund and designated as
capital gain dividends will be taxable to shareholders as long-term capital
dividends, regardless of the length of time for which they have held their
shares in the Fund.
Generally, gain or loss on the sale or exchange Fund shares will be
capital gain or loss, which will be long-term if the share is held for more than
one year. A loss realized on a sale or exchange will be disallowed if the shares
disposed of are replaced within the 61-day period beginning 30 days before and
ending 30 days after the disposal of the shares. If a shareholder realizes a
loss on the sale or exchange of a share held for six months or less and such
shareholder has previously received a capital gain distribution with respect to
the share, the loss must be treated as a long-term capital loss to the extent of
the amount of such prior capital gain distribution.
The Fund sends its shareholders an annual statement detailing federal
tax information, including information about distributions paid during the
preceding year. Distributions by the Fund, including the amount of any
redemptions, are reported to Fund shareholders and to the Internal Revenue
Service to the extent required by the Code.
This is a general summary of the federal tax law in effect as of the
date of this Prospectus. See the Statement of Additional Information for further
details. Before investing in the Fund, you should check the consequences of your
local and state tax laws.
INVESTMENT PERFORMANCE
Advertisements and other sales literature for the Fund may refer to
average annual total return and cumulative total return and may compare such
performance quotations with published indices and comparable quotations of other
funds. 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 the Fund will
fluctuate, so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
Average annual total return is the average annual compounded rate of
return on a hypothetical $1,000 investment made at the beginning of the
advertised period. In calculating
<PAGE>
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 the 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 calculatingending redeemable value, all
income and capital gain distributions are assumed to be reinvested in additional
Fund shares and the maximum sales load is deducted.
In reports or other communications to shareholders and in advertising
material, the Fund may compare its performance with (1) the performance of other
mutual funds (or classes thereof) as listed in rankings prepared by Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc. or similar
investment services that monitor the performance of mutual funds or as set out
in the nationally recognized publications listed below, (2) the Dow Jones
Industrial Average, the Standard & Poor's 500 Composite Stock Price Index, the
Russell 2000 and the Russell 5000, each of which is an unmanaged index of common
stocks or (3) other appropriate indexes of investment securities or with data
derived from those indexes. The Fund may also include in communications to
shareholders evaluations of the Fund published by nationally recognized ranking
services and by financial publications that are nationally recognized, such as
BARRON'S, BUSINESS WEEK, FORBES, INSTITUTIONAL INVESTOR, INVESTOR'S DAILY,
MONEY, KIPLINGER'S PERSONAL FINANCE MAGAZINE, MORNINGSTAR MUTUAL FUND VALUES,
THE NEW YORK TIMES, USA TODAY and THE WALL STREET JOURNAL. Performance
comparisons should not be considered as representative of the Fund's performance
for any future period.
For Fund performance information and daily net asset value quotations,
investors may call (612) 376-7030 or (800) 277-3862. For additional information
regarding the calculation of average annual total return and cumulative total
return, see "Calculation of Performance Data" in the Statement of Additional
Information.
GENERAL INFORMATION
The Fund sends its shareholders six-month unaudited and annual audited
financial statements which include a list of investment securities held by the
Fund.
Growth and Income Fund was organized as Series H of VAM Institutional
Funds, Inc. (the "Company") in March 1997. Effective with the close of business
on April 30, 1997, Growth and Income Fund acquired the assets and assumed all
liabilities of Voyageur Growth and Income Fund, a series of Voyageur Mutual
Funds III, Inc., in a tax-free exchange by issuing new shares. Growth and Income
Fund had no assets or liabilities prior to the acquisition.
The Company's Amended and Restated Articles of Incorporation limit
liability of the Company's Directors to the fullest extent permitted by law. The
Articles 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.
<PAGE>
The Fund currently offers only Class A shares. The Fund previously
offered three classes of shares, each with different sales arrangements and
bearing different expenses. Class A, Class B and Class C shares each represent
interests in the assets of the Fund and have identical voting, dividend,
liquidation and other rights on the same terms and conditions except that
expenses related to the distribution of each class are borne solely by such
class and each class of shares has exclusive voting rights with respect to
provisions of the Fund's Rule 12b-1 distribution plan which pertain to a
particular class and other matters for which separate class voting is
appropriate under applicable law.
Fund shares are freely transferable, are entitled to dividends as
declared by the Board of Directors, and, in liquidation of a Fund, are entitled
to receive the net assets of the Fund. The Fund does not generally hold annual
meetings of shareholders and will do so only when required by law.
Each share of a series has one vote irrespective of the relative net
asset values of the 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 or class, the shares of the affected series or class
vote as a separate series or class. An example of such an issue would be a
fundamental investment restriction pertaining to only one 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 DEALER, SALES REPRESENTATIVE OR OTHER 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 FUND OR THE DISTRIBUTOR. 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.
<PAGE>
PART B
SEGALL BRYANT & HAMILL GROWTH AND INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED APRIL 30, 1997 AS SUPPLEMENTED JULY 25, 1997
This Statement of Additional Information is not a prospectus, but
should be read in conjunction with the Prospectus of the Fund dated April 30,
1997 as supplemented July 25, 1997. A copy of the Prospectus or this Statement
of Additional Information may be obtained free of charge by contacting the Fund
at 90 South Seventh Street, Suite 4400, Minneapolis, Minnesota 55402. Telephone:
(612) 376-7030 or toll free (800) 277-3862.
TABLE OF CONTENTS
Page
Investment Policies and Restrictions...................................... B-2
Directors and Executive Officers of the Company........................... B-12
The Distributor; Advisory, Sub-Advisory and Administrative
Services Agreement; Expenses; Distribution Expenses and Brokerage....... B-14
Distributions to Shareholders and Taxes................................... B-19
Net Asset Value and Public Offering Price................................. B-21
Calculation of Performance Data........................................... B-22
Monthly Cash Withdrawal Plan.............................................. B-23
Additional Information.................................................... B-23
Appendix A - - Common Stock, Corporate Bond, Preferred Stock and
Commercial Paper Ratings................................................ B-25
Appendix B - - Stock Index Futures Contracts and Related Options.......... B-30
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 April 30, 1997 as supplemented July 25,
1997, and, if given or made, such information or representations may not be
relied upon as having been authorized by the Fund. 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 Fund since the date hereof.
<PAGE>
INVESTMENT POLICIES AND RESTRICTIONS
The investment objectives and policies of Segall Bryant & Hamill Growth
and Income Fund ("Growth and Income Fund" or the "Fund") is set forth in the
Prospectus relating to the Fund. The Fund is a series of VAM Institutional
Funds, Inc. (the "Company"), an open-end investment company which offers its
shares in separate series. Supplemental information is set out below concerning
certain of the securities and other instruments in which the Fund may invest,
the investment techniques and strategies that the Fund may utilize and certain
risks involved with those investments, techniques and strategies.
On April 11, 1997, shareholders of the Voyageur Growth and Income Fund,
a series of Voyageur Mutual Funds III, Inc., approved an Agreement and Plan of
Reorganization, pursuant to which all the assets of the Voyageur Growth and
Income Fund would be acquired by a new fund, the Segall Bryant & Hamill Growth
and Income Fund, a newly formed series of VAM Institutional Funds, Inc. In this
Statement of Additional Information, certain performance and financial
information is provided for the Fund for periods prior to May 1, 1997. Such
information relates to the Voyageur Growth and Income Fund (the "predecessor
Fund"), the predecessor of the Fund prior to the reorganization.
GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities ("Government Securities") in which the Fund may invest
include debt obligations of varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality of the U.S. Government,
including the Federal Housing Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small Business Administration,
Government National Mortgage Association, General Services Administration,
Central Bank for Cooperatives, Federal Farm Credit Banks, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal National Mortgage Association, Maritime
Administration, Tennessee Valley Authority, District of Columbia Armory Board,
Student Loan Marketing Association and Resolution Trust Corporation. Direct
obligations of the United States Treasury include a variety of securities that
differ in their interest rates, maturities and dates of issuance. Because the
U.S. Government is not obligated by law to provide support to an instrumentality
that it sponsors, the Fund invests in obligations issued by an instrumentality
of the U.S. Government only if the Fund's investment sub-adviser, Segall Bryant
& Hamill (the Sub-Adviser"), or the Fund's investment adviser, Voyageur Asset
Management LLC ("VAM LLC" or the "Adviser"), determines that the
instrumentality's credit risk does not make its securities unsuitable for
investment by the Fund.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements. When investing in a
repurchase agreement, the Fund purchases a security and obtains a simultaneous
commitment from the seller to repurchase the security at an agreed upon price
and date. The resale price is in excess of the purchase price and reflects an
agreed upon market rate unrelated to the coupon rate on the purchased security.
Generally, repurchase agreements are of short duration--usually less than a
week--but on occasion may be for longer periods. Such transactions afford the
Fund the opportunity to earn a return on temporarily available cash. While the
underlying security may be a bill, certificate of indebtedness, note or bond
issued by an agency, authority or instrumentality of the U. S. Government, the
obligation of the seller is not guaranteed by the U. S. Government and there is
a risk that the seller may fail to repurchase the underlying security. In such
event, the Fund would attempt to dispose of the underlying security in the
market or would hold the underlying security until maturity. However, in the
case of a repurchase agreement construed by the courts as a collateralized loan
or an executory contract, the Fund may be subject to various delays and risks of
loss in attempting to dispose of the underlying security, including (a) possible
declines in the value of the underlying security during the period while the
Fund seeks to enforce its rights thereto, (b) possible reduced levels of income
and lack of access to income during this period, and (c) expenses involved in
the enforcement of the Fund's rights.
<PAGE>
The Fund's custodian will hold the securities underlying any repurchase
agreement or such securities may 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 Fund will promptly receive additional
collateral (so the total collateral is an amount at least equal to the
repurchase price plus accrued interest).
The use of repurchase agreements also involves certain risks. For
example, if the seller of the agreement defaults on its obligation to repurchase
the underlying securities at a time when the value of those securities has
declined, the Fund may incur a loss upon their disposition. In addition, if the
seller of the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a bankruptcy court may
determine that the underlying securities are collateral not within the control
of the Fund and therefore subject to sale by the trustee in bankruptcy.
Investments in repurchase agreements by the Fund will be only for
defensive or temporary purposes. The Fund will limit its investment in
repurchase agreements with a maturity of more than seven days to 15% of the
Fund's net assets (subject to the Fund's collective 15% limitation regarding
illiquid investments). See "Investment Policies and Limitations--Illiquid
Investments."
ILLIQUID INVESTMENTS
The 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 acknowledged
that a market exists for certain restricted securities (for example, securities
qualifying for resale to certain "qualified institutional buyers" pursuant to
Rule 144A under the 1933 Act, certain forms of interest-only and principal-only,
mortgage-backed U.S. Government securities and commercial paper issued pursuant
to the private placement exemption of Section 4(2) of the 1933 Act). The Fund
may invest without limitation in these forms of restricted securities if such
securities are deemed by the Adviser or the Sub-Adviser, as the case may be, to
be liquid in accordance with standards established by the Fund's Board of
Directors. Under these guidelines, the Adviser or the Sub-Adviser must consider
(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 the
Fund's illiquidity to the extent that qualified purchasers of the securities
become, for a time, uninterested in purchasing these securities.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund may purchase put and call options and engage in the writing of
covered call options and secured put options, and employ a variety of other
investment techniques. Specifically, the Fund may engage in the purchase and
sale of stock index future contracts, interest rate futures contracts, and
options on such futures, all as described more fully below. Such investment
policies and techniques may involve a greater degree of risk than those inherent
in more conservative investment approaches.
<PAGE>
The Fund will engage in such transactions only to hedge existing
positions and not for the purposes of speculation or leverage. The Fund will not
engage in such options or futures transactions unless it receives any necessary
regulatory approvals permitting it to engage in such transactions.
Options on Securities. To hedge against adverse market shifts, the Fund
may purchase put and call options on securities held in its portfolio. In
addition, the Fund may seek to increase its income in an amount designed to meet
operating expenses or may hedge a portion of its portfolio investments through
writing (that is, selling) "covered" put and call options. A put option provides
its purchaser with the right to compel the writer of the option to purchase from
the option holder an underlying security at a specified price at any time during
or at the end of the option period. In contrast, a call option gives the
purchaser the right to buy the underlying security covered by the option from
the writer of the option at the stated exercise price. A covered call option
contemplates that, for so long as the Fund is obligated as the writer of the
option, it will own (1) the underlying securities subject to the option or (2)
securities convertible into, or exchangeable without the payment of any
consideration for, the securities subject to the option. The value of the
underlying securities on which covered call options will be written at any one
time by the Fund will not exceed 25% of the Fund's total assets. The 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.
The Fund may purchase options on securities that are listed on
securities exchanges or that are traded over-the-counter. As the holder of a put
option, the Fund has the right to sell the securities underlying the option and
as the holder of a call option, the Fund has the right to purchase the
securities underlying the option, in each case at the option's exercise price at
any time prior to, or on, the option's expiration date. The Fund may choose to
exercise the options it holds, permit them to expire or terminate them prior to
their expiration by entering into closing sale transactions. In entering into a
closing sale transaction, the Fund would sell an option of the same series as
the one it has purchased.
The Fund receives a premium when it writes call options, which
increases the Fund's return on the underlying security in the event the option
expires unexercised or is closed out at a profit. By writing a call, the Fund
limits its opportunity to profit from an increase in the market value of the
underlying security above the exercise price of the option for as long as the
Fund's obligation as writer of the option continues. The Fund receives a premium
when it writes put options, which increases the Fund's return on the underlying
security in the event the option expires unexercised or is closed out at a
profit. By writing a put, the Fund limits its opportunity to profit from an
increase in the market value of the underlying security above the exercise price
of the option for as long as the Fund's obligation as writer of the option
continues. Thus, in some periods, the Fund will receive less total return and in
other periods greater total return from its hedged positions than it would have
received from its underlying securities if unhedged.
In purchasing a put option, the Fund seeks to benefit from a decline in
the market price of the underlying security, whereas in purchasing a call
option, the Fund seeks to benefit from an increase in the market price of the
underlying security. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying security remains equal
to or greater than the exercise price, in the case of a put, or remains equal to
or below the exercise price, in the case of a call, during the life of the
option, the Fund will lose its investment in the option. For the purchase of an
option to be profitable, the market price of the underlying security must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs. Because option premiums paid by the Fund are
small in relation to the market value of the investments underlying the options,
buying options can result in large amounts of leverage. The leverage offered by
trading in options could cause the Fund's net asset value to be subject to more
frequent and wider fluctuations than would be the case if the Fund did not
invest in options.
Over-the-Counter ("OTC") Options. OTC options differ from
exchange-traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation, and there is a risk of
non-performance by the dealer. However, the premium is paid in advance by the
dealer. OTC options are available for a greater variety of securities and
foreign currencies, and in a wider range of expiration dates and
<PAGE>
exercise prices than exchange-traded options. Since there is no exchange,
pricing is normally done by reference to information from a market maker, which
information is carefully monitored or caused to be monitored by the Adviser or
the Sub-Adviser, as the case may be, and verified in appropriate cases.
A writer or purchaser of a put or call option can terminate it
voluntarily only by entering into a closing transaction. In the case of OTC
options, there can be no assurance that a continuous liquid secondary market
will exist for any particular option at any specific time. Consequently, the
Fund may be able to realize the value of an OTC option it has purchased only by
exercising it or entering into a closing sale transaction with the dealer that
issued it. Similarly, when the Fund writes an OTC option, it generally can close
out that option prior to its expiration only by entering into a closing purchase
transaction with the dealer to which it originally wrote the option. If a
covered call option writer cannot effect a closing transaction, it cannot sell
the underlying security or foreign currency until the option expires or the
option is exercised. Therefore, the writer of a covered OTC call option may not
be able to sell an underlying security even though it might otherwise be
advantageous to do so. Likewise, the writer of a covered OTC put option may be
unable to sell the securities pledged to secure the put for other investment
purposes while it is obligated as a put writer. Similarly, a purchaser of an OTC
put or call option might also find it difficult to terminate its position on a
timely basis in the absence of a secondary market.
The Fund may purchase and write over-the-counter ("OTC") put and call
options in negotiated transactions. The staff of the Securities and Exchange
Commission has previously taken the position that the value of purchased OTC
options and the assets used as "cover" for written OTC options are illiquid
securities and, as such, are to be included in the calculation of the Fund's 15%
limitation on illiquid securities. However, the staff has eased its position
somewhat in certain limited circumstances. The Fund will attempt to enter into
contracts with certain dealers with which it writes OTC options. Each such
contract will provide that the Fund has the absolute right to repurchase the
options it writes at any time at a repurchase price which represents the fair
market value, as determined in good faith through negotiation between the
parties, but which in no event will exceed a price determined pursuant to a
formula contained in the contract. Although the specific details of such formula
may vary among contracts, the formula will generally be based upon a multiple of
the premium received by the Fund for writing the option, plus the amount, if
any, of the option's intrinsic value. The formula will also include a factor to
account for the difference between the price of the security and the strike
price of the option. If such a contract is entered into, the Fund will count as
illiquid only the initial formula price minus the option's intrinsic value.
The Fund will enter into such contracts only with primary U.S.
Government securities dealers recognized by the Federal Reserve Bank of New
York. Moreover, such primary dealers will be subject to the same standards as
are imposed upon dealers with which the Fund enters into repurchase agreements.
Securities Index Options. In seeking to hedge all or a portion of its
investment, the Fund may purchase and write put and call options on securities
indexes listed on securities exchanges, which indexes include securities held in
the Fund's portfolio.
A securities index measures the movement of a certain group of stocks
or debt securities by assigning relative values to the securities included in
the index. Options on securities indexes are generally similar to options on
specific securities. Unlike options on specific securities, however, options on
securities indexes do not involve the delivery of an underlying security; the
option in the case of an option on a stock index represents the holder's right
to obtain from the writer in cash a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying stock index on the exercise date.
When the Fund writes an option on a securities index, it will establish
a segregated account with its custodian, or a designated sub-custodian, in which
the Fund will deposit cash, U.S. Government Securities or other liquid high
grade debt obligations in an amount equal to the market value of the option, and
will maintain the account while the option is open.
<PAGE>
Securities index options are subject to position and exercise limits
and other regulations imposed by the exchange on which they are traded. If the
Fund writes a securities index option, it may terminate its obligation by
effecting a closing purchase transaction, which is accomplished by purchasing an
option of the same series as the option previously written. The ability of the
Fund to engage in closing purchase transactions with respect to securities index
options depends on the existence of a liquid secondary market. Although the Fund
generally purchases or writes securities index options only if a liquid
secondary market for the options purchased or sold appears to exist, no such
secondary market may exist, or the market may cease to exist at some future
date, for some options. No assurance can be given that a closing purchase
transaction can be effected when the Fund desires to engage in such a
transaction.
Risks Relating to Purchase and Sale of Options on Stock Indexes.
Purchase and sale of options on stock indexes by the Fund are subject to certain
risks that are not present with options on securities. Because the effectiveness
of purchasing or writing stock index options as a hedging technique depends upon
the extent to which price movements in the Fund's portfolio correlate with price
movements in the level of the index rather than the price of a particular stock,
whether the Fund will realize a gain or loss on the purchase or writing of an
option on an index depends upon movements in the level of stock prices in the
stock market generally or, in the case of certain indexes, in an industry or
market segment, rather than movements in the price of a particular stock.
Accordingly, successful use by the Fund of options on indexes will be subject to
the ability of the Adviser or the Sub-Adviser, as the case may be, to correctly
predict movements in the direction of the stock market generally or of a
particular industry. This requires different skills and techniques than
predicting changes in the price of individual stocks. In the event the Fund's
adviser is unsuccessful in predicting the movements of an index, the Fund could
be in a worse position than had no hedge been attempted.
Index prices may be distorted if trading of certain stocks included in
the index is interrupted. Trading in index options also may be interrupted in
certain circumstances, such as if trading were halted in a substantial number of
stocks included in the index. If this occurred, the Fund would not be able to
close out options which it had purchased or written and, if restrictions on
exercise were imposed, might be unable to exercise an option it holds, which
could result in substantial losses to the Fund. However, it will be the Fund's
policy to purchase or write options only on indexes which include a sufficient
number of stocks so that the likelihood of a trading halt in the index is
minimized.
Short Sales Against the Box. The Fund may sell securities "short
against the box." Whereas a short sale is the sale of a security the Fund does
not own, a short sale is "against the box" if at all times during which the
short position is open, the Fund owns at least an equal amount of the securities
or securities convertible into, or exchangeable without further consideration
for, securities of the same issue as the securities sold short. Short sales
against the box are typically used by sophisticated investors to defer
recognition of capital gains or losses.
Futures Contracts and Options on Futures Contracts. The Fund may
purchase and sell stock index futures contracts. The purpose of the acquisition
or sale of a futures contract by the Fund is to hedge against fluctuations in
the value of its portfolio without actually buying or selling securities. The
futures contracts in which the Fund may invest have been developed by and are
traded on national commodity exchanges. Stock index futures contracts may be
based upon broad-based stock indexes such as the S&P 500 or upon narrow-based
stock indexes. A buyer entering into a stock index futures contract will, on a
specified future date, pay or receive a final cash payment equal to the
difference between the actual value of the stock index on the last day of the
contract and the value of the stock index established by the contract. The Fund
may assume both "long" and "short" positions with respect to futures contracts.
A long position involves entering into a futures contract to buy a commodity,
whereas a short position involves entering into a futures contract to sell a
commodity.
The purpose of trading futures contracts is to protect the Fund from
fluctuations in value of its investment securities without necessarily buying or
selling the securities. Because the value of the Fund's investment securities
will exceed the value of the futures contracts sold by the Fund, an increase in
the value of the futures contracts could only mitigate, but not totally offset,
the decline in the value of the Fund's assets. No
<PAGE>
consideration is paid or received by the Fund upon trading a futures contract.
Upon trading a futures contract, the Fund will be required to deposit in a
segregated account with its custodian, or designated sub-custodian, an amount of
cash, short-term Government Securities or other U.S. dollar-denominated,
high-grade, short-term money market instruments equal to approximately 1% to 10%
of the contract amount (this amount is subject to change by the exchange on
which the contract is traded and brokers may charge a higher amount). This
amount is known as "initial margin" and is in the nature of a performance bond
or good faith deposit on the contract that is returned to the Fund upon
termination of the futures contract, assuming that all contractual obligations
have been satisfied; the broker will have access to amounts in the margin
account if the Fund fails to meet its contractual obligations. Subsequent
payments, known as "variation margin," to and from the broker, will be made
daily as the price of the currency or securities underlying the futures contract
fluctuates, making the long and short positions in the futures contract more or
less valuable, a process known as "marking-to-market." At any time prior to the
expiration of a futures contract, the Fund may elect to close a position by
taking an opposite position, which will operate to terminate the Fund's existing
position in the contract.
Each short position in a futures or options contract entered into by
the Fund is secured by the Fund's ownership of underlying securities. The Fund
does not use leverage when it enters into long futures or options contracts; the
Fund places in a segregated account with its custodian, or designated
sub-custodian, with respect to each of its long positions, cash or money market
instruments having a value equal to the underlying commodity value of the
contract.
The Fund may trade stock index futures contracts to the extent
permitted under rules and interpretations adopted by the Commodity Futures
Trading Commission (the "CFTC"). U.S. futures contracts have been designed by
exchanges that have been designated as "contract markets" by the CFTC, and must
be executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. Futures contracts trade on a number of
contract markets, and, through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.
The Fund intends to comply with CFTC regulations and avoid "commodity
pool operator" status. These regulations require that the Fund use futures and
options positions (a) for "bona fide hedging purposes" (as defined in the
regulations) or (b) for other purposes so long as aggregate initial margins and
premiums required in connection with non-hedging positions do not exceed 5% of
the liquidation value of the Fund's portfolio. The Fund currently does not
intend to engage in transactions in futures contracts or options thereon for
speculation, but will engage in such transactions only for bona fide hedging
purposes.
Risks of Transactions in Futures Contracts and Options on Futures
Contracts.
HOLDING RISKS IN FUTURES CONTRACTS TRANSACTIONS. There are several
risks in using stock index futures contracts as hedging devices. 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 or
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 stock index futures contracts, the risk of
imperfect correlation increases as the composition of the Fund's portfolio
diverges from the securities included in the applicable stock index. It is
possible that the Fund might sell stock index futures contracts to hedge its
portfolio against a decline in the market, only to have the market advance and
the value of securities held in the Fund's portfolio decline. If this occurred,
the Fund would lose money on the contracts
<PAGE>
and also experience a decline in the value of its portfolio securities. While
this could occur, the Adviser and the Sub-Adviser believe that over time the
value of the Fund's portfolio will tend to move in the same direction as the
market indexes and will attempt to reduce this risk, to the extent possible, by
entering into futures contracts on indexes whose movements they believe will
have a significant correlation with movements in the value of the Fund's
portfolio securities sought to be hedged.
Successful use of futures contracts by the Fund is subject to the
ability of the Adviser or the Sub-Adviser, as the case may be, to predict
correctly movements in the direction of interest rates or the market. If the
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 would 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. The 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. The 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 Fund intends 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 AND SPECIAL CONSIDERATIONS OF OPTIONS ON FUTURES CONTRACTS. The
use of options 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 on futures contracts involves less potential
risk to the Fund because the maximum amount at risk is the premium paid for the
options (plus transactions costs). The writing of a call option on a futures
contract generates a premium which may partially offset a decline in the value
of the Fund's portfolio assets. By writing a call option, the Fund becomes
obligated to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium, but the Fund becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. Thus, the loss
incurred by the Fund in writing options on futures contracts may exceed the
amount of the premium received.
The effective use of options strategies is dependent, among other
things, on the Fund's ability to terminate options positions at a time when the
Adviser or the Sub-Adviser deems it desirable to do so.
<PAGE>
Although the Fund will enter into an option position only if the Adviser, or the
Sub-Adviser, as the case may be, 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
Fund's transactions involving options on futures contracts will be conducted
only on recognized exchanges.
The Fund's purchase or sale of put or call options on futures contracts
will be based upon predictions as to anticipated interest rates or market trends
by the Adviser or the Sub-Adviser, which could prove to be inaccurate. Even if
the expectations of the Adviser or Sub-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.
Investments in futures contracts and related options by their nature
tend to be more short-term than other equity investments made by the Fund. The
Fund's ability to make such investments, therefore, may result in an increase in
the Fund's portfolio activity and thereby may result in the payment of
additional transaction costs.
The Internal Revenue Code of 1986, as amended (the "Code"), forbids the
Fund from earning more than 30% of its gross income from the sale or other
disposition of certain investments, including futures contracts and options
thereon, which are owned for less than three months. The likelihood of violating
this 30% test is increased by the amount of investing the Fund does in futures
contracts and related options. Additionally, the Code requires the Fund to
diversify its investment holdings. The Internal Revenue Service position
regarding the treatment of futures contracts and related options for
diversification purposes is not clear, and the extent to which the Fund may
engage in these transactions may be limited by this requirement. The Code also
provides that, with respect to certain futures contracts and options held by the
Fund at the end of its taxable year, unrealized gain or loss on such contracts
may have to be recognized for tax purposes under a special system within the
Code. The actual gain or loss recognized by the Fund in an eventual disposition
of such contract, however, will be adjusted by the amount of the gain or loss
recognized earlier under the Code's system. See "Distributions to Shareholders
and Taxes." For more information on stock index futures contracts and related
options, see Appendix B.
FOREIGN SECURITIES
Additional costs may be incurred which are related to any international
investment, since foreign brokerage commissions and the custodial costs
associated with maintaining foreign portfolio securities are generally higher
than in the United States. Fee expense may also be incurred on currency
exchanges when the Fund changes investments from one country to another or
converts foreign securities holdings into U.S. dollars. Foreign companies and
foreign investment practices are not subject to uniform accounting, auditing and
financial reporting standards and practices or regulatory requirements
comparable to those applicable to United States companies. There may be less
public information available about foreign companies.
United States Government policies have at times in the past, through
imposition of interest equalization taxes and other restrictions, discouraged
United States investors from making certain investments abroad. While such taxes
or restrictions are not presently in effect they may be reinstituted from time
to time as a means of fostering a favorable United States balance of payments.
In addition, foreign countries may impose withholding and taxes on dividends and
interest. See "Risk Factors and Special Considerations" in the Prospectus.
CREDIT QUALITY
Any bond in which the Fund invests will be rated investment grade. As
has been the industry practice, this determination of credit quality is made at
the time the Fund acquires the bond. However, because it is possible that
subsequent downgrades could occur, if a bond held by the Fund is later
downgraded, the Adviser or the Sub-Adviser, as the case may be, under the
supervision of the Board of Directors, will consider whether it is in the best
interest of the Fund's shareholders to hold or to dispose of the bond. Among the
criteria that may be considered by the Adviser or the Sub-Adviser, as the case
may be, and the Board are the probability that the bonds will be able to make
scheduled interest and principal payments in the future, the extent to which any
<PAGE>
devaluation of the bond has already been reflected in the Fund's net asset
value, and the total percentage, if any, of bonds currently rated below
investment grade held by the Fund. In no event, however, will the Fund invest
more than 5% of its net assets in bonds rated lower than investment grade.
Non-investment grade securities have moderate to poor protection of
principal and interest payments and have speculative characteristics. They
involve greater risk of default or price declines due to changes in the issuer's
creditworthiness than investment-grade debt securities. Because the market for
lower-rated securities may be thinner and less active than for higher-rated
securities, there may be market price volatility for these securities and
limited liquidity in the resale market. Market prices for these securities may
decline significantly in periods of general economic difficulty or rising
interest rates.
INVESTMENT RESTRICTIONS
The Fund has adopted certain investment restrictions. Certain of these
restrictions are fundamental policies. Under the Investment Company Act of 1940,
as amended (the "1940 Act"), a fundamental policy may not be changed without the
vote of a majority of the outstanding voting securities of the Fund, as defined
in the 1940 Act.
The following investment restrictions have been adopted by the Fund as
fundamental policies:
1. The Fund will not borrow money, except that the Fund may borrow from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests and cash payments of dividends and distributions
that might otherwise require the untimely disposition of securities, in an
amount not to exceed 20% of the value of the Fund's total assets (including the
amount borrowed) valued at market less liabilities (not including the amount
borrowed) at the time the borrowing is made. Whenever borrowings exceed 5% of
the value of the total assets of the Fund, the Fund will not make any additional
investments.
2. The Fund will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
3. The Fund will not invest 25% or more of the value of its total
assets in securities of issuers in any one industry. For purposes of this
restriction, the term industry will be deemed to include the government of any
country other than the United States, but not the U.S. Government.
4. The Fund will not purchase or sell real estate or real estate
limited partnership interests, except that the Fund may purchase and sell
securities of companies that deal in real estate or interests in real estate.
5. The Fund will not purchase or sell commodities or commodity
contracts, except futures contracts and related options and other similar
contracts.
6. The Fund will not act as an underwriter of securities, except that
the Fund may acquire securities under circumstances in which, if the securities
were sold, the Fund might be deemed to be an underwriter for purposes of the
Securities Act of 1933, as amended.
7. The Fund will not issue senior securities, as defined in the 1940
Act, other than as set forth in restriction #1 above and except to the extent
that using options and futures contracts or purchasing or selling securities on
a when-issued or forward commitment basis may be deemed to constitute issuing a
senior security.
The Fund has adopted the following operating (i.e. non-fundamental)
investment policies and restrictions which may be changed by the Board of
Directors without shareholder approval:
1. The Fund will not purchase any investment company security, other
than a security acquired pursuant to a plan of reorganization or an offer of
exchange, if as a result of the purchase (a) the Fund would
<PAGE>
own more than 3% of the total outstanding voting securities of any investment
company, (b) more than 5% of the value of the Fund's total assets would be
invested in securities of any one investment company or (c) more than 10% or the
Fund's total assets would be invested in securities issued by investment
companies.
2. The Fund will not participate on a joint or joint-and-several basis
in any securities trading account.
3. The Fund will not invest in warrants (other than warrants acquired
by the Fund as part of a unit or attached to securities at the time of purchase)
if, as a result, the investments (valued at the lower of cost or market) would
exceed 5% of the value of the Fund's net assets of which not more than 2% of the
Fund's net assets may be invested in warrants not listed on a recognized foreign
or domestic stock exchange.
4. The Fund will not purchase securities on margin, except that the
Fund may obtain any short-term credits necessary for the clearance of purchases
and sales of securities. For purposes of this restriction, the deposit or
payment of initial or variation margin in connection with futures contracts or
options on futures contracts will not be deemed to be a purchase of securities
on margin.
5. The Fund will not make short sales of securities or maintain a short
position, unless at all times when a short position is open, the Fund owns an
equal amount of the securities or securities convertible into or exchangeable
for, without payment of any further consideration, securities of the same issue
as, and equal in amount to, the securities sold short.
For purposes of the Fund's concentration policy, the Fund intends 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.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be considered to be violated unless an excess
over the applicable percentage occurs immediately after an acquisition of
securities or utilization of assets and such excess results therefrom.
DIVERSIFICATION
The Fund intends to operate as a "diversified" management investment
company, as defined in the 1940 Act, which means that at least 75% of its total
assets must be represented by cash and cash items (including receivables), U.S.
Government securities, securities of other investment companies, and other
securities for the purposes of this calculation limited in respect of any one
issuer to an amount not greater in value than 5% of the value of total assets of
the Fund and to not more than 10% of the outstanding voting securities of such
issuer.
PORTFOLIO TURNOVER
Portfolio turnover is the ratio of the lesser of annual purchases or
sales of portfolio securities by the 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 the 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. The Fund will dispose of
securities without regard to the time they have been held when such action
appears advisable to the Fund's investment adviser or sub-adviser, as the case
may be. Frequent portfolio trades may result in higher transaction and other
costs for the Fund.
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The Directors and officers of the Company and their principal
occupations during the past five years are set forth below. Unless otherwise
indicated, all positions have been held for at least five years.
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation(s) During
Name, Address, and Age Position Past Five Years and Other Affiliations
- ---------------------- -------- --------------------------------------
<S> <C> <C>
Clarence G. Frame, 78 Director Of counsel, Briggs & Morgan law firm. Mr. Frame
First National Bank Building, currently serves on the board of directors of Tosco
W-875 Corporation (an oil refining and marketing
332 Minnesota Street company), Milwaukee Land Company and
St. Paul, Minnesota 55101 Independence One Mutual Funds.
Richard F. McNamara, 63 Director Chief Executive Officer of Activar, Inc., a
7808 Creekridge Circle #200 Minneapolis-based holding company consisting of
Minneapolis, Minnesota seventeen companies in industrial plastics, sheet
55439 metal, automotive aftermarket, construction supply,
electronics and financial services, since 1966. Mr.
McNamara currently serves on the board of
directors of Rimage (electronics manufacturing) and
Interbank.
Thomas F. Madison, 60 Director President and CEO of MLM Partners, Inc. since
200 South Fifth Street January 1993; previously, Vice Chairman-- Office of
Suite 2100 the CEO, The Minnesota Mutual Life Insurance
Minneapolis, Minnesota Company from February to September 1994;
55402 President of U.S. WEST Communications--Markets
from 1988 to 1993. Mr. Madison currently serves on
the board of directors of Valmont Industries, Inc.
(metal manufacturing), Eltrax Systems, Inc. (data
communications integration), Minnesgasco, Span
Link Communications (software), ACI Telecentrics
(outbound telemarketing and telecommunications)
and various civic and educational organizations.
James W. Nelson, 55 Director Chairman and Chief Executive Officer of Eberhardt
81 South Ninth Street Holding Company and its subsidiaries.
Suite 400
Minneapolis, Minnesota
55440
Robert J. Odegard, 75 Director Special Assistant to the President of the University
University of Minnesota of Minnesota.
Foundation
1300 South Second Street
Minneapolis, Minnesota
55454
John G. Taft, 42 President President and Director (since 1993) of the Adviser;
90 South Seventh Street Director (since 1993) and Executive Vice President
Suite 4400 (since 1995) of the Distributor; President of the
Minneapolis, Minnesota Distributor from 1991 to 1995; Management
55402 committee member of the Adviser from 1991 to
1993.
<PAGE>
Jane M. Wyatt, 42 Executive Chief Investment Officer and Director of the Adviser
90 South Seventh Street Vice since 1993; Director and Executive Vice President of
Suite 4400 President the Distributor since 1993; Executive Vice President
Minneapolis, Minnesota and Portfolio Manager of the Adviser from 1992 to
55402 1993.
James C. King, 56 Vice Senior Equity Portfolio Manager of the Adviser since
90 South Seventh Street President 1993; previously, Director of the Adviser and the
Suite 4400 Distributor from 1993 to 1995.
Minneapolis, Minnesota
55402
Steven P. Eldredge, 40 Vice Senior Tax Exempt Portfolio Manager of the Adviser
90 South Seventh Street President since 1995; previously, portfolio manager for ABT
Suite 4400 Mutual Funds, Palm Beach, Florida, from 1989 to
Minneapolis, Minnesota 1995.
55402
Thomas J. Abood, 33 Secretary Senior Vice President and General Counsel of
90 South Seventh Street Dougherty Financial Group, Inc. (since 1995); Senior
Suite 4400 Vice President (since 1995) of the Adviser, the
Minneapolis, Minnesota Distributor and Voyageur Companies, Inc. (since
55402 1995); previously, Vice President of the Adviser and
Voyageur Companies, Inc. from 1994 to 1995;
associated with the law firm of Skadden, Arps, Slate,
Meagher & Flom, Chicago, Illinois from 1988 to 1994.
- -----------------
* Denotes Directors who are interested persons (as that term is defined
by the 1940 Act) of the Adviser and the Fund.
</TABLE>
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 $4,000 for serving as a director of the Company, plus a $100 fee for each
special in-person meeting attended by such director. These fees are allocated
among each series in the Company based on the relative average net asset value
of each series. In addition, each director who is not an employee of Adviser or
any of its affiliates is reimbursed for expenses incurred in connection with
attending meetings.
For the fiscal year ended April 30, 1996, the Fund was not in
existence, and therefore, did not pay any compensation to directors. Each
director received $25,500 in compensation from the Company and from all other
registered investment companies for which the Adviser acted as investment
advisor or sub-advisor during the calendar year ended December 31, 1996 (the
"Fund Complex"). For the year ended December 31, 1996, the Fund Complex
consisted of 10 open-end investment companies comprising 33 series or funds and
6 closed-end investment companies.
THE DISTRIBUTOR; ADVISORY, SUB-ADVISORY AND ADMINISTRATIVE SERVICES
AGREEMENT; EXPENSES; DISTRIBUTION EXPENSES AND BROKERAGE
DISTRIBUTOR
Dougherty Dawkins LLC (the "Distributor") is the principal distributor
of the Fund's shares.
INVESTMENT ADVISORY AGREEMENT
<PAGE>
Pursuant to the Advisory Agreement, the Fund has engaged VAM LLC to act
as investment adviser. As compensation for the Adviser's services, the Fund is
obligated to pay a monthly investment advisory fee equivalent on an annual basis
to 0.75% of its average daily net assets. The percentage fee is based on the
average daily value of the 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 Advisory Agreement, the Fund's net assets equal its total assets minus its
total liabilities. The Advisory Agreement requires the Adviser to furnish, at
its own expense, office facilities, equipment and personnel for servicing the
investments of the Fund. The Adviser has agreed to arrange for officers and
employees of the Adviser to serve without compensation from the Fund as
Directors, officers or employees of the Fund if duly elected to such positions
by the shareholders or Directors of the Fund.
The Advisory Agreement continues from year to year only if approved
annually (a) by the Company's Board of Directors or by a vote of a majority of
the outstanding voting securities of the Fund and (b) by vote of a majority of
Directors of the Company who are not parties to such 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 of the Company called for the
purpose of voting on such approval. The Advisory Agreement may be terminated by
either party on 60 days' notice to the other party and terminates automatically
upon its assignment. The 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 Fund's shareholders and that all proposed
assignments of such agreement are subject to approval by the Company's Board of
Directors (unless the Act otherwise requires shareholder approval thereof).
SUB-ADVISORY AGREEMENTS
Segall Bryant & Hamill ("Segall Bryant") is the Sub-Adviser to the
Growth and Income Fund. Its business office is located at 10 South Wacker Drive,
Suite 2150, Chicago, IL 60606. Segall Bryant is a Minnesota partnership which is
50% owned by Voyageur Advisory Services LLC, an affiliate of the Adviser, and
50% owned by SBGP Holdings, Inc., an Illinois corporation. The Sub-Adviser
manages the investment and reinvestment of the assets of the Fund, although the
Adviser monitors and evaluates the performance and investment style of the
Sub-Adviser.
The Sub-Advisory Agreement provides that Segall Bryant is entitled to a
sub-advisory fee of .75% of Growth and Income Fund's average daily net assets.
The Sub-Adviser's fee is paid by the Adviser, not the Fund. Under the
Sub-Advisory Agreement, the Sub-Adviser determines investment selections for the
Fund and is responsible for the placement of brokerage transactions in
connection therewith. 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
objectives, policies and restrictions. The Sub-Advisory Agreement also requires
the Sub-Adviser to provide all office space, personnel and facilities necessary
and incident to their performance of services under the Sub-Advisory Agreement.
ADMINISTRATIVE SERVICES AGREEMENT
VAM LLC also acts as the Fund's dividend disbursing, transfer,
administrative and accounting services agent pursuant to an Administrative
Services Agreement (the "Administrative Services Agreement") between VAM LLC and
the Company. Pursuant to the Administrative Services Agreement, the Adviser
provides all dividend disbursing, transfer agency, administrative and accounting
services required by the Fund including, without limitation, the following: (i)
the calculation of net asset value per share (including the pricing of the
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 the Fund's shares or the receipt
of redemption requests with respect to the Fund's shares outstanding, the
calculation of the number of shares to be purchased or redeemed, respectively,
(iii)
<PAGE>
upon the 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 the Fund to be received by each shareholder of the 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 the Fund as the 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 the
Fund, and (vii) the provision of such other dividend disbursing, transfer
agency, administrative and accounting services as the Fund and the Adviser may
from time to time agree upon.
As compensation for these services, the Fund pays the Adviser a monthly
fee based upon the Fund's average daily net assets and the number of shareholder
accounts then existing. This fee is equal to the sum of (i) $1.25 per
shareholder account per month, (ii) $1,000 per month if the Fund's average daily
net assets do not exceed $50 million, $1,250 per month if the Fund's average
daily net assets are greater than $50 million but do not exceed $100 million,
and $1,500 per month if the Fund's average daily net assets exceed $100 million
and (iii) 0.11% per annum of the first $20 million of the Fund's average daily
net assets, 0.06% per annum of the next $80 million of the Fund's average daily
net assets, and 0.035% per annum of average daily net assets in excess of $100
million. For purposes of calculating average daily net assets, as such term is
used in the Administrative Services Agreement, the Fund's net assets equal its
total assets minus its total liabilities. The Fund also reimburses the Adviser
for its out-of-pocket expenses in connection with the Adviser's provision of
services under the Fund's Administrative Services Agreements.
The Fund's Administrative Services Agreement is renewable from year to
year if the Directors (including a majority of the disinterested Directors)
approve the continuance of the Agreement. The Company or VAM LLC can terminate
the 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 (including a majority of
the Directors who are not interested persons of VAM LLC or the Company), 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 Board of Directors (unless the 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. The
Adviser intends to reimburse expenses to the extent set forth in the Prospectus
and reserves the right to discontinue expense reimbursements.
All costs and expenses (other than those expressly assumed by the
Adviser or the Distributor) incurred in the operation of the Fund are borne by
the 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 the issue and sale of shares (to the extent
not borne by the Distributor under its agreement with the Fund), expenses of
printing and mailing stock certificates representing shares of the Fund,
association membership dues, charges of the Fund's custodian, and bookkeeping,
auditing and legal expenses. The Fund will also pay the fees and bear the
expense of registering and maintaining the registration of the 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.
For the fiscal period from September 7, 1995 (commencement of
operations) through April 30, 1996, the Fund paid advisory fees of $14,256 and
administrative service fees of $16,750. During the same time period, the Adviser
and Distributor absorbed or waived fees in the amount of $25,000. The Adviser
paid
<PAGE>
$14,256 in sub-advisory fees to Segall Bryant under the Sub-Advisory Agreement
for the fiscal period ended April 30, 1996.
PLAN OF DISTRIBUTION AND DISTRIBUTION AGREEMENT
The Company has adopted a Plan of Distribution on behalf of the Fund
relating to the payment of certain expenses pursuant to Rule 12b-1 under the
1940 Act. Rule 12b-1(b) provides that any payments made by the Fund in
connection with the distribution of its shares may only be made pursuant to a
written plan describing all material aspects of the proposed financing of
distribution and also requires that all agreements with any person relating to
implementation of the plan must be in writing. In addition, Rule 12b-1(b)(1)
requires that such plan be approved by a vote of at least a majority of the
Fund's outstanding shares, and Rule 12b-1(b)(2) requires that such plan,
together with any related agreements, be approved by a vote of the Board of
Directors and the Directors who are not interested persons of the Company and
have no direct or indirect financial interest in the operation of the plan or in
any agreements related to the plan, cast in person at a meeting called for the
purpose of voting on such plan or agreements. Rule 12b-1(b)(3) requires that the
plan or agreement provide, in substance: (1) that it shall continue in effect
for a period of more than one year from the date of its execution or adoption
only so long as such continuance is specifically approved at least annually in
the manner described in paragraph (b)(2) of Rule 12b-1; (2) that any person
authorized to direct the disposition of monies paid or payable by the Fund
pursuant to its plan or any related agreement shall provide to the Board of
Directors, and the Directors shall review, at least quarterly, a written report
of the amount so expended and the purposes for which such expenditures were
made; and (3) in the case of a plan, that it may be terminated at any time by
vote of a majority of the members of the Board of Directors who are not
interested persons of the Company and have no direct or indirect financial
interest in the operation of the plan or in any agreements related to the plan
or by vote of a majority of the outstanding voting securities of the Fund.
Rule 12b-1(b)(4) requires that such plans may not be amended to
increase materially the amount to be spent for distribution without shareholder
approval and that all material amendments of the plan must be approved in the
manner described in paragraph (b)(2) of Rule 12b-1. Rule 12b-1(c) provides that
the Company may rely upon Rule 12b-1(b) only if selection and nomination of the
Company's disinterested Directors are committed to the discretion of such
disinterested Directors. Rule 12b-1(e) provides that the Fund may implement or
continue a plan pursuant to Rule 12b-1(b) only if the Directors who vote to
approve such implementation or continuation conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties under state
law, and under Section 36(a) and (b) of the 1940 Act, that there is a reasonable
likelihood that the plan will benefit the Fund and its shareholders.
The Company has entered into a Distribution Agreement (on behalf of the
Fund) with the Distributor, pursuant to which the Distributor acts as the
principal Distributor of each Fund's shares. The Distribution Agreement and Plan
provide that the Distributor agrees to provide, and shall pay costs which it
incurs in connection with providing, administrative or accounting services to
shareholders of the Funds (such costs are referred to as "Shareholder Servicing
Expenses") and that the Distributor shall also pay all costs of distributing the
shares of the Fund ("Distribution Expenses"). Shareholder Servicing Expenses
include all expenses of the Distributor incurred in connection with providing
administrative or accounting services to shareholders of the Fund, including,
but not limited to, an allocation of the Distributor's overhead and payments
made to persons, including employees of the Distributor, who respond to
inquiries of shareholders regarding their ownership of Fund shares, or who
provide other administrative or accounting services not otherwise required to be
provided by the Fund's investment adviser or transfer agent. Distribution
Expenses include, but are not limited to, initial and ongoing sales compensation
(in addition to sales loads) paid to investment executives of the Distributor
and to other broker-dealers and participating financial institutions; expenses
incurred in the printing of prospectuses, statements of additional information
and reports used for sales purposes; expenses of preparation and distribution of
sales literature; expenses of advertising of any type; an allocation of the
Distributor's overhead; payments to and expenses of persons who provide support
services in connection with the distribution of Fund shares; and other
distribution-related expenses.
<PAGE>
Pursuant to the provisions of the Distribution Agreement, the
Distributor is entitled to receive a total fee each quarter at an annual rate of
.25% of the average daily net assets attributable to the Fund's Class A shares,
1.00% of the average daily net assets attributable to the Fund's Class B shares
and 1.00% of the average daily net assets attributable to the Fund's Class C
shares to pay distribution expenses. As determined from time to time by the
Board, a portion of such fees shall be designated as a "shareholder servicing
fee" and a portion shall be designated as a "distribution fee." The Board has
determined that all of the fee payable with respect to Class A shares shall be
designated a shareholder servicing fee. With respect to fees payable with
respect to Class B shares and Class C shares, that portion of the fee equal to
.25% of average daily net assets attributable to the Fund's Class B shares or
Class C shares is designated a shareholder servicing fee and that portion of the
fee equal to .75% of average daily net assets attributable to the Fund's Class B
shares or Class C shares is designated a distribution fee. Amounts payable to
the Distributor under the Distribution Agreement may exceed or be less than the
Distributor's actual distribution expenses and shareholder servicing expenses.
In the event such distribution expenses and shareholder servicing expenses
exceed amounts payable to the Distributor under the Plan, the Distributor shall
not be entitled to reimbursement by the Funds. In addition to being paid
shareholder servicing and distribution fees, the Distributor also receives for
its services the sales charge on sales of Fund shares set forth in the
Prospectus. The Fund does not currently offer Class B and C shares.
The Distribution Agreement is renewable from year to year if the
Company's Directors approve such Plan and Distribution Agreement. The Company or
the Distributor can terminate the Distribution Agreement on 60 days' notice to
the other party, and the Distribution Agreement terminates automatically upon
its assignment. In the Distribution Agreement, the Distributor agrees to
indemnify the Fund against all costs of litigation and other legal proceedings
and against any liability incurred by or imposed on the Fund in any way arising
out of or in connection with the sale or distribution of the Fund's shares,
except to the extent that such liability is the result of information which was
obtainable by the Distributor only from persons affiliated with the Fund but not
the Distributor.
For the fiscal period from September 7, 1995 (commencement of
operations) to April 30, 1996, the Class A shares of the Fund paid Rule 12b-1
fees in the amount of $4,743. For the fiscal period from December 28, 1995
(commencement of operations) to April 30, 1996, the Class B shares of the Fund
paid Rule 12b-1 fees in the amount of $36. There were no Class C outstanding
during this time.
For the fiscal period from September 7, 1995 (commencement of
operations) to April 30, 1996, the Fund paid total underwriting commissions in
the amount of $1,481, none of which was retained by the Distributor.
PORTFOLIO TRANSACTION AND ALLOCATION OF BROKERAGE
Pursuant to conditions set forth in the rules of the Securities and
Exchange Commission, each Fund may effect brokerage transactions in its
portfolio securities with a broker or dealer affiliated directly or indirectly
with the Adviser or Sub-Adviser, as the case may be. In determining the
commissions to be paid to an affiliated broker-dealer acting as an agent on
behalf of the Fund, it is the policy of the Fund that such commissions will, in
the judgment of the Adviser or Sub-Adviser, subject to review by the Board of
Directors, be both (i) 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 a securities exchange during a
comparable period of time, and (ii) at least as favorable as commissions
contemporaneously charged by such affiliated broker-dealers on comparable
transactions for their most favored comparable unaffiliated customers. While the
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.
Decisions with respect to placement of the Fund's portfolio
transactions are made by the Adviser or Sub-Adviser, as the case may be. In
selecting brokers to execute portfolio transactions, the Adviser and the
Sub-Adviser each seeks to obtain the best price and execution of orders.
Commission rates, being a
<PAGE>
component of price, are considered together with other relevant factors. When
consistent with these criteria, business may be placed with broker-dealers who
furnish investment research services to the Sub-Adviser or the Adviser;
provided, however, that the provision of research and brokerage services may not
be considered in selecting dealers to execute futures contracts and related
options. 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 the Sub-Adviser to supplement their own
investment research activities by obtaining the views and information of
individuals and research staffs of many different securities research firms
prior to making investment decisions for the Fund. Research may also include
computer software and hardware which conveys or analyzes the foregoing. To the
extent portfolio transactions are effected with broker-dealers who furnish
research services, the Adviser and Sub-Adviser receive a benefit, not capable of
evaluation in dollar amounts, without providing any direct monetary benefit to
the Fund from these transactions. The Adviser and Sub-Adviser may, from time to
time, maintain an informal list of broker-dealers which may be used as a general
guide in the placement of Fund business in order to encourage certain
broker-dealers to provide research services. Because the list is merely a
general guide which is to be used only after the primary criteria for the
selection of broker-dealers (discussed above) have been met, substantial
deviations from the list are permissible and may be expected to occur. The
Adviser and Sub-Adviser will authorize the Fund to pay to a broker-dealer 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 their overall responsibilities with respect to the accounts as to
which the Adviser or Sub-Adviser exercise investment discretion.
It is expected the Fund will purchase most foreign equity securities in
the over-the-counter markets or stock exchanges located in the countries in
which the respective principal offices of the issuers of the various securities
are located if that is the best available market. The fixed commissions paid in
connection with most such foreign stock transactions generally are higher than
negotiated commission on United States transactions. There generally is less
governmental supervision and regulation of foreign stock exchanges than in the
United States. Foreign securities settlements may in some instances be subject
to delays and related administrative uncertainties.
Foreign equity securities may be held in the form of American
Depositary Receipts, or ADRs, Global Depositary Receipts, or GDRs, or securities
convertible into foreign equity securities. ADRs and GDRs may be listed on stock
exchanges or traded in the over-the-counter markets in the United States or
overseas, as the case may be. ADRs, like other securities traded in the United
States, will be subject to negotiated commission rates. The foreign and domestic
debt securities and money market instruments in which the Funds may invest are
generally traded in over-the-counter markets.
The Adviser believes that most research services obtained by the
Adviser or the Sub-Adviser will generally benefit one or more of the investment
companies which they manage and will also benefit accounts which they manage.
Normally research services obtained through commissions paid by the managed
funds and accounts investing in debt securities would primarily benefit such
funds and accounts; similarly, services obtained from transactions in common
stocks would be of greater benefit to the managed funds and accounts investing
in common stocks.
Consistent with the Rules of Fair Practice of the National Association
of Securities Dealers, Inc. and subject to the policies set forth above and such
other policies as the Fund's directors may determine, the Adviser or the
Sub-Adviser may consider sales of shares of the Fund as a factor in the
selection of broker-dealers to execute the Fund's securities transactions.
Pursuant to conditions set forth in rules of the Securities and
Exchange Commission, the Fund 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
<PAGE>
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,
particularly those Directors who are not interested persons of the Company.
When two or more clients of the Adviser or Sub-Adviser are
simultaneously engaged in the purchase or sale of the same security, the prices
and amounts are allocated in accordance with a formula considered by the Adviser
or Sub-Adviser to be equitable to each client. In some cases, this system could
have a detrimental effect on the price or volume of the security as far as each
client is concerned. In other cases, however, the ability of the clients to
participate in volume transactions will produce better executions for each
client.
The Fund paid total brokerage commissions for the fiscal period from
September 7, 1995 (commencement of operations) to April 30, 1996 in the amount
of $7,303.
DISTRIBUTIONS TO SHAREHOLDERS AND TAXES
It is the Fund's policy to distribute annually all net investment
income. The Fund distributes annually all net realized capital gains, if any,
after offsetting any capital loss carryovers. Distributions are payable in full
and fractional shares of the Fund based upon the next determined net asset value
on the payment date for each distribution. A shareholder may, however, elect by
written application received by the Distributor or such shareholder's financial
institution on or prior to the record date to receive net investment income
distributions or both net investment income and net capital gains distributions
in cash.
Under the Internal Revenue Code of 1986, as amended (the "Code") the
Fund will be subject to a non-deductible excise tax equal to 4% of the excess,
if any, of the amount required to be distributed for each calendar year over the
amount actually distributed. In order to avoid the imposition of this excise
tax, the Fund generally must declare dividends by the end of a 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 capital gains) for
the 12-month period ending October 31 of the calendar year. The 4% excise tax
does not apply to amounts with respect to which the Fund has paid a
corporate-level income tax.
For individuals, long-term capital gains are subject to a maximum tax
rate of 28% while ordinary income is generally subject to a maximum effective
rate in excess of 39.6% (resulting from a combination of a nominal 39.6% rate, a
phase-out of personal exemptions for individuals filing single returns with
adjusted gross income in excess of $121,200 and for married couples filing joint
returns with adjusted gross income in excess of $181,800, and a partial
disallowance of itemized deductions for individuals with adjusted gross income
in excess of $121,200). For corporations, both ordinary income and capital gains
are currently subject to a maximum rate of 35%.
Ordinarily, distributions and redemption proceeds earned by the Fund
shareholder are not subject to withholding of federal income tax. However, 31%
of Fund distributions and redemption proceeds may be withheld upon the
occurrence of certain events specified in Section 3406 of the Code and
regulations promulgated thereunder. These events include the failure of the Fund
shareholder to supply the Fund or its agent with such shareholder's taxpayer
identification number. Withholding may also occur if the Fund shareholder who is
otherwise exempt from withholding fails to properly document such shareholder's
status as an exempt recipient.
If a taxpayer exchanges shares in the Fund for shares in another fund
managed by the Adviser pursuant to the exchange privilege (see "Exchange
Privilege" in the Prospectus), the exchange is a taxable event that may give
rise to capital gain or loss. Furthermore, if a shareholder uses the exchange
privilege within 90 days of investing shares in the Fund, the shareholder may
not take the sales charge paid on purchase of the Fund shares into account in
determining gain or loss on the exchange (to the extent that the sales charge on
the latter purchase was reduced). Similarly, if a taxpayer redeems shares in the
Fund within 90 days of purchasing them and then repurchases shares in the Fund
pursuant to the reinstatement privilege (see "Reinstatement Privilege" in the
Prospectus), the shareholder may not take the sales charge
<PAGE>
paid on the initial purchase of Fund shares into account in determining gain or
loss on the sale of the first acquired shares. However, in both cases the amount
of the disallowed sales charge may be taken into account in determining gain or
loss on the eventual disposition of the later acquired shares.
The Fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Code. To qualify as a regulated investment
company the Fund must, among other things, receive at least 90% of its gross
income each year from dividends, interest, gains from the sale or other
disposition of securities and certain other types of income, including income
from options and futures contracts.
The Code forbids a regulated investment company from earning 30% or
more of its gross income from the sale or other disposition of stock,
securities, options, futures, and certain foreign currencies held less than
three months. This restriction may limit the extent to which the Fund may
purchase futures contracts and options. To the extent the Fund engages in
short-term trading and enters into futures and options transactions, the
likelihood of violating this 30% requirement is increased.
The Code also requires a regulated investment company to diversify its
holdings. The Internal Revenue Service has not made its position clear regarding
the treatment of futures contracts and options for purposes of the
diversification test, and the extent to which the Fund could buy or sell futures
contracts and options may be limited by this requirement.
Gain or loss on futures contracts and options is taken into account
when realized by entering into a closing transaction or by exercise. In
addition, with respect to many types of futures contracts and options held at
the end of the Fund's 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 futures 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 the Fund in a subsequent
sale or other disposition of such futures 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."
Code Section 988 may 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 Fund will attempt to monitor Section 988 transactions
to avoid an adverse tax impact.
Under the Code, the 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.
Pursuant to the Code, distributions of net investment income by the
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. The Fund will report
annually to its shareholders the amount of any withholding.
NET ASSET VALUE AND PUBLIC OFFERING PRICE
<PAGE>
The method for determining the net asset value of Fund shares is
summarized in the Prospectus in "Determination of Net Asset Value." The public
offering price of Class A shares is the net asset value of Fund shares. The
portfolio securities in which the Fund invests fluctuate in value, and,
therefore, the net asset value per share of the Fund also fluctuates.
As of April 30, 1996, the net asset value per share of the Fund was
calculated as follows. There were no Class C shares outstanding on such date.
Such information relates to the predecessor Fund, Voyageur Growth and Income
Fund.
Class A
Net Assets ($3,962,412) = Net Asset Value Per Share ($11.24)
----------------------------
Shares Outstanding (352,525)
Class B
Net Assets ($11,144) = Net Asset Value Per Share ($11.21)
----------------------------
Shares Outstanding (994)
OTHER INFORMATION
Signature Guaranty. In addition to information regarding redemption of
shares and signature guaranty set forth in the Prospectus, a signature guaranty
will be required when redemption proceeds: (1) exceed $50,000 (unless proceeds
are being wired to a preauthorized bank account, in which case a guarantee is
not required), (2) are to be paid to someone other than the registered
shareholder or (3) are to be mailed to an address other than the address of
record or wired to an account other than the preauthorized bank or brokerage
account. On joint account redemptions of the type previously listed, each
signature must be guaranteed. A signature guarantee may not be provided by a
notary public. Please contact your investment executive for instructions as to
what institutions constitute eligible signature guarantors.
Valuation of Portfolio Securities. Generally, trading in certain
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 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.
CALCULATION OF PERFORMANCE DATA
All performance information is that of the predecessor Fund, Voyageur
Growth and Income Fund.
Average Annual Total Return. Advertisements and other sales literature
for the Fund may refer to "average annual total return." Average annual total
return figures are 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:
P (1 + T)(nth power) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years; and
<PAGE>
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 gains
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 to all shareholder accounts.
The average annual total returns for periods ending April 30, 1996 were:
<TABLE>
<CAPTION>
Absent Voluntary
Fee Waivers and
Actual Expense Reimbursement
---------------------------------- -------------------------------
1 5 10 Since 1 5 10 Since
Year Years Years Inception Year Year Year Inception
---- ----- ----- --------- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class A (Inception 9/7/95) N/A N/A N/A 7.29% N/A N/A N/A 6.62%
Class B (Inception 12/28/95) N/A N/A N/A 1.36% N/A N/A N/A 0.98%
</TABLE>
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:
CTR = 100 (ERV-P)/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.
The cumulative total returns from inception through April 30, 1996
were:
Absent Voluntary Fee
Waivers and Expense
Actual Reimbursements
------ --------------
Class A (Inception 9/7/95) 7.29% 6.62%
Class B (Inception 12/28/95) 1.36% 0.98%
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 to all shareholder accounts.
MONTHLY CASH WITHDRAWAL PLAN
Any investor who owns or buys shares of the Fund valued at $10,000 or
more at the current offering price may open a Withdrawal Plan and have a
designated sum of money paid monthly to the investor or another person. Shares
are deposited in a Withdrawal Plan account and all distributions are reinvested
in additional shares of the Fund at net asset value. Shares in a Withdrawal Plan
account are then redeemed at net asset value to make each withdrawal payment.
Redemptions for the purpose of withdrawal are made on the 25th of the month (or
on the preceding business day if the 25th falls on a weekend or is a holiday) at
that day's closing net asset value and checks are mailed on the next business
day. Payments will be made to the registered shareholder. As withdrawal payments
may include a return on principal, they cannot be considered a guaranteed
annuity or actual yield of income to the investor. The redemption of shares in
connection with a
<PAGE>
Withdrawal Plan may result in a gain or loss for tax purposes. Continued
withdrawals in excess of income will reduce and possibly exhaust invested
principal, especially in the event of a market decline. The Fund or the
Underwriter may terminate or change the terms of the Withdrawal Plan at any
time. The Withdrawal Plan is fully voluntary and may be terminated by the
shareholder at any time without the imposition of any penalty.
Since the Withdrawal Plan may involve invasion of capital, investors
should consider carefully with their own financial advisers whether the
Withdrawal Plan and the specified amounts to be withdrawn are appropriate in
their circumstances. The Fund makes no recommendations or representations in
this regard.
ADDITIONAL INFORMATION
Information regarding certain record and beneficial ownership as of
March 31, 1997, which equals of exceeds 5% of the predecessor Fund is available
without charge by calling 800-553-2143.
CUSTODIAN; COUNSEL; INDEPENDENT AUDITORS
Norwest Bank Minnesota, N.A., Sixth Street & Marquette Avenue,
Minneapolis, Minnesota 55479, acts as custodian of the Fund's assets and
portfolio securities.
Dorsey & Whitney LLP, 220 South Sixth Street, Minneapolis, Minnesota
55402, serves as Counsel for the Company.
KPMG Peat Marwick LLP, 4200 Norwest Center, Minneapolis, Minnesota
55402, serves as the Company's independent auditors.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the year ended April
30, 1996 and the unaudited financial statements for the period ended October 31,
1996, are incorporated herein by reference from the annual report and the
semi-annual report of the Fund as filed with the Securities and Exchange
Commission. Please call 800-277-3862 to obtain a copy of the most recent annual
report and semi-annual report at no charge.
LIMITATION OF DIRECTOR LIABILITY
Under Minnesota law, each director of the Company owes certain
fiduciary duties to the Funds and to their 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 a
director (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 director derived an
improper personal benefit. The Company's Articles of Incorporation limit the
liability of it's 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 prohibits any provisions which purport to limit the
liability of directors arising from such directors' willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved in the
conduct of their role as directors).
<PAGE>
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 (including the liability of directors who serve as officers
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 the Securities Act of
1933 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.
SHAREHOLDER MEETINGS
The Company is not required under Minnesota law 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 corporation law provides for the Board of Directors
to convene shareholder meetings when it deems appropriate. In addition, if a
regular meeting of shareholders has not been held during the immediately
preceding fifteen months, a shareholder or shareholders holding three percent or
more of the voting shares of the Company may demand a regular meeting of
shareholders by written notice of demand given to the chief executive officer or
the chief financial officer of the Company. Within ninety days after receipt of
the demand, a regular meeting of shareholders must be held at the expense of the
Company. Additionally, the 1940 Act requires shareholder votes for all
amendments to fundamental investment policies and restrictions and for all
amendments to investment advisory contracts and Rule 12b-1 distribution plans.
<PAGE>
APPENDIX A
COMMON STOCK, CORPORATE BOND, PREFERRED STOCK AND
COMMERCIAL PAPER RATINGS
EARNINGS AND DIVIDEND RANKINGS FOR COMMON STOCKS
Standard & Poor's Ratings Services. The investment process involves
assessment of various factors -- such as product and industry position,
corporate resources and financial policy -- with results that make some common
stocks more highly esteemed than others. In this assessment, Standard & Poor's
believes that earnings and dividend performance is the end result of the
interplay of these factors and that, over the long run, the record of this
performance has a considerable bearing on relative quality. The rankings,
however, do not pretend to reflect all of the factors, tangible or intangible,
that bear on stock quality.
Relative quality of bonds or other debt, that is, degrees of protection
for principal and interest, called creditworthiness, cannot be applied to common
stocks, and therefore rankings are not to be confused with bond quality ratings
which are arrived at by a necessarily different approach.
Growth and stability of earnings and dividends are deemed key elements
in establishing Standard & Poor's earnings and dividend rankings for common
stocks, which are designed to capsulize the nature of this record in a single
symbol. It should be noted, however, that the process also takes into
consideration certain adjustments and modifications deemed desirable in
establishing such rankings.
The point of departure in arriving at these rankings is a computerized
scoring system based on per-share earnings and dividend records of the most
recent ten years -- a period deemed long enough to measure significant time
segments of secular growth, to capture indications of basic change in trend as
they develop, and to encompass the full peak-to-peak range of the business
cycle. Basic scores are computed for earnings and dividends, then adjusted as
indicated by a set of predetermined modifiers for growth, stability within
long-term trend, and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final score.
Further, the ranking system makes allowance for the fact that, in
general, corporate size imparts certain recognized advantages from an investment
standpoint. Conversely, minimum size limits (in terms of corporate sales volume)
are set for the various rankings, but the system provides for making exceptions
where the score reflects an outstanding earnings-dividend record.
The final score for each stock is measured against a scoring matrix
determined by analysis of the scores of a large and representative sample of
stocks. The range of scores in the array of this sample has been aligned with
the following ladder of rankings:
A+ Highest B+ Average C Lowest
A High B Below Average D In Reorganization
A- Above Average B- Lower
NR signifies no ranking because of insufficient data or because the
stock is not amenable to the ranking process.
The positions as determined above may be modified in some instances by
special considerations, such as natural disasters, massive strikes, and
non-recurring accounting adjustments.
A ranking is not a forecast of future market price performance, but is
basically an appraisal of past performance of earnings and dividends, and
relative current standing. These rankings must not be used as market
recommendations; a high-score stock may at times be so overpriced as to justify
its sale, while a low-score stock may be attractively priced for purchase.
Rankings based upon earnings and dividend records are no substitute for complete
analysis. They cannot take into account potential effects of management
<PAGE>
changes, internal company policies not yet fully reflected in the earnings and
dividend record, public relations standing, recent competitive shifts, and a
host of other factors that may be relevant to investment status and decision.
COMMERCIAL PAPER RATINGS
Standard & Poor's Ratings Services. Commercial paper ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues assigned the A rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with designation 1, 2, and 3 to indicate the relative degree of safety.
The "A-1" designation indicates that the degree of safety regarding timely
payment is very strong.
Moody's Investors Service, Inc. Moody's commercial paper ratings are
opinions of the ability of the issuers to repay punctually promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representation that such obligations are exempt from registration under
the Securities Act of 1933, nor does it represent that any specific note is a
valid obligation of a rated issuer or issued in conformity with any applicable
law. Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers:
Prime-1 Superior capacity for repayment of
short-term promissory obligations.
Prime-2 Strong capacity for repayment of short-term
promissory obligations.
Prime-3 Acceptable capacity for repayment of
short-term promissory obligations.
CORPORATE BOND RATINGS
Standard & Poor's Ratings Services. Its ratings for corporate bonds
have the following definitions:
INVESTMENT GRADE:
Debt rated "AAA" has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in a small degree.
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.
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.
SPECULATIVE GRADE:
Debt rated "BB," "B," "CCC" and "CC" and "C" is regarded, as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
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Bond Investment Quality Standards: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories (AAA, AA, A, BBB, commonly known as "Investment Grade" ratings)
generally are regarded as eligible for bank investment. Also, the laws of
various states governing legal investments impose certain rating or other
standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
Moody's Investors Service, Inc. Its ratings for corporate bonds include
the following:
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.
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 risk appear somewhat larger than in Aaa securities.
Bonds which are rated "A" possess many favorable 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.
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.
Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
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.
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.
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.
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.
PREFERRED STOCK RATING
Standard& Poor's Ratings Services. Its ratings for preferred stock have
the following definitions:
An issue rated "AAA" has the highest rating that may be assigned by
Standard& Poor's to a preferred stock issue and indicates an extremely strong
capacity to pay the preferred stock obligations.
A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations is very
strong, although not as overwhelming as for issues rated "AAA."
<PAGE>
An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions.
An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
Preferred stock rate "BB," "B," and "CCC" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB" indicates the lowest degree of speculation and "CCC" the
highest degree of speculation. While such issues will likely have some quality
and protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
A preferred stock rated "C" is a non-paying issue.
A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
"NR" indicates that 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.
Moody's Investors Service, Inc. Its ratings for preferred stock include
the following:
An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
An issue which is rate "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protection are, nevertheless,
expected to be maintained at adequate levels.
An issue which is rated "baa" is considered to be medium-grade, neither
highly protected nor poorly secured. Earnings and asset protection appear
adequate at present but may be questionable over any great length of time.
An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
An issue rated "c" is the lowest rated class of preferred or preference
stock. Issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
<PAGE>
APPENDIX B
STOCK INDEX FUTURES CONTRACTS AND RELATED OPTIONS
Stock Index Futures Contracts
To the extent described in the Prospectus and Statement of Additional
Information, the Fund may purchase and sell stock index futures contracts,
options thereon and options on stock indexes. Stock index futures contracts are
commodity contracts listed on commodity exchanges. They presently include
contracts on the Standard & Poor's 500 Stock Index (the "S&P 500 Index") and
such other broad stock market indexes as the New York Stock Exchange Composite
Stock Index and the Value Line Composite Stock Index, as well as narrower
"sub-indexes" such as the S&P 100 Energy Stock Index and the New York Stock
Exchange Utilities Stock Index. A stock index assigns relative values to common
stocks included in the index and the index fluctuates with the value of the
common stocks so included. A futures contract is a legal agreement between a
buyer or seller and the clearing house of a futures exchange in which the
parties agree to make a cash settlement on a specified future date in an amount
determined by the stock index on the last trading day of the contract. The
amount is a specified dollar amount (usually $100 or $500) times the difference
between the index value on the last trading day and the value on the day the
contract was struck.
For example, the S&P 500 Index consists of 500 selected common stocks,
most of which are listed on the New York Stock Exchange. The S&P 500 Index
assigns relative weightings to the common stocks included in the Index, and the
Index fluctuates with changes in the market values of those common stocks. In
the case of S&P 500 Index futures contracts, the specified multiple is $500.
Thus, if the value of the S&P 500 Index were 150, the value of one contract
would be $75,000 (150 x $500). Unlike other futures contracts, a stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract with the settlement amount being the difference
between the contract price and the actual level of the stock index at the
expiration of the contract. For example (excluding any transaction costs), if
the Fund enters into one futures contract to buy the S&P 500 Index at a
specified future date at a contract value of 150 and the S&P 500 Index is at 154
on that future date, the Fund will gain $500 x (154-150) or $2,000. If the Fund
enters into one futures contract to sell the S&P 500 Index at a specified future
date at a contract value of 150 and the S&P 500 Index is at 152 on that future
date, the Fund will lose $500 x (152-150) or $1,000.
Unlike the purchase or sale of an equity security, no price would be
paid or received by the Fund upon entering into stock index futures contracts.
Upon entering into a contract, the Fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount of
cash or U.S. Treasury bills equal to a portion of the contract value. This
amount is known as "initial margin." The nature of initial margin in futures
transactions is different from that of margin in security transactions in that
futures contract margin does not involve borrowing funds by the Fund to finance
the transactions. Rather, the initial margin is in the nature of a performance
bond or good faith deposit on the contract that is returned to the Fund upon
termination of the contract, assuming all contractual obligations have been
satisfied.
Subsequent payments, called "variation margin," to and from the broker
would be made on a daily basis as the price of the underlying stock index
fluctuates, making the long and short positions in the contract more or less
valuable, a process known as "marking to the market." For example, when the Fund
enters into a contract in which it benefits from a rise in the value of an index
and the price of the underlying stock index has risen, the Fund will receive
from the broker a variation margin payment equal to that increase in value.
Conversely, if the price of the underlying stock index declines, the Fund would
be required to make a variation margin payment to the broker equal to the
decline in value.
The Fund intends to use stock index futures contracts and related
options for hedging and not for speculation. Hedging permits the Fund to gain
rapid exposure to or protect itself from changes in the market. For example, the
Fund may find itself with a high cash position at the beginning of a market
rally. Conventional procedures of purchasing a number of individual issues
entail the lapse of time and the possibility of missing a significant market
movement. By using futures contracts, the Fund can obtain
<PAGE>
immediate exposure to the market and benefit from the beginning stages of a
rally. The buying program can then proceed, and once it is completed (or as it
proceeds), the contracts can be closed. Conversely, in the early stages of a
market decline, market exposure can be promptly offset by entering into stock
index futures contracts to sell units of an index and individual stocks can be
sold over a longer period under cover of the resulting short contract position.
The Fund may enter into contracts with respect to any stock index or
sub-index. To hedge the Fund's portfolio successfully, however, the Fund must
enter into contracts with respect to indexes or sub-indexes whose movements will
have a significant correlation with movements in the prices of the Fund's
portfolio securities.
Options on Stock Index Futures Contracts
To the extent described in the Prospectus and Statement of Additional
Information the Fund may purchase and sell put and call options on stock index
futures contracts which are traded on a recognized exchange or board of trade as
a hedge against changes in the market, and will enter into closing transactions
with respect to such options to terminate existing positions. An option on a
stock index futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a stock index futures contract at a
specified exercise price at any time prior to the expiration date of the option.
A call option gives the purchaser of such option the right to buy, and it
obliges its writer to sell, a specified underlying futures contract at a
specified exercise price at any time prior to the expiration date of the option.
A purchaser of a put option has the right to sell, and the writer has the
obligation to buy, such contract at the exercise price during the option period.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's future margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. If an option is exercised on the last trading day prior
to the expiration date of the option, the settlement will be made entirely in
cash equal to the difference between the exercise price of the option and the
closing price of the stock index futures contract on the expiration date. The
Fund will pay a premium for purchasing options on stock index futures contracts.
Because the value of the option is fixed at the point of sale, there are no
daily cash payments to reflect changes in the value of the underlying contract;
however, the value of the option does change daily and that change would be
reflected in the net asset value of a Fund. In connection with the writing of
options on stock index futures contracts, the Fund will make initial margin
deposits and make or receive maintenance margin payments that reflect changes in
the market value of such options. Premiums received from the writing of an
option are included in initial margin deposits.
Purchase of Put Options on Futures Contracts. The Fund will purchase
put options on futures contracts if the Fund's investment adviser or sub-adviser
anticipates a market decline. A put option on a stock index futures contract
becomes more valuable as the market declines. By purchasing put options on stock
index futures contracts at a time when the Fund's investment adviser or
sub-adviser expects the market to decline, the Fund will seek to realize a
profit to offset the loss in value of its portfolio securities.
Purchase of Call Options on Futures Contracts. The Fund will purchase
call options on stock index futures contracts if the Fund's investment adviser
anticipates a market rally. The purchase of a call option on a stock index
futures contract represents a means of obtaining temporary exposure to market
appreciation at limited risk. A call option on such a contract becomes more
valuable as the market appreciates. The Fund will purchase a call option on a
stock index futures contract to hedge against a market advance when the Fund is
holding cash. The Fund can take advantage of the anticipated rise in the value
of equity securities without actually buying them until the market is
stabilized. At that time, the options can be liquidated and the Fund's cash can
be used to buy portfolio securities.
Writing Call Options on Futures Contracts. The Fund will write call
options on stock index futures contracts if the Fund's investment adviser
anticipates a market decline. As the market declines, a call option on such a
contract becomes less valuable. If the futures contract price at expiration of
the option is below the exercise price, the option will not be exercised and the
Fund will retain the full amount of the option premium.
<PAGE>
Such amount provides a partial hedge against any decline that may have occurred
in the Fund's portfolio securities.
Writing Put Options on Futures Contracts. The Fund will write put
options on stock index futures contracts if the Fund's investment adviser
anticipates a market rally. As the market appreciates, a put option on a stock
index futures contract becomes less valuable. If the futures contract price at
expiration of the option has risen due to market appreciation and is above the
exercise price, the option will not be exercised and the Fund will retain the
full amount of the option premium. Such amount can then be used by the Fund to
buy portfolio securities when the market has stabilized.
Risks Relating to Options on Stock Index Futures Contracts. Compared to
the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to the Fund because the
maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when a purchase of a call or put
option on a futures contract would result in a loss to the Fund when the
purchase or sale of a futures contract would not result in a loss, such as when
there is no movement in the underlying index.
The writing of a put or call option on a futures contract involves
risks similar to those relating to transactions in futures contracts as
described in the Prospectus and Statement of Additional Information. By writing
a call option, the Fund, in exchange for the receipt of a premium, becomes
obligated to sell a futures contract, which may have a value higher than the
exercise price. Conversely, the writing of a put option on a futures contract
generates a premium, but the Fund becomes obligated to purchase a futures
contract, which may have a value lower than the exercise price. The loss
incurred by the Fund in writing options on futures contracts may exceed the
amount of the premium received.
The holder or writer of an option on a futures contract may terminate
its position by selling or purchasing an offsetting option of the same series.
There is no guarantee that such closing transactions can be effected. The Fund's
ability to establish and close out positions on such options will be subject to
the development and maintenance of a liquid market.
Finally, the Fund's purchase or sale of put or call options on stock
index futures contracts will be based upon predictions as to anticipated market
trends by the Fund's investment adviser or sub-adviser, which could prove to be
inaccurate. Even if the expectations of the Fund's investment adviser or
sub-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.
